Capital Flight from South Africa, 1980 to 2000¶
Seeraj Mohamed; Kade Finnoff (2004). Capital Flight from South Africa, 1980 to 2000. Political Economy Research Institute (PERI).
| Type | working paper |
| Scope | Economics and economic history of apartheid |
| Method | mixed |
| Period studied | 1980–2000 |
| Regions | South Africa |
| Themes | macro fiscal finance debt, sanctions divestment, business and state, transition post apartheid, manufacturing industrial policy, politics ideology elections, methods data sources |
| Citation key | mohamed2004 |
Argument¶
Using the residual (Boyce and Ndikumana) method adjusted for trade misinvoicing, the paper estimates that capital flight averaged 6.6 percent of GDP a year over 1980-2000. Flight was higher after the 1994 democratic transition (9.2 percent) than in 1980-93 (5.4 percent), despite greater political stability, which the authors read as a change in motivation: white elite discomfort with majority rule rather than simple political risk. Surges in short-term capital inflows (early-1980s bank lending, 1990s portfolio flows) coincide with peaks in flight. Structural weaknesses (the minerals-energy complex, conglomerate concentration, deep integration with foreign capital) are said to encourage flight rather than diversifying investment. The authors conclude that capital controls are needed.
Evidence and method¶
Balance-of-payments residual calculation using IMF IFS (external debt), SARB (net foreign investment), World Bank WDI (current account, reserves) and IMF DOTS (trade misinvoicing from mirror trade data). Figures, tables, a private communication on the General Export Incentive Scheme (GEIS), and secondary literature (Fine and Rustomjee, Terreblanche, Jenkins, Mohamed 2003).
Place in the debates¶
- Motivations for capital flight: portfolio-choice and political-risk models vs structural/political-economy explanations (see Finance, capital flight, the 1985 debt crisis and banking). Argues against Fedderke and Liu's focus on political uncertainty and risk. Favours Fine and Rustomjee's structural account, adding the role of capital-flow surges and elite attitudes.
- Magnitude of capital flight and trade underinvoicing from South Africa (Khan and Rustomjee vs Wood and Moll) (see Finance, capital flight, the 1985 debt crisis and banking). Sides with those finding flight high by international standards, but uses a conservative misinvoicing estimate that assumes none with developing countries.
- Open capital markets vs capital controls after apartheid (see Finance, capital flight, the 1985 debt crisis and banking). Argues that capital controls would reduce vulnerability to crises and flight, and criticises the ANC's neoliberal opening to short-term foreign flows.
- Cause of the 1985 debt crisis and the role of sanctions and the anti-apartheid struggle (see Finance, capital flight, the 1985 debt crisis and banking). Treats the 1985 crisis as the result of a surge of short-term lending after the Latin American debt crisis, reinforced by political instability and disinvestment pressure.
Findings¶
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Capital flight was high over the whole period, averaging 6.6 percent of GDP a year. (p. 3)
From 1980 to 2000 on average, capital flight as a percentage of GDP was 6.6 percent a year.
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Flight was higher after 1994 than in the last years of apartheid. (p. 3)
During the last 13 years of apartheid, from 1980 to 1993, average capital flight as a percentage of GDP was 5.4 percent a year. Post-apartheid, from 1994 to 2000 capital flight rose to an average of 9.2 percent
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Cumulative flight was large relative to domestic investment. (p. 3)
The extent of accumulated capital flight from 1980 to 2000 was 37 percent of the value of cumulative gross fixed capital formation for the same period.
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The early-1980s peak was linked to a surge in short-term foreign bank lending after the Latin American defaults. (p. 8)
During the earlier period there was a surge in the volume of short-term bank lending when South Africa became a preferred destination for international lenders after the Latin American debt crisis.
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Capital flight was negative in 1986-87 despite intense resistance and the state of emergency, because capital inflows dried up after the debt crisis. (p. 10)
Capital flight as a percentage of GDP was negative in 1986 and 1987 despite high levels of resistance to apartheid and the continuation of the apartheid government’s state of emergency
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The 1985 debt crisis forced a repayment moratorium on short-term loans. (p. 35)
The apartheid government was forced to call a four-month moratorium on $14 billion short-term loan repayments in August 1985.
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Post-election misinvoicing stayed high and steady, which the authors read as a multi-year effort to build offshore wealth. (p. 13)
The behaviour after the elections seemed to indicate a multi-year effort to build up wealth reserves outside of South Africa rather than a knee-jerk response to larger problems as in previous years.
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The 1990s portfolio inflows funded consumption, imports and capital flight rather than productive investment. (p. 12)
Mohamed (2003) shows that net capital flows were instead associated with increased consumption, imports of goods and services and capital flight instead of promoting sustainable economic growth.
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Capital flight absorbed a very large share of fixed investment, especially after 1994. (p. 18)
During the latter period, 1994-2000 capital flight as a percentage of GFCF averages a high of 58 percent
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Misinvoicing never fell below a substantial floor, suggesting flight is routine for large trading firms. (p. 19)
Our calculations indicate that the lowest level of misinvoicing was 1.9 percent of GDP for the period investigated.
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Household and business savings declined across the two periods. (p. 14)
Household average savings as a percentage of GDP was 3 percent for the 1980-1993 period and dropped to 0.8 percent for the 1994-2000 period.
Evidence ledger¶
Sources used¶
| Source | Kind | Period | How used |
|---|---|---|---|
| International Financial Statistics (IFS) – external debt data | international trade or finance data | 1980-2000 | Provides the change in the stock of external debt, one component of the residual capital flight equation. |
| South African Reserve Bank balance of payments data (net foreign investment) | official statistical series | 1980-2000 | Supplies net direct and portfolio foreign investment flows for the capital flight calculation. |
| World Development Indicators (WDI) CD-ROM 2003 – current account and change in reserves | international trade or finance data | 1980-2000 | Supplies the current account balance and change in foreign reserves used in the residual calculation. |
| IMF Direction of Trade Statistics (DOTS) CD-ROM 2003 | international trade or finance data | 1980-2000 | Mirror-trade comparison of South African reported trade with partners' data to estimate net trade misinvoicing, which is added to residual capital flight. |
| Global Development Finance (GDF) CD-ROM 2002 | international trade or finance data | from 1994 | Noted as having currency-decomposed debt data only from 1994, so not usable to adjust debt for exchange rate changes over the whole period. |
| SARB annual data on corporate and household savings | official statistical series | 1980-2000 | Used to compute average business and household saving as a percentage of GDP for 1980-93 versus 1994-2000. |
| Boyce and Ndikumana (2001) residual capital flight methodology | secondary literature compilation | 1970-96 (method) | Supplies the residual-plus-misinvoicing estimation framework, modified to a conservative misinvoicing assumption. |
| Private communication with Department of Trade and Industry officials who administered GEIS | interviews oral history | c. 1990-1997 | Used to support the claim that the General Export Incentive Scheme led to export overinvoicing in 1990-94, including fraud court cases. |
| Jenkins (1990) data on US and British corporate disinvestment | secondary literature compilation | 1984-1988 | Provides counts of US companies leaving South Africa in 1984-88 as evidence of the disinvestment campaign. |
| Fine and Rustomjee (1996) estimates and input-output analysis of the minerals-energy complex | secondary literature compilation | 1970-1988 | Relied on for the MEC structural framework and their estimate of average capital flight of 7 percent of GDP in 1970-88. |
| Mohamed (2003) analysis of capital inflows and the 2001 currency crisis | secondary literature compilation | 1990s-2001 | Relied on for the finding that post-1994 net capital flows were short-term portfolio flows tied to consumption, imports and capital flight rather than investment. |
| Terreblanche (2003) on white business attitudes and fears | secondary literature compilation | post-apartheid | Source for the list of fears of white business about the democratic government, underpinning the attitudinal explanation. |
| ABSA (1999) Economic Spotlight 27 on migration of South African companies to London | company records or reports | 1999 | Cited for companies' stated reasons for moving primary listings offshore (reduce emerging market risk). |
| Mbeki (2003) ANC Today column | newspapers periodicals | 5-11 December 2003 | Cited as insight into tension between business and the ANC government over empowerment. |
| Previous capital flight estimates (Khan 1991; Smit and Mocke 1991; Rustomjee 1991; Wood and Moll 1994; Fedderke and Liu 2002) | secondary literature compilation | 1960-1995 | Summarized in Table 1 as comparison points for magnitude and methods of capital flight estimates. |
| South African producer price index (2000=100) | official statistical series | 1980-2000 | Used to deflate capital flight to real terms in Table 2. |
New data¶
Authors computed an annual 1980-2000 series of residual capital flight, trade misinvoicing and adjusted capital flight for South Africa (US$ millions, nominal and real), shown in Table 2 and expressed as ratios to GDP and gross fixed capital formation; built from IFS, SARB, WDI and DOTS data.
Inference¶
Quantification: Descriptive tables.
Residual (sources-and-uses of foreign exchange) accounting estimate of capital flight with a conservative mirror-trade misinvoicing adjustment, compared across sub-periods (1980-85, 1986-93, 1994-2000) via graphs and period averages; explanations for patterns are inferred by visual co-movement with debt, net capital flows, REER and political events, plus qualitative political economy argument drawing on Fine and Rustomjee and Terreblanche. No formal statistical tests.
Key claims¶
| Claim | Basis | Strength |
|---|---|---|
| Average adjusted capital flight was 6.6% of GDP over 1980-2000, 5.4% in 1980-93 and 9.2% in 1994-2000. (p. 2) | Residual calculation from IFS, SARB, WDI and DOTS data in Table 2, divided by GDP. | Systematic data |
| Higher capital flight after 1994 despite greater stability suggests changed motivations, namely discomfort of wealthy whites with democratic transition. (p. 2) | Comparison of period averages plus inference from constant post-election misinvoicing and Terreblanche's account of white attitudes; no direct data on motives. | Illustrative or anecdotal |
| Peaks in capital flight coincide with surges in net capital flows (early 1980s short-term bank lending; post-1994 portfolio inflows). (p. 14) | Visual comparison of capital flight with change in debt and net capital flows in Figures 2 and 5, plus Mohamed (2003). | Partial data |
| Trade misinvoicing is a large and persistent channel of capital flight, with export underinvoicing rising from under 0.5% of GDP in 1993 to 5% in 2000. (p. 10) | Mirror-trade DOTS calculations (Table 2, Figure 3), with the GEIS effect on overinvoicing known only from officials' private communication. | Partial data |
| Accumulated capital flight equals 37% of cumulative gross fixed capital formation, averaging 58% of GFCF in 1994-2000, so substantial investment was foregone. (p. 17) | Summing nominal annual capital flight and GFCF figures over 1980-2000 (Figure 8). | Systematic data |
| Structural weaknesses (MEC dominance, conglomerate concentration, failure to diversify) contribute to capital flight rather than domestic investment. (p. 16) | Relies on Fine and Rustomjee's framework and quotations, with savings and investment declines in Figure 7; no direct test linking structure to flight. | Asserted |
| Business saving fell from 6% to 5% of GDP and household saving from 3% to 0.8% between 1980-93 and 1994-2000, alongside weak investment and exports. (p. 13) | SARB annual savings data and Figure 7. | Systematic data |
The author's caveats¶
Authors note that IFS gives no currency breakdown of debt, so debt is not adjusted for exchange rate changes; South African trade data before 1994 are of questionable quality because strategic goods such as oil were unreported; SACCA trade data before 1998 include neighbouring countries; misinvoicing is made deliberately conservative by assuming none with developing countries; the size of GEIS-related export overinvoicing is unknown; cumulative totals use nominal values and ignore rates of return.
Gaps in the evidence¶
The motivational claims rest on one secondary source and on the timing of aggregates, with no survey, interview or portfolio-level data on who moved money and why. Disaggregated balance-of-payments data, exchange control and SARB records, or firm-level offshore listing and transfer-pricing data would better separate capital flight from legitimate portfolio diversification and GEIS distortions; some of these exist in SARB and company filings. The causal links to capital flows and structural MEC weaknesses are shown only by visual co-movement, so time-series or econometric testing with controls, using the available annual data, would be needed.
Replicability: Data described but not public.