Elite Capital Flight: An Unintended Side Effect of the Global Financial Safety Net?

What drives elite capital flight into offshore destinations? While existing literature emphasizes the role of regulatory interventions, we focus on the Global Financial Safety Net (GFSN) as a catalyst for elite capital flight. Although the GFSN comprises numerous bailout mechanisms, we concentrate on International Monetary Fund (IMF) programs and swap lines from the People’s Bank of China (PBoC). While accessing IMF bailouts requires governments to commit to deep-seated economic reforms, PBoC swap lines come without these strings attached. We hypothesize that where government elites expect to receive a loan from the IMF, they have increased incentives to ex-ante rescue their fortunes and transfer their assets to offshore destinations, while in the case of PBoC swap lines, elites can get hold of these funds and transfer them into offshore financial destinations. Using a dataset of 201 countries from 1990 to 2018, we show that an anticipated IMF program increases the share of bank deposits held in offshore financial destinations by 14.2%. Offshore financial deposits even increase by 92.3% after the introduction of a PBoC swap line. From a policy perspective, our results underscore the importance of closing financial loopholes and strengthening financial governance frameworks to mitigate these unintended side effects of international bailout programs.

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