Net Foreign Investment Research Articles

Was Capital Fleeing Southeast Asia? Estimates from Indonesia, Malaysia, the Philippines, and Thailand

Capital flight is the movement of capital from a resource-scarce developing country to avoid social control. It is measured as the net unrecorded capital outflow, or the residual between officially recorded uses and sources of funds. For Indonesia, Malaysia, the Philippines, and Thailand, we estimated total capital flight at US$ 658 billion (in 1995 prices) over the period 1970–2000. Including imputed interest earnings, we estimated the stock of capital flight at US$ 1 trillion as of 2002. The figures mean large amounts of lost resources that could have been utilized in the four countries to generate additional output and jobs.

Macroeconomic Fundamentals and Net Portfolio Investment Between Developed Regions*

Our paper investigates how macroeconomic fundamentals correlate with net capital inflows in the US. Understanding the factors associated with capital flows helps policy makers to predict future capital flows and analyse the international implications of domestic macroeconomic policy. Yet the theoretical relationship between net capital inflows and relative economic conditions is ambiguous. Using quarterly data from 1988 to 2003, we analyse the relation between a set of relative macroeconomic variables and net purchases of US stocks and bonds from Western Europe, Canada, Japan and Australia. We find that relative output growth is uncorrelated with net US investment for all regions. However, other macroeconomic factors matter; for example, an increase in US interest rates relative to European interest rates is associated with an increase in net portfolio investment from Europe. The linkages between macroeconomic factors and net foreign investment in the US are strongest for Western Europe, implying that information costs, home bias and other capital frictions are less relevant for US–Europe flows compared with capital flows between the US and the other three source regions. Lastly, stock purchases are more correlated with macroeconomic fundamentals than bonds, a striking finding suggesting that equity traders are more likely than bond traders to change their net asset holdings as a result of a macroeconomic event.

Budget Deficits, National Saving, and Interest Rates

Budget Deficits, National Saving, and Interest Rates William G. Gale and Peter R. Orszag Economic analysis of the aggregate effects of fiscal policy dates back at least to the work of David Ricardo. Modern academic interest was reinvigorated by the work of Robert Barro and others and by the emergence of large U.S. federal budget deficits in the 1980s and early 1990s.1 The result was a substantial amount of research, which is summarized in several excellent surveys.2 The rapid but short-lived transition to budget surpluses in the late 1990s, followed by the sharp reversal in budget outcomes since 2000, has raised interest in this topic again. Economists tend to view the aggregate effects of fiscal policy from one of three perspectives. To sharpen the distinctions among them, it is helpful to consider a deficit induced by a lump-sum tax cut today followed by a lump-sum tax increase in the future, holding the path of government purchases and marginal tax rates constant. Under the Ricardian equivalence hypothesis proposed by Barro, such a deficit will be fully offset by an increase in private saving, as taxpayers recognize that the tax is merely postponed, not canceled. The offsetting increase in private saving means that the deficit will have no effect on national saving, interest rates, [End Page 101] exchange rates, future domestic production, or future national income. A second model, the small open economy view, suggests that budget deficits do reduce national saving but, at the same time, induce increased capital inflows from abroad that finance the entire reduction. As a result, domestic production does not decline and interest rates do not rise, but future national income falls because of the added burden of servicing the increased foreign debt. A third model, which we call the conventional view, likewise holds that deficits reduce national saving but that this reduction is at least partly reflected in lower domestic investment. In this model, budget deficits partly crowd out private investment and partly increase borrowing from abroad; the combined effect reduces future national income and future domestic production. The reduction in domestic investment in this model is brought about by an increase in interest rates, thus establishing a connection between deficits and interest rates. We emphasize throughout this paper that the relationship between deficits and national saving is central to the analysis of the economic effects of fiscal policy. National saving, which is the sum of private and government saving, finances national investment, which is the sum of domestic investment and net foreign investment.3 The accumulation of assets, whether located in the United States or abroad, associated with national saving means that the capital stock owned by Americans rises. The returns to those additional assets raise the income of Americans in the future. An increase in the budget deficit reduces national saving unless it is fully offset by an increase in private saving. If national saving falls, national investment and future national income must fall as well, all else equal. Therefore, to the extent that budget deficits reduce national saving, they reduce future national income. This reduction occurs even if there is no increase in domestic interest rates. In that case the reduction in national saving associated with budget deficits manifests itself solely in increased borrowing from abroad (the outcome under the small open economy view). This is the sense in which the effect of deficits on interest rates and exchange rates (which distinguishes the small open economy view from the conventional view) is subsidiary to the question of the [End Page 102] effect on national saving (to which the Ricardian view gives a different answer than the other two). A key objective of this paper is to generate tests of the empirical effects of budget deficits on national saving and interest rates and therefore to help distinguish among the three models empirically. We test the Ricardian view against the small open economy and conventional views by estimating the effect on national saving of budget deficits associated with tax reductions, after controlling for government purchases, transfers, marginal tax rates, and other factors. Our empirical results imply that an increase in the budget deficit substantially reduces national saving: specifically, after...

Current Account Reversal during a Currency Crisis: The Malaysian Experience

I. Introduction During the 1997-98 East Asian financial crisis, the affected economies experienced a massive outflow of portfolio capital. To effect the transfer of such financial resources, the current account of the balance of payments underwent a dramatic reversal within a relatively compressed time period accompanied by massive reduction in domestic spending, sharp depreciation in the real exchange rate, and upward pressure on the real interest rate. This paper studies Malaysia's experience with current account reversal following the outbreak of the financial crisis. During the period 1997-98, the economy experienced a net short-term capital outflow of RM34.6 billion, representing 6.5 per cent of nominal gross national product (GNP). In response, the current account reversed itself from a deficit that averaged 6.2 per cent of GNP during the period 1990-97 to a surplus of 13.7 per cent in 1998. The magnitude of the current account reversal in Malaysia was the largest among the four East Asian economies that were most severely affected by the currency crisis. As Table 1 indicates, the current account in Indonesia reversed from an average deficit of 2.5 per cent of nominal gross domestic product (GDP) from 1993-97 to an average surplus of 4.6 per cent from 1998-2000, representing a reversal of 7.1 per cent. For Thailand, the switch-around in the current account amounted to 15.7 per cent of GDP. In contrast, Malaysia's external balance reversal during the same period amounted to 19.3 per cent of GDP. Such a massive turnaround in the current account, however, was accomplished with relatively less severe contraction in domestic demand. In 1998, economic activity in Malaysia contracted by 7.4 per cent compared with 13.1 per cent in Indonesia and 10.5 per cent in Thailand. Malaysia's current account reversal therefore appears to have been less painful in terms of the contraction necessary to achieve the reduction in domestic absorption to effect the transfer of resources abroad. Malaysia stood out among the crisis-hit countries as the only one that did not follow the conventional restrictive macroeconomic policy to stabilize the exchange rate and bring about improvement in the external balance. Instead the authorities chose to fix the exchange rate and impose capital controls, and pursued a moderate expansionary policy. Malaysia therefore presents an interesting case study of current account reversal, and this paper represents an attempt to provide a better understanding of the events following the outbreak of crisis and the adjustment process during the critical years of recovery. Section II of the paper analyses the dynamics of the external balance adjustment and how key macroeconomic variables shifted to facilitate the required real transfer employing an event-study approach. To complement the descriptive event-study findings, we estimate a structural vector autogression (SVAR) model in Section III to provide an econometric evaluation on the dynamics of the current account adjustment in response to shocks in relative prices and domestic income. Section IV summarizes the overall findings and draws some implications from the Malaysian experience on how the large current account deficit was reversed within a short period of time. II. Current Account Adjustment and Macroeconomic Performance An event-study approach to characterizing the dynamics of current account reversal would require an identification of the period before the external balance turned itself from a deficit to a surplus position and an analysis of the behaviour of the economy during the periods before and after the event. (1) The objective of such an analysis is to appraise the duration and the sustainability of the current account reversal and to evaluate how costly the adjustment process was in terms of macroeconomic performance. Using the criteria set out by Milesti-Ferretti and Razin (1998) for a significant and sustained turnaround in the external balance, (2) we identified the fourth quarter of 1997 as the period before the current account reversed into a surplus position (Figure 1). …

A QUANTITATIVE ANALYSIS OF THE EFFECTS OF CAPITAL CONTROLS: SPAIN, 1986–1990 *

This paper offers a quantitative assessment of the effectiveness of capital controls in Spain during the period 1986-1990. The analysis is based on a portfoliobalance model previously estimated for the Spanish economy, where the complete elimination of capital controls is simulated. Our results suggest that capital controls would have avoided a net capital outflow amounting to nearly a 4 per cent increase in the Spanish net foreign asset position, as a quarterly average, during the first five years of Spain’s membership into the EU.

A Quantitative Analysis of the Effects of Capital Controls: Spain, 1986–1990*

This Paper offers a quantitative assessment of the effectiveness of capital controls in Spain during the period 1986-1990. The analysis is based on a portfolio-balance model Previously estimated for the Spanish economy, where the complete elimination of capital controls is simulated. Our results suggest that capital controls would have avoided a net capital outflow amounting to nearly a 4 per cent increase in the Spanish net foreign asset position, as a quarterly average, during the first five years of Spanish membership into the EU. [C32, F21, F36]

The ASEAN Economic Miracle Unravels

In 1998, the Asian economic miracle seemed like a distant dream for the economies of Southeast Asia, with the string of bad news being blamed on excesses committed during the years of strong growth. The countries reeled from the continued withdrawal of capital from the region, the disintegration and collapse of confidence in domestic financial sectors, policy- and psychology-induced demand contractions, the interdependent weaknesses in the international value of their currencies, and political conflict and a significant erosion of the social consensus over economic policy. The Southeast Asian economies faced these problems in common, but the impact varied according to the level of development, specific features in their financial systems, the nature of the governments' responses to the crisis, and the impact of the crisis on political stability. The withdrawal of capital from the region in 1998 constituted the biggest shared factor among the Southeast Asian economies. The level of capital outflow, initiated by the Thai economic crisis of July 1997, increased in 1998 for the four most severely affected ASEAN economies — Indonesia, Malaysia, the Philippines, and Thailand — plus South Korea, with net capital outflows accelerating from US$1 billion in 1997 to $28 billion in 1998. In 1996, there had actually been net inflows of $103 billion. The fickle nature of short-term portfolio investments was much in evidence during 1998. There was a brief slowdown of capital outflow from the region in the first quarter of 1998, but the levels accelerated as evidence of a deep recession in Japan became inescapable and the yen weakened, Russia's teetering economy saw the offering of interest rates on short-term Russian bonds reach 80 to 100 per cent, and Indonesia's thirty-year political arrangements disintegrated with President Soeharto's resignation in May. In August, the Russian economic programme collapsed and a general retreat from portfolio investments in all emerging markets ensued. The premium on developing country debt shot up to unprecedented levels of 10 to 15 percentage points by October 1998.

The Impact of Fiscal Policy on the Real Exchange Rate: Anecdotal Evidence from Tanzania

In macroeconomics theory of open economies, it is argued that an adverse fiscal imbalance results into a higher real interest rate. In turn the higher real interest rate reduces net foreign investment and that this leads to an appreciation of the domestic currency. This study is a preliminary empirical investigation of the extent to which the budget deficit in Tanzania has had any relationship with the real interest rate and the real exchange rate. After analysing relevant data covering almost three decades beginning in 1968, the study finds no evidence to support the above theory. Further empirical work remains to be done in order to establish the link between a budget deficit and movements in the real exchange rate for a small but open economy such as Tanzania. Only in this way can one justify the prevailing concerns among policy makers in Tanzania over the need to eliminate the budget deficit due to its alleged adverse effect on other macro-economic indicators. African Journal of Finance and Management Vol.8(1) 1999: 28-36

Direct Foreign Investment and Technology Transfer in ASEAN

Technological upgrading constitutes a critical element of the development process. Member countries of the Association of Southeast Asian Nations (ASEAN) have placed a strong emphasis on attracting direct foreign investment (DFI) flows as a means of promoting technology transfer. This article explores the relationship between DFI and technological upgrading in a developing-country context, with an emphasis on ASEAN. It begins with a review of the theoretical literature on DFI and real-world applications in the ASEAN countries. Next, it develops a simple model of technological upgrading in ASEAN, which underscores the importance of national policies in the process. Finally, it considers how multinational enterprises and DFI are contributing to regional economic integration in ASEAN. I. Introductionl It is probably accurate to claim that most of what has been learnt about the relationship between direct foreign investment (DFI) and technological upgrading in the process of development has been learned in the thirty years coinciding with the existence of ASEAN. It is probably not immodest to claim that much of this learning came from the experiences of the ASEAN member countries themselves. These countries received a significant proportion of the worldwide DFI flows during this period; over 1961-80, the original five ASEAN countries received US$11.9 billion in net foreign investment flows and US$47 billion over 1981-90 (Chia 1993, p. 73). Moreover, these countries, coming from diverse starting points and resource constraints but sharing the same development ambitions, engaged in much policy experimentation with regard to DFI during the period (Chia 1993). These experiences have the potential to shed light on the relationship between DFI and economic development. There have been a variety of treatments of this topic in the literature (see, for example, Ramstteter 1991), but the issue of the role of DFI in the technological upgrading of developing countries has proven to be illusive.2 The objective of this article is to identify key features of the ASEAN experience with respect to DFI and technological upgrading, as well as to highlight the theoretical meaning of these features. Section II provides an inventory of these key areas, followed in Section III by an analytical interpretation of this experience. Section IV discusses the implications of the ASEAN experience its regional integration efforts. Finally, Section V gives some concluding remarks. II. FDI and Technological Upgrading in the ASEAN Experience Countries acquire technology in five ways, namely through: (1) licensing agreements and outright purchase, (2) purchasing foreign capital goods, (3) DFI inflows, (4) turnkey projects, and (5) various forms of international technical assistance. In its development process, Japan relied heavily on licensing, turnkey projects, and the reverse engineering of imported goods; Korea has relied heavily on machinery imports and turnkey projects (Kakazu 1990). The acquisition of technology through DFI relies on the interaction between the absorptive capacity and policies of the host country and the objectives and the character of the domestic operations of the foreign enterprise which owns the technology. The transfer of technology through DFI does stimulate competing firms in the domestic market to carry out technological upgrading; employees can also learn the technology while working for the firm and there are many instances of local employees starting their own ventures using the acquired technology.3 Since the hardware is more easily purchased, the component is the most essential element of any technology; DFI ensures that the technology will be operational in the host location. But in order to assimilate the technology into the host economy, the multinational enterprise (MNE) must deem it advantageous to share its software component. An overwhelming proportion of research and development that provides the basis for technology development is found within MNE operations, perhaps as much as 75 to 80 per cent of global civilian expenditures (Dunning 1993). …

The world economic system and international migration in less developed countries: an ecological approach.

"This paper analysed net migration within the context of [the] world economic system and urban ecological framework using the structural equation model." The author "employs linear structural equation modelling to examine determinants of international migration, using data from the World Bank World Tables, World Development Reports and the World Bank." (SUMMARY IN FRE AND SPA)

Orthodox Investment vs. Government Spending: Two Contrasting Models for the 1990s

The dominant orthodoxy today has developed a quite clear macro model for the U.S. economy in the intermediate future. We propose here to specify quantitatively this model's assumptions and to appraise its goals and plausibility. We shall limit the discussion to the major domestic real spending streams and productive factor inputs. It is contrasted to a model using expanded government spending to produce high rates of real growth. The results of the expanded government model are shown to produce many results expressly desired by the orthodoxy, like an increased share of going to investment. It is also more consistent with the postwar behavior of the economy. This orthodox model's expectation is that real noninflationary potential can grow at only about 2.5 percent a year. This or lower rates of growth for potential may be found in the works of many representatives of orthodoxy such as: The Congressional Budget Office (CBO, August 1989; January 1990, pp. 24-25; and February 1990, p. 17); former Chairman of the Council of Economic Advisers Herbert Stein (Stein, 1988); The Federal Reserve System (cited in CBO, August 1989); several of the Federal Reserve Banks including Cleveland, (January 1989) and Richmond (Fall 1989); Charles Wolf of The Rand Corporation (Wolf, 1988); and some of the works of Robert J. Gordon published by the Brookings Institution (Gordon, 1973). These can be thought of as the makers of Paul Krugman's Diminished Expectations (Krugman, 1990). Gordon calls potential real natural real GNP, which he defines as the level of real consistent with no change in the inflation rate. He has regularly published his estimates of natural real GNP for every year of the twentieth century in his textbook, Macroeconomics. In the latest edition (Gordon, 1990) the rate of growth of natural real GNP for 1975-1988 is 2.54 percent, and for every year for 1981 through 1988 it is 2.36 percent. We believe that the work of Gordon and his colleagues at Brookings is the probable origin of this pessimistic number, a 2.5 percent potential growth rate. This rate is a good half percent below the actual for the twentieth century, (including the Great Depression) and three quarters of a percent below the actual real growth from 1948-1988. In our judgment it is an unrealistically low policy variable; consequently, we call the whole model restrictionist. The model is also conservative and orthodox in its sluggish desired growth in all-government purchases of goods and services. It is solidly based in the anti-big government tradition. Orthodoxy also is very much alarmed about an alleged fall in the U.S. savings ratio. Accompanying the alarm is an attack upon American consumers for living high on the hog in the last decade or so. Consumption must be cut to create more saving, which will presumably stimulate more investment. Investment is the only major spending and input category that the model does not wish to rein in. Indeed, in good traditional fashion, the sky is the limit so far as investment is concerned. In our quantitative specification of this restrictionist model, for simplicity we will ignore net foreign investment as utterly unforecastable and inventory investment change as both insignificant and comparatively stable in the intermediate period. What should be concentrated upon is business nonresidential fixed investment. This is the dynamic, technology-embodying, capacity-creating component of private investment. It is the darling of the restrictionists. Residential investment, though quantitatively of some importance, we shall also subordinate by allocating to it an estimate upon which we can probably all agree. Let us construct a hypothetical restrictionist model, incorporating magnitudes for the major variables that to us appear to reasonably represent the goals of the orthodox group. We concentrate upon real aggregate demand flows using the following simplified, closed economy statement: GNP= C + |I. …

Net capital outflows and the viability of family farms

Abstract The importance of the family farm in EC agriculture is undisputed. This paper focuses upon the potential impact on family farms of capital outflows which arise from the Napoleonic Code inheritance system which is in place in many continental countries. This system implies that the transfer of ownership of the farm between generations is typically associated with a requirement for the successor to buy out the non‐succeeding heirs. The potential effects of these capital outflows on the family farm's current consumption and ability to pass on a viable unit to the next generation is illustrated using two versions of a life cycle simulation model using two definitions of what constitutes future family farm viability. The numerical results give some indication of the extra burden imposed by the Napoleonic Code inheritance system relative to primogeniture.

Real Foreign Investment in Perspective

Much concern regarding recent negative net foreign investment of the United States is misguided. It has frequently reflected misunderstanding of the nature of foreign investment and of misleading official measures. The extent of negative net foreign investment and, all the more so, its sum over the years, which is the presumed debt of the United States to the rest of the world, have been exaggerated. Correctly measured, which means taking into account changes in the value of the U.S. assets abroad that are usually ignored, they are not and do not threaten to be large relative to total income and wealth. Net foreign investment in the long run reflects relative growth and portfolio choices among nations. If the monetary authority does not prevent the fall of interest rates and exchange rates, rates of foreign investment can be expected, within a reasonable time, to be self-adjusting. They will then reflect underlying preferences and economic forces, interference with which is likely to do more harm than good.

THE REAL RATE OF U.S. NATIONAL SAVING

The conventional measure of national saving in U.S. accounts does not include saving in consumer durables, public investment, or intangible capital. It reflects a measure of net foreign investment that relates in considerable part to original cost rather than market values. It also does not include real capital gains.Comprehensive, adjusted measures of national saving are calculated for as many of the years from 1946 to 1989 as relevant components are available. They generally suggest much larger rates of national saving than are usually recognized. They also cast a sharp and substantially different light on the likely effects of policies designed to increase provision for the future.

Comment on Peter Temin's comment

tI seems to me that Temin's characteristically ingenious and thoughtprovoking Comment on my paper' is not so much a critique of its contents or conclusions as an extension of them, seeking to offer certainty where I remained in doubt. I nevertheless gladly accept the offer of the editors to add a comment of my own. Temin chooses what one might call an economist's approach rather than a historian's. He does not ask: this happen or did that happen? but rather, supposing that is what happened, can we find a formula that will take care of all the facts we feed in, and show up relationships we were not aware of before?. There are frequently two problems with models of that kind: (i) to be manageable, inputs have to be simplified to a point at which they no longer usefully represent reality, and (2) the data fed in are not the appropriate ones. Neither of these pitfalls, it seems to me, have been entirely avoided here. On the first score, it does less than justice to the Victorian investor to suggest (p. 454) that he merely had a clear choice of two types of assets: liquid foreign bonds or illiquid shares in domestic firms-quite apart from the fact that the literature I surveyed was much more concerned with returns than with liquidity. In practice, there was a large variety of intermediate choices available, from debentures in domestic industrial firms, to domestic railway shares and debentures, to local authority loans, many of which were raised for productive infrastructure enterprises which competed with potential private ventures-and many others. The trade-off between returns and liquidity, risks and foreign/domestic alternative was a continuous band rather than a clear choice. Moreover, as my article demonstrated, the literature is by no means unanimously of the opinion that high foreign investment raised the returns on domestic capital and that a transfer to home investment would have lowered them (p. 456). At least one party to the debate holds strongly that a sufficiently large switch to home investment might have raised productivity and international competitiveness to a point at which capital owners would have benefited also. Lastly, and most damagingly, it will not do (p. 455) to assume glibly that capital stocks and returns determine (via the S-I difference) net foreign investment. Net foreign investment is also, quite independently, determined simultaneously by the balance of real trading transactions which have quite different determinants, and the substantial literature which debates how these quantities might be brought into equilibrium, and which are cause and which are effect has made some of the most interesting and most difficult contributions to the ongoing discussion.

On the Determinants of Net Foreign Investment

these models do not explain why investments in productive processes in any country exceed or fall short of the wealth of the residents of that country. Most existing models of portfolio choice and asset pricing make the key assumption of a given world market portfolio, which implies that at any point in time net foreign investment itself is given.2 The present paper does not make this assumption. This paper provides a simple model of net foreign investment in a world of perfect markets.3 The model has the useful property that production decisions are made simultaneously with portfolio choice decisions, as in Cox, Ingersoll and Ross (1978). The central feature of the model is that technologies in use differ across countries. It is assumed that pre-existing capital can be shifted costlessly between countries. Production decisions, in other words, decisions about how the existing stock of capital is invested among available technologies, determine net foreign investment in the home country. However, production decisions depend on the distribution of the returns to investments in various technologies. Whereas this paper analyzes an issue which has always been of considerable interest in the field of international finance, it uses a different framework from that used in most of the literature on net capital flows. It recognizes explicitly the role of risk as a determinant of net foreign investment.4 Because political risk is not modeled explicitly, this paper constitutes only a first attempt at understanding the determinants of net foreign investment. Political risk must play a significant role as a determinant of net foreign investment, because net * University of Rochester. I am grateful to the members of the International Finance seminar at the University of Rochester, to Jorge de Macedo, Ron Jones, Don Lessard and especially Pat Reagan for useful conversations and comments and to the center for Research in Government Policy and Business for financial support. ' Net foreign investment in the domestic country is understood to mean the difference between total wealth invested in the domestic country and domestic wealth. It follows that net foreign investment is a stock and not a flow. International economists would call net foreign investment the

On the Determinants of Net Foreign Investment: Discussion

On the Determinants of Net Foreign Investment: Discussion

On the Determinants of Net Foreign Investment

On the Determinants of Net Foreign Investment

Domestic saving and international capital movements in the long run and the short run

The evidence and analysis in this paper support the earlier findings of Feldstein and Horioka (1980) that sustained increases in domestic savings rates induce approximately equal increases in domestic rates of investment. New estimates for the post-OPEC period 1974-79 imply that each extra dollar of domestic saving increases domestic investment by approximately 85 cents in a sample of 17 OECD countries. An explicit analysis of the problems of identification and simultaneous equations bias suggests that the regression estimates are more relevant as a guide to the long-run response of international capital flows than to their short-run behavior. Coefficient estimates based on annual variations in savings and investment are subject to potentially severe simultaneous equations bias that is not present when annual observations are averaged over a decade or more and the regression is estimated with a cross-country sample of these averages. A portfolio model of international capital allocation that is presented in the paper indicates that the short-run change in the rate of net foreign investment in response to a sustained increase in domestic saving is likely to be substantially greater than the ultimate steady state response.

Rural-urban migration and capital transfer: Possible effects on food prices in Nigeria

The problem of population movement and its relation to the food production/consumption pattern has been a source of concern to policymakers in Nigeria. Early decisions in this area have been taken on the basis of limited empirical evidence on the relationship between migration, capital transfer from rural areas and food prices. In this study, an attempt is made to determine the effect of rural-urban migration on investment in agriculture and resultant capital transfer due to such out-migration behaviour from the countryside to the towns. The potential impact on food prices is assessed. The findings indicate that rural areas in Nigeria experience massive net capital outflow due to such rural-urban migration. The major component of this capital movement is in the form of investment in the education (formal training) of migrants. Back capital transfers are minimal and the effect on food prices is enormous—more so for the rural than the urban areas.