What is Leakage?
Leakage occurs when money leaves an economy. In the investor relations world, leakage also refers to the unauthorized or unanticipated dissemination of information.
Let's say interest rates in Country X suddenly surpass interest rates in Country Y. Money begins to leak out of Country X and into Country Y as investors seek higher returns for the same amount of risk.
Another example includes a common problem involving transnational corporations. This occurs when large companies have factories or production facilities in countries that are less developed. These factories produce wealth which is often not transferred to the host country's economy and instead retained by the corporation involved. The economic value of the goods and/or profits lost here is leakage.
Why Leakage Matters in Economics
Leakage matters because it represents revenue lost. It can have many forms; interest rates are just one way for money to leak out of an economy. High taxes can have the same effect, as can excessive saving or higher interest in purchasing imported goods. In any case, the exit of money from an economy means the businesses in those economies must look for other forms of revenue. The shortage of capital can spur governments to stimulate the economy as a result.