draining development.pdf - Khazar University

84 Draining Developmentessential to the dividend-collecting transition to effective, politicallyopen access states and open markets (North et al. 2007; North, Wallis,and Weingast 2009). The creation and enforcement of property rightsare, however, not costless (Khan 2005). Historically, the need to raiserevenue motivated states to define property rights. In turn, this stimulatedeconomic growth (Tilly 1975). Taxpayers are politically prepared topay taxes that fund the state capabilities needed to secure their propertyrights (Khan 2000). In developing polities, the allocation and definitionof property rights are continuously evolving, as they did historically indeveloped countries (Everest-Phillips 2008b; Hoppit 2011). Tackling taxevasion and illicit flows is therefore part of the political bargaining overhow and what services, including protection of property rights, the statewill provide.If taxpayers do not accept the legitimacy of the state and are notintrinsically prepared to fund the state’s services and the development oftheir own collective future prosperity, the political incentives for andcredibility of the commitment to long-term sustainable development arelacking. Widespread illicit capital flows occur not only because the stateis ineffectual, but also because citizens believe that the state has neitherthe political leadership nor the consensus needed to reform weak or corruptinstitutions that threaten peace, justice, and the long-term securityof private property rights (Friedman et al. 2001). As van de Walle (2001,53) notes, the root of the problem is “the political logic of a system inwhich the authority of the state is diverted to enhance private powerrather than the public domain.”Despite the democratization that began in the 1990s in many developingcountries, the entrenchment of vested interests has ensured thatimprovements have been modest. 33 Improvements in the ratio of tax revenueto GDP have also often been short-lived because technical changesdependent on cooperative elites and high tax morale have been overcomeby underlying political forces (Orviska and Hudson 2003; Engelschalkand Nerré 2002). So, rampant tax evasion remains widespread inmany developing countries despite the seemingly endless tax policy andadministration reforms undertaken over the intervening two decades.Tackling illicit capital flows therefore requires not merely more tighteningof tax policy and tax administration, but a shift in citizen attitudes