draining development.pdf - Khazar University

88 Draining DevelopmentControlling illicit capital flows: Governance beyond technicalsolutions“Revenue is the chief preoccupation of the state. Nay, more, it is the state.”—Edmund Burke, quoted in O’Brien (2001, 21)The last decade or so has demonstrated that improving governance indeveloping countries is not simply a technical task of putting capacitiesin place, but is a problem of political will shaped by institutions andincentives. As a result, the development challenge has evolved from goodgovernance through good-enough governance to engaging with the specificpolitical drivers of change (Fritz, Kaiser, and Levy 2009). Administrativeand policy reforms alone cannot alter the rampant corruptionand tax evasion typical of weak states into the strong compliance ofcitizen-taxpayers in effective liberal democracies. Tax evasion and corruptiontranslate into capital flight and illicit flows not only if the opportunityarises to place assets abroad. Capital flight arises from politicalrisk; illicit flows arise from a perceived lack of political consensus aboutbuilding an effective state. “A tax regime is conditioned by the power balancesand struggles among the major social groups in a country, includingthe relative strengths of political parties that represent their divergentinterests” (Di John 2008, 1). So, as Ndikumana (2004, 290) pointsout: “Tax evasion is made easier when the taxpayer is also the politicalclient for the decision-maker.” Such patrimonial politics, so common inmany developing countries, thrives on evasion, corruption, and criminality(Chabal and Daloz 1999).Illicit capital flows should, as a consequence, be addressed in the contextof the political economy of inequality. Nontaxation and wide-scaletax evasion by the rich in high-inequality contexts undermine the capabilitiesand perceived legitimacy of the state (World Bank 2008a). Inmany developing countries, extreme inequalities create potential politicalinstability, which, if combined with the lack of a social contract topay taxes for the common good, fosters illicit capital flows and explainswhy achieving genuine national ownership of development often provesso problematic.In such environments, tax system complexity can replace brutalrepression as the obfuscation of political choice by elites in a situation inwhich tax morale is weak. An extreme example is offered by Honduras in