draining development.pdf - Khazar University

158 Draining Development?accounts of a close campaign associate in New York who had abscondedwith some money for his own benefit.However, this situation may be changing because of the surge in corruptionin the past decade. During the eight-year presidency of AlvaroUribe (2002–10), corruption increased especially in the infrastructuresector, where many large projects were left incomplete or barely begun.While media reports suggest that a large part of the funds remained inthe country, a significant, though unknown portion may have beeninvested abroad. The available information concerning this issue is fragmentedand anecdotal, and there are no definitive figures permitting usto describe a pattern of behavior or to reach an acceptable conclusion.Future research might be able to throw light on this issue.Capital flows and economic policies: From a foreign exchangecontrol regime to an open economyThe literature of the early 1970s describes Colombia as a foreignexchange–constrained economy that has a strict foreign exchange controlsystem (World Bank 1972; Nelson, Schultz, and Slighton 1971).Colombia had the longest running exchange control regime in LatinAmerica. The system was in place from 1931 to 1991. There were severaltraditional ways for capital to flee the country illegally, including importoverinvoicing and export underinvoicing, contraband exports (coffeeand emeralds to the developed world and cattle to República Bolivarianade Venezuela were favorites), and, in the case of transnational corporations,transfer prices and payments for patents and royalties. 19 Tax evasionand avoidance were not likely to be an important determinant ofcapital flight because one could keep one’s tax payments low throughcreative accounting and the frequent tax amnesties that the governmentperiodically enacted. 20Colombia did not have large investments by foreign corporations; so,transfer pricing, another illegal capital outflow or inflow modality, wasnot likely to have been significant, although it was probably used by foreigninvestors.The situation had changed drastically by the mid-1970s when illegaldrug exports of marijuana and then cocaine grew quickly. From December1974 until the change in the foreign exchange regime in 1991, theblack market exchange rate remained significantly below the official one