draining development.pdf - Khazar University

8 Draining Developmentcapital flight from developing countries. They begin with an extensivehistory of the use of the term capital flight and the variety of conceptsand measures that have been attached to this label. This is an essentialstarting point because the central estimates of the scale of illicit flows arebased on methods developed to estimate the volume of capital flight.Moreover, the concept of capital flight has morphed a number of timessince it was first formulated by Kindleberger (1937); even now, there isconsiderable ambiguity as to whether capital flight refers to short- orlong-term capital movements.Blankenburg and Khan then relate systematically the concepts ofdirty money, illegal capital flows, and capital flight, which are often usedalmost synonymously, but which represent different behaviors and challenges.Some definitions are legalistic and rule oriented; others are broadand oriented toward defining the phenomenon in terms of motivationsor effects.A significant component of the illicit funds leaving developing countriesresults from the structural features of the societies of these countries,such as laws that advance the interests of a ruling elite; paradoxically,these features cause domestic capital to seek profitable investment opportunitiesin more advanced economies. Policy measures to control andreduce illicit capital flight from developing economies will be effectiveonly to the extent that they take account of these structural investmentconstraints. Market-improving good governance reforms are insufficientand can sometimes even be counterproductive in this respect.The heart of Blankenburg and Khan’s argument is that, in manydeveloping countries, governments lack legitimacy; government policiesdo not represent the result of the working out of a bargain among variousinterest groups, but, rather, the imposition of the power of a smallset of economic actors. Illegal financial flows may not be illicit flowsbecause of the state’s lack of legitimacy.Max Everest-Phillips, a governance adviser at the U.K. Department forInternational Development at the time of writing, also examines, in chapter3, the determinants of IFFs through a political economy analysis. Hisfocus, though, is tax evasion. Reviewing the experiences of a large array ofcountries and tax systems, he argues that the root cause of all illicit capitaloutflows is ultimately not poor policy or capacity constraints in administration,but the failure of political will. Controlling tax evasion (and the