draining development.pdf - Khazar University

Tax Havens and Illicit Flows 355mission is in this area. Torvik (2009) goes beyond the generic argumentsabout tax and governance to make a specific case against havens bydrawing parallels with the well-established literature on the paradox ofplenty (the poor economic performance often associated with a country’snatural resource wealth). Torvik argues that havens distort developingcountries, above all, by changing incentives. First, the balancebetween productive activity and rent-seeking behavior is pushed towardthe latter because of the availability of secrecy, which allows the captureof higher returns to rent seeking. This process can occur in any context,but may be particularly potent in the presence of natural resources.The secondary effects may be even more powerful because they relateto the institutional and political context. Most narrowly, the availabilityof haven services can support the undermining or disestablishment ofinstitutions by politicians so as to conceal corruption and financial malfeasancegenerally. Furthermore, the incentives of politicians to achievea shift toward political systems that make elite capture easier (that is,presidential rather than parliamentary systems) will also be strengthenedby haven opportunities. Finally, if havens support the returns tonarrow self-interest over more broadly based progress, Torvik arguesthat they may increase the chances of conflict and contribute to theweakening of democratic processes.Torvik summarizes his conclusions thus:The negative effects of tax havens are greater for developing countriesthan for other countries. There are many reasons for this. Reduced governmentincome will have a greater social cost for developing countriesthan for industrialized countries. In addition, other mechanisms makethemselves felt in countries with weak institutions and political systems.(Torvik 2009, 188)While the theoretical arguments set out are compelling, what remainsunavailable at this point is empirical verification of the haven links in theseries of hypotheses that connect natural resource wealth, political systems,and institutional quality with particular outcomes. Research shouldbuild on the valuable insights of Torvik (2009) and test a range of hypothesesin two directions: to assess the impact of natural resource wealth,political systems, and institutional quality on the extent of economic linkswith tax havens and to assess the impact of economic links with tax havens