draining development.pdf - Khazar University

2Governance and Illicit FlowsStephanie Blankenburg and Mushtaq KhanAbstractThe concern about illicit capital flows from developing countries reflectsa variety of relevant policy issues, but is often motivated by weakly formulatedunderlying analytical frameworks. We review the literature onillicit capital flows and suggest that the common underlying concernthat motivates the different approaches is the identification of flows thatpotentially damage economic development. Implicitly, if these flowscould be blocked, the result would be an improvement in social outcomes.Illicit flows can be illegal, but they need not be if the legal frameworkdoes not reflect social interests or does not cover the relevant flows.A minimal definition of an illicit capital flow has to consider both thedirect and the indirect effects of the flow and has to assess these effects inthe context of the specific political settlement of the country in question.To demonstrate the implications in simplified form, we distinguishamong advanced countries, intermediate developers, and fragile developingcountries. The types of flows that would be considered illicit areshown to be significantly different in each of these cases. The analysisprovides a rigorous way of identifying policy-relevant illicit flows indeveloping countries. Given the potential importance of these flows, it is21