draining development.pdf - Khazar University

22 Draining Developmentvital to have a rigorous framework that at least ensures that we minimizethe chances of causing inadvertent damage through well-intentionedpolicies. Indeed, the analysis shows that many loose definitions of illicitcapital flows are problematic in this sense.IntroductionThe concept of illicit capital flows has come to prominence relativelyrecently, reflecting growing concerns about the ramifications of an insufficientlyregulated and apparently increasingly predatory internationalfinancial system. In advanced economies, the 2008 global financial crisisbrought into sharp relief the growing gap between the effectiveness ofnational regulatory tools and the global operations of private financialagencies. As illustrated, for example, by the standoff between the U.S.Securities and Exchange Commission and Goldman Sachs employeesover the collateralized debt obligation deal, Abacus 2007–AC 1, thedebate in advanced countries has highlighted important ambiguitiesabout what constitutes legitimate financial market behavior.In the case of developing countries, the international concern aboutillicit capital flows is motivated primarily by concerns that vital developmentalresources are being lost to these economies because of the easewith which capital flight can flourish in the context of a burgeoning, yetopaque international financial system (for example, see Eurodad 2008a;Global Witness 2009; Kar and Cartwright-Smith 2008; Baker 2005).Closely related to this is the idea that illicit capital flows from developingeconomies are indicative of deeper structural problems of political governancein these countries. Finally, there also are worries about howillicit capital flows from developing countries may affect advanced countriesthrough diverse mechanisms, such as directly or indirectly financingcrime or terror. In this chapter, we are concerned mainly with theimpact of illicit capital flows on developing countries and the effectivenessof policy to control such outflows.The next section situates the literature on illicit capital flows withinthe wider context of economic analyses of capital flight from developingeconomies and provides our definitions. The following section elaboratesour definition of illicit capital flows. We simplify the range of varia-