draining development.pdf - Khazar University

Governance and Illicit Flows 23tion across countries using a three-tier typology of different economicand political contexts: advanced economies; an intermediate group ofnormal developing countries in which a stable political settlement existseven though institutions still have a large element of informality; and afinal tier of fragile and vulnerable developing countries in which thepolitical settlement is collapsing, and economic processes, includingillicit capital flight, are driven by the collapsing polity. A definition ofillicit capital flight has to be consistently applicable across these substantiallydifferent institutional and political contexts. Keeping this in mind,we define illicit capital flows as flows that imply economic damage for asociety given its existing economic and political structure. The penultimatesection develops some basic policy tools to operationalize this analyticalframework. The final section concludes.Illicit Capital Flows and Capital Flight:Concepts and DefinitionsThe term illicit has strong moral undertones, but a closer look at theactual use of the term almost always reveals an underlying concern withthe developmental damage that particular capital flows can inflict. Webelieve that, from a policy perspective, this has to be made explicit, aswell as the precise methodology that is being applied to determine thedamage. We start by defining an illicit capital flow as a flow that has anegative impact on an economy if all direct and indirect effects in thecontext of the specific political economy of the society are taken intoaccount. Direct effects refer to the immediate impact of a particularillicit capital flow on a country’s economic growth performance, forexample, through reduced private domestic investment or adverse effectson tax revenue and public investment. Indirect effects are feedbackeffects on economic growth that arise from the role played by illicit capitalflows in the sustainability of the social and political structure anddynamics of a country. For clarity of exposition, we specify the politicaleconomy of a society in terms of the political settlement. A political settlementis a reproducible structure of formal and informal institutionswith an associated distribution of benefits that reflects a sustainable distributionof power. Sustainability requires that the formal and informal