draining development.pdf - Khazar University

26 Draining Developmentdemanding way of judging damage because the more minimal ourrequirement, the more likely we are to find broad support across observerswho may disagree at the level of more detailed specifications.An illicit financial flow (IFF), according to our minimal definition, isone that has an overall negative effect on economic growth, taking intoaccount both direct and indirect effects in the context of the specific politicalsettlement of a country. A flow that has not directly affected economicgrowth, but has undermined the viability of a given political settlementwithout preparing the ground for an alternative sustainable politicalsettlement may be seen to have, indirectly, a negative effect after weaccount for adjustments that are likely as a result of a decline in politicalstability. It is now increasingly recognized that the different ways inwhich the political and social order is constructed in developing countrieshave important implications for how institutions and the economyfunction (North et al. 2007). Because the construction of political settlements(and, in North’s terminology, of social orders) differs significantlyacross societies, the economic and political effects of particular financialflows are also likely to be different.Our definition has some overlaps with, but also important points ofdeparture from, the way in which damaging capital flight has been analyzedin the economics literature. The loss of developmental resourcesthrough capital flows from poor to rich economies has been an importanttopic of development economics since its inception. In particular, the literatureon capital flight had made the problem of abnormal capital outflowsfrom developing countries its main interest long before the policyfocus on illicit capital outflows from such economies emerged. A briefreview of this literature allows us to identify systematically different coredrivers of capital flight highlighted by different strands of the literature.Our review also establishes the problems associated with ignoring thestructural differences in the types of political settlements across countries,problems that our definition of illicit capital flight specifically addresses.From capital flight as abnormal capital outflowsto single-driver models of capital flightIn 1937, Charles Kindleberger famously defined capital flight as “abnormal”capital outflows “propelled from a country . . . by . . . any one ormore of a complex list of fears and suspicions” (Kindleberger 1937, 158).