draining development.pdf - Khazar University

458 Draining Development?for more democratic governance. More effective international actionagainst illicit capital flows would be complementary rather than competitivewith attempts to improve from within the quality of public institutionsin the poorest countries.IntroductionIllicit capital flows is a difficult topic. As we see from the other chapters inthis volume, there are differing definitions of the concept itself and contrastingviews both on how it might be operationally defined for the purposeof producing estimates of magnitudes and on the analytic proceduresthat should be used to produce these estimates. The wise researchermight park the big questions about the dimensions and effects of illicitflows and focus on developing a better understanding of the componentsand correlates of the flows: capital flight, corruption, money laundering,tax avoidance, tax havens, and transfer mispricing. These topics, too, arechallenging. I make a case here for continuing to work with the broaderconcept. Illicit flows have serious, systematic adverse effects on the economicand political development of many of the poorest countries. Whileit is impossible to block all illicit flows, there are significant, feasibleopportunities to reduce them and mitigate their consequences throughcoordinated international action. The better we understand the adverseeffects of these flows, the greater the likelihood of mobilizing more effectiveinternational action. These propositions cannot be proven beyonddoubt. My case is based on deduction from interlocking bits of evidence.It is strong enough to merit more serious inquiry.This is an exercise in political economy. For some purposes, it is usefulto separate the economic causes or consequences of illicit flows fromthe political counterparts. Illicit flows certainly damage the quality ofgovernance. They undermine democracy. The opportunities they createfor personal or institutional enrichment create or exacerbate incentivesfor powerful people and interest groups both to be corrupt and toweaken public institutions so that they can continue to be corrupt (Reedand Fontana 2011). I focus more on a less familiar thread of argument:the ways in which the system that permits illicit flows discouragesdomestic investment in poor countries and therefore reduces rates ofeconomic growth. The economic and political aspects of this system are