draining development.pdf - Khazar University

30 Draining Developmentthe primary source of net errors and omissions in a country’s balance ofpayments) (for example, see Cuddington 1986, 1987). In contrast, themost widely used statistical definition of capital flight, often referred toas the residual measure, includes recorded and nonrecorded acquisitionsof medium- and short-term assets and uses broader estimates of capitalinflows (World Bank 1985; Erbe 1985; Myrvin and Hughes Hallett1992). 2 Cuddington thus reemphasizes the idea that abnormal capitaloutflows of money running away are a reaction to exceptional circumstancesand events rather than ordinary business, although, in times ofextensive deregulation of international financial markets, this conjecturemay be less convincing. Other authors have taken a different route todistinguish portfolio capital flight from other forms of capital flight, inparticular that induced by extreme political instability, such as civil war(Tornell and Velasco 1992; Collier 1999). In the latter case, capital flightcan occur despite lower actual foreign returns relative to potentialdomestic returns (if peace could be achieved) and is part of a wider outflowof productive resources, including labor.The social controls approach to capital flightA second strand of the capital flight literature defines capital flight as“the movement of private capital from one jurisdiction to another inorder to reduce the actual or potential level of social control over capital”(Boyce and Zarsky 1988, 192). To the extent that such capital flight ismotivated primarily by the pursuit of private economic gain, this socialcontrol definition is not radically different from the portfolio approach.In both cases, capital flight occurs in response to policy intervention.However, the “social controls” approach restsupon an explicit premise absent in much conventional economic theory,namely that individual control over capital is rarely absolute or uncontested,but rather subject to social constraints, the character and extent ofwhich vary through time. Unlike many authors, Boyce and Zarsky, thereforedo not consider capital flight to be necessarily “abnormal.” (Rishi andBoyce 1990, 1645)As with the portfolio approach, there is no systematic distinctionbetween fundamentally different drivers of capital flight. All capitalflight occurs in response to government controls, whether these concern