draining development.pdf - Khazar University

468 Draining Development?welfare and the needs of capitalists for infrastructure and other kinds ofsupport. The high proportion of the world’s private companies that arerooted, historically and in terms of activities and beneficial ownership,in OECD countries face significant tax bills and pressures to relocatetheir profits formally to low-tax jurisdictions.Weak statesThese tend to be small countries, although Nigeria is also included, characterizedby relatively weak public institutions and by political elites thatface unusually strong temptations to enrich themselves through the waysin which they intermediate between domestic and international actors,institutions and resources (see the section on globalization). Commercialand banking confidentiality is not guaranteed. Legal and penal systemsoften function slowly and badly. Property rights tend to be weak. Arelatively small proportion of the population are employees in the formalprivate sector. Private enterprise is often associated with immigrantforeigners or ethnic minorities and is still widely considered illegitimateor immoral (Chaudhry 1994; Moore 1997; Riggs 1964). Almost paradoxically,this limited political and cultural legitimacy of capitalismcoexists with a relatively high dependence of governments for their revenueon what they can collect directly from private companies.In general, the capacity of governments to raise revenue is substantiallydependent on the structure of national economies. Above all, the proportionof GDP that accrues to governments increases predictably as averageincomes rise. 12 Historically, the governments of poorer countries havedepended heavily for revenue on easy-to-collect import and export taxes.This remains broadly true of the contemporary world, but is, however,much less true than 20 years ago. In the intervening period, governmentsof poorer countries have reduced tariff rates substantially and introduceda value added tax (VAT) to substitute, not always completely, for the revenueforgone (Baunsgaard and Keen 2005; Keen and Lockwood 2010). Tothat extent, their formal tax structures have come to resemble those of theOECD countries. However, they lack the capacity of the OECD’s richercountries to raise large revenues through personal income taxes collectedby employers on a withholding basis (see table 14.1).The net effect of these factors is that governments of poorer countries—thebest proxy we have for weak states—are relatively highly depen-