draining development.pdf - Khazar University

The Practical Political Economy of Illicit Flows 471Other jurisdictionsThis residual category includes most of the world’s most rapidly growinglarge economies, including Brazil, China, India, Indonesia, and Turkey,and a number of rapidly growing medium-sized economies such asArgentina; Chile; the Republic of Korea; Malaysia; and Taiwan, China.They are relatively peripheral to the concerns of this chapter becausethey do not yet provide environments in which illicit capital can be kept,invested, or laundered easily, securely, and anonymously, especially notby foreigners without good local political connections. Some are majorsources of illicit international flows, sometimes as a part of relativelydistinct localized flow patterns. We know that large quantities of illicitflows out of India are routed through Mauritius before they return toIndia to take advantage of the privileges granted to foreign investment.Similarly, an even larger proportion of total global illicit flows take theform of business profits or the proceeds of corruption generated inChina that are illicitly expatriated, partly to avoid the risk and burdensof foreign exchange controls, and often reappear in China to benefitfrom tax exemptions for foreign investment. 17The Location of Capital and ProfitsAs the global economy has become more liberal and financialized inrecent decades, the people who own and control large amounts of capitalface wider choices about where they locate it, where they book theirprofits for accounting and tax purposes, and how they transfer capitalbetween jurisdictions. Many factors affect these choices, not least the realprofitability of investment. All else being equal, investment will flow tothe places where it can generate higher returns. But there is, in addition,a range of other political, institutional, and policy factors that affectthese decisions. Six such factors seem particularly consequential for thepattern of illicit capital flows, as follows:1. The degree of property security. This, in turn, reflects the interactionof four main considerations: the degree of political stability; theextent to which political power-holders are likely, because of combinationsof incentive and opportunity, to prey on the property of others;the extent to which there is effective protection against private