draining development.pdf - Khazar University

Governance and Illicit Flows 31short-term macroeconomic stabilization through fiscal and monetarypolicy measures or more long-term structural interventions. However,in this case, the underlying model of the economy is not that of universaland competitive markets inhabited by maximizers of expected utilityand profits, but rather that of a mixed economy in which markets areone set of several institutions ultimately governed by a (welfare or developmental)state or, more broadly, by social interventions from outsidethe market sphere. Different from the portfolio approach, the main policyimplication is therefore not simply a focus to promote markets, butto minimize capital flight through the strengthening of existing socialcontrols or the introduction of alternative, more effective administrativemeasures to control private capital movements.The social controls approach remains ambiguous, however, about theorigin and legitimacy of social (capital) controls. A weak version of theapproach identifies governments as the core players in social control,and no explicit judgment is made about the legitimacy or effectivenessof specific government controls. This position comes closest to the portfolioapproach. In this vein, Walter, for example, argues that capital flightappears to consist of a subset of international asset redeployments orportfolio adjustments—undertaken in response to significant perceiveddeterioration in risk/return profiles associated with assets located in aparticular country—that occur in the presence of conflict between objectivesof asset holders and the government. It may or may not violate thelaw. It is always considered by authorities to violate an implied social contract.(Walter 1987, 105)By contrast, the strong version adopts the more heroic assumptionthat social (capital) controls reflect some kind of a social consensusabout the ways in which economic development is best achieved. Theimplied social contract here is not one merely perceived by governmentauthorities to exist, but one based on genuine social approval. A recentexample is the observation of Epstein, as follows:When people hear the term “capital flight” they think of money runningaway from one country to a money “haven” abroad, in the process doingharm to the home economy and society. People probably have the idea thatmoney runs away for any of a number of reasons: to avoid taxation; toavoid confiscation; in search of better treatment, or of higher returns