draining development.pdf - Khazar University

The Practical Political Economy of Illicit Flows 473The first inference that we can make is that, even if the rates of returnon capital investment were the same across all four types of jurisdictions,people who own or control large amounts of capital from within weakstates would prefer to expatriate (some of) it to other jurisdictions.There are three interacting reasons, as follows:1. In weak states, property rights are, anyway, relatively insecure. Theseare, on average, not good places for companies or wealthy individualsto keep abundant assets, especially liquid assets.2. Especially in contemporary weak states, large capital accumulationsin private hands are often the result of corruption, the abuse of politicalpower, and theft of public assets. Such accumulations are alwaysvulnerable to changes of political fortune. New power-holders willtend to try to expose the sins and corruption or take a share in theassets of the people they replace. Placing illicitly acquired money elsewherein the world, above all in a tax haven, is the best protectionagainst political opponents or political successors at home, domestictax authorities, global investigatory authorities, and campaigninginternational nongovernmental organizations.3. Companies operating in weak states frequently face a trade-offbetween (a) paying the relatively high headline rates of tax on theiroperations or (b) making political contributions to purchase formalor informal exemptions, tax holidays, or other favorable treatmentfrom tax authorities. We can assume—hard evidence on this point isparticularly elusive—that the people concerned would prefer tounderstate profits and expatriate capital clandestinely to reduce theirvulnerability to this kind of political squeeze. Transfer mispricing islikely the dominant means.Owners and managers of capital have significant extraeconomicincentives to expatriate capital secretly from weak states. They also haveopportunities to do so at relatively low cost. First, central banking and taxauthorities tend to be weak and, thus, do not constitute much of a barrierto transfer mispricing or other mechanisms of illicit outflow. Second,other attractive locations for capital have become increasingly available.The OECD countries have some allure, but the disadvantage that theirgovernments mostly require significant tax payments. Tax havens moreclosely meet the three major needs: security of ownership, the secrecy