draining development.pdf - Khazar University

474 Draining Development?needed to hide the recent origins of the capital, and low tax rates. Muchof the capital passing through tax havens might be laundered and thenappear as direct foreign investment in other jurisdictions.The first-round consequence of the institutional configuration I havesketched out is that the people who own or control capital in weak stateshave powerful incentives to convert the capital into illicit outflows andsignificant opportunities to do so. 19 Even if we remain agnostic about thevarious estimates of the aggregate size of these outflows from weakstates, we could reasonably conclude that the combination of the extraeconomicincentives to expatriate capital and the opportunities to do sowill tend to reduce the rates of investment and economic growth in weakstates. However, only when we examine the second and third ordereffects of this institutional configuration can we appreciate the extent towhich it may be doing consistent economic and political damage to weakstates, as follows:• The potential to hide illicit capital securely in tax havens is a directstimulus to corruption and other illicit activities such as transfer mispricing.It decreases the chances of detection and therefore increasesthe likely returns.• Especially in polities characterized by high degrees of socioeconomicinequality and little or no effective institutionalized popular control ofthe actions of political elites, those fractions of the political elites thatare able and willing to participate in this nexus of corrupt internalaccumulation and illicit capital outflows are also motivated and able tocreate or change the rules of the game to ensure that they can continueplaying it in a rewarding way. In practice, this is likely to mean taxagencies that collect enough money to run basic government services,but have low overall capacity, especially in dealing with complex internationalissues such as transfer pricing; police services that lack investigatorypowers; court systems vulnerable to corruption; weak publicaudit offices that lack independent authority; legislatures that lack collectivecohesion and authority; fragile, unstable political parties motivatedby money and patronage; and public services that lack a collective,professional ethos. Indirectly, these processes may further weakenthe protection of property rights through their incentive effects onpolitical elites. Powerful groups that control considerable (illicit) capi-