draining development.pdf - Khazar University

32 Draining Developmentsomewhere else. In any event, people have a sense that capital flight is insome way illicit, in some way bad for the home country, unless, of course,capital is fleeing unfair discrimination, as in the case of Nazi persecution.(Epstein 2006, 3; italics added)For Epstein (2006, 3–4), capital flight is therefore an “inherently politicalphenomenon” and also mainly “the prerogative of those—usuallythe wealthy—with access to foreign exchange.” This view entails a moreexplicitly normative position than either the portfolio approach or theweak version of the social controls approach in that capital flight is characterizednot only as economically damaging for development, but alsoas illegitimate from the perspective of an existing consensus about thesocial (developmental) good.Capital flight as dirty moneyBoth the portfolio approach and the social controls approach broadlyinterpret capital flight as a response by private capital to expectations oflower domestic returns relative to foreign returns on assets. Both are outcomeoriented in that their primary concern is with the macro economicanalysis of the perceived damage inflicted by capital flight on developingeconomies rather than with the origins of flight capital or the methods bywhich it is being transferred abroad. They differ with regard to their analyticalbenchmark models of a normal or ideal economy. Whereas theportfolio approach subscribes to variants of the standard model of a competitivefree-market economy, the social controls approach adopts a mixedeconomy model in which the social control of private capital, for exampleby a welfare state, is normal. This translates into different single-drivermodels of capital flight. In the first case, the driver is simply profit (or utility)maximization (or the minimization of investment risk) at a globallevel, and the damage done arises not from capital flight per se, but frommarket distortions that lower relative returns on domestic private assets.In the second case, the driver is the avoidance of policy controls, and thedamage arises from private capital breaking implicit or explicit social contracts.These models overlap only in so far as (1) market distortions arisefrom domestic policy interventions rather than other exogenous shocksand (2) social controls are judged, in any particular context, to be poorlydesigned so as to undermine rather than promote economic developmentand thus violate the implicit or explicit social contract.