draining development.pdf - Khazar University

486 Draining Development?heavily in small countries with kleptocratic traditions. The fear mayincrease the current kleptocrats’ incentives for retaining power giventhat flight will separate them from their wealth. 2 However, this seems amodest effect; few kleptocrats quit power easily, even with vast amountsof wealth overseas, as evidenced by Muammar Ghaddafi’s refusal to leaveLibya under extreme pressure, despite the availability of billions of dollarsin overseas accounts.It is unclear how one should assess the plausibility of the above arguments:one is at a loss to identify instances in which it has, in fact, beendifficult to transfer money from a developing country. The argumentsdo not seem persuasive. One suspects that trapping the funds at homewill not much reduce the temptations for corruption and tax evasion,but that is pure conjecture.There are, however, potential negative effects of preventing internationaltransfers as well; those forced to keep their funds at home willhave incentives to pay more bribes to protect their assets, now more vulnerableto the kleptocratic regime. Whereas a one-time payment mayhave sufficed to get the funds out of the country illegally, protectingthem at home year after year might require frequent payments. Theshare of total gross domestic product (GDP) devoted to corruption mayactually rise. Assessing how important this effect might be is also difficult,but it is probably not large under most circumstances.Stephanie Blankenburg and Mushtaq Khan, in chapter 2, offer anargument why IFFs might be the wrong focus for policy efforts. They seethe flows as the consequence of more fundamental failures of governance,which generate grand corruption and a reduced willingness topay taxes, a theme also of chapter 3 by Max Everest-Phillips. The argumentis almost one of feasibility rather than relative effectiveness. It isonly possible to reduce the outflows from developing countries byimproving governance, and, anyway, good governance produces manyother gains. For example, a significant share of illicit flows in some countriesarise in response to policies that lower the domestic returns availableto investors outside of a favored elite who have access to the bestopportunities. The sources of the income that is seeking higher returnsoverseas may be legitimate, but, if the government has imposed strictlimits on currency conversion to stimulate domestic investment, moneywill flow overseas illegally. Eliminating the restrictive policies may be a