draining development.pdf - Khazar University

498 Draining Development?low levels of tax collection. However, the dominance of oil is highly relevantbecause there are specific factors that can explain outflows relatedto oil. Indeed, it is well known that oil trade statistics are particularlyerror-ridden because of the fluid (pun intended) nature of the trade(Statistics Norway 2006; Laherrere 2007; Sinton and Fridley 2001). Forexample, a tanker may leave Saudi Arabia bound for the Netherlands(and be so recorded in Saudi Arabia’s trade statistics), but then bediverted to Mumbai because a better price has been negotiated for deliverythere. It will show up as an Indian rather than a Netherland import.Moreover, the supposed price when it leaves Saudi Arabia will be lowerthan the price when it arrives in India.None of these concerns invalidates the estimates. They do raise questionsabout exactly what the numbers mean, a matter we take up belowin the research agenda portion of this chapter.Do illicit inflows matter?Critics of the large Global Financial Integrity estimates of IFFs, such asFuest and Riedel (chapter 4) and Nitsch (chapter 10), have pointed outthat net illicit flows may be substantially smaller than gross outflowsbecause there are reasons to bring funds in illicitly. Capital flight, fromwhich the estimates are derived, has always been considered potentially atwo-way flow. While temporary events might lead to rapid exits (flighthaving a time dimension), these might then reverse after the events.Political unrest is an example; money that has exited during a period ofinstability might return after a new regime has been established. Even inthe period 2002–06, which is covered by Kar and Cartwright-Smith(2008), a large share of the developing world had restrictions on currencyconversion and international funds flows that gave individuals and firmsincentives to carry out such transactions illegally.Kar and others have correctly pointed out that illicit inflows generatetheir own problems for governments. 19 The ability of the government toconduct effective economic policy, whether fiscal or monetary, is underminedby these flows. Illegal organizations can gain power by access tothese unregistered funds. The illicit funds are likely to avoid taxation.Governments, indeed, make great efforts to force such flows aboveground. The government of Bangladesh, faced with a flow of unrecordedremittances from overseas workers, developed methods to make the use