draining development.pdf - Khazar University

500 Draining Development?Generally, however, the focus on aggregate figures obscures thedynamics of the phenomenon; it has a black box quality to it. Theaggregates do not allow the analyst to determine composition. Kar andCartwright-Smith note (2008, 1) that their “paper makes no attempt tolink illicit financial flows with the nature of underlying activitieswhether legal or illegal.” It could be argued that, if IFFs constitute auseful target for policy purposes, then the tools are generic. It does notmatter whether the flow is generated by bribery, tax evasion, or circumventingexchange controls. These all involve similar mechanismsfor moving money to another country, probably a rich one, and can bedealt with through the various reform proposals: tightened AML controls,country-by-country reporting, a requirement that transfer pricingregulations be instituted in all countries, and so on. All that isneeded is evidence that the problem is large, and the proposals shouldthen be adopted.In fact, we know far too little about the causes and consequences totake such a reductionist approach at this stage. It is likely that the outflowshave varied sources, channels, and destinations across countries.Nigeria’s IFFs have historically come primarily from high-level corruptionin the oil industry; in Mexico, tax evasion has probably beensubstantially more important. The high estimates for China show thattrade mispricing is a particularly serious problem in that nation, whereasit has been a relatively minor channel in many other developing countries.As Alexander Cobham shows in chapter 11, Switzerland plays acentral role in Zambian flows, while the Isle of Jersey is important in thecase of Algeria. Some channels will be more difficult to shut down; somedestinations, more recalcitrant; and some sources, more innovative incircumventing particular controls. The discussion above also suggeststhat the adverse consequences differ among the various components ofillicit outflows.Moreover, IFFs are almost certainly driven by different factors acrosscountries and over time. As with capital flight generally, political eventsmay be important. Population dynamics matter as well; countries withlarge diasporas may see high inflows, as well as outflows given that émigrésprovide facilitating networks for placing funds overseas.