draining development.pdf - Khazar University

34 Draining Developmentonly of unrecorded capital flows in the balance of payments. Rather,measures of illicit capital flows attempt to capture as many likely conduitsfor such flows as possible, in practice integrating different conventionalmeasures of capital flight with estimates of trade misinvoicing(Kar and Cartwright-Smith 2008).Second, consistent with the conceptual focus on dirty money, the coredriver of capital flight is also more narrowly defined, as follows:The term flight capital is most commonly applied in reference to moneythat shifts out of developing countries, usually into western economies.Motivations for such shifts are usually regarded as portfolio diversificationor fears of political or economic instability or fears of taxation orinflation or confiscation. All of these are valid explanations for the phenomenon,yet the most common motivation appears to be, instead, a desirefor the hidden accumulation of wealth. (Kar and Cartwright-Smith 2008, 2;emphasis added)However, capital flight in response to return differentials, asymmetricinvestment risks, or perceived macroeconomic mismanagementthrough social controls can also occur in the open, in particular in ahighly deregulated financial environment. Thus, the main concern ofconventional approaches to capital flight is with wealth accumulationabroad in general, rather than exclusively or even primarily with hiddenwealth accumulation.Finally, illicit capital flows are also often equated with illegal outflows,on the grounds that funds originating in (or intended for) illicit activitieshave to be hidden and will eventually disappear from any records inthe transferring country (Kar and Cartwright-Smith 2008; Baker andNordin 2007). This narrows conventional definitions of capital flightbecause the latter’s focus on capital outflows that are, in some sense,damaging to the economy is not limited to illegal outflows. How extensivethe overlap between illegal and damaging capital outflows is willdepend on how closely and effectively legal frameworks encapsulate thesocial or economic good, defined in terms of the respective underlyingbenchmark models of an ideal or licit state of affairs.In fact, the equation of illegal and illicit capital outflows is not systematicallysustained, even in the dirty money approach. At least some ofthe activities included in the analysis of dirty money are not illegal, but