draining development.pdf - Khazar University

Governance and Illicit Flows 35refer to practices characterized as abusive, such as aspects of transferpricing, specific uses made of tax havens, and corrupt activities that havenot necessarily been outlawed. Rather, the procedural or rule-basedfocus on adherence to the law in this approach to capital flight is basedon an implicit claim that adherence to the law will promote economicdevelopment or, more generally, the social good. If the principal motivationfor capital flight is, in fact, “the external, often hidden, accumulationof wealth, and this far outweighs concerns about taxes” (Baker and Nordin2007, 2), the policy response has to be directed primarily at eliminatingthe dirty money structure through the enforcement of national andglobal standards of financial transparency and democratic accountability.The core obstacle to economic development then becomes the lack ofgood governance, corruption, and the absence of or weaknesses in therule of law (rather than specific legislation).Thus, the dirty money approach to illicit capital flows from developingcountries differs from more conventional definitions of capital flightmainly in that it appears to be rooted less in outcome-oriented models ofeconomic growth and development, but in a specific rule-based liberalmodel of good governance and a good polity, perceived to be a necessarycondition for achieving any more substantially defined social good.From the above, we see that the literature identifies three core driversof capital flight from developing economies, each implying a differentunderlying view of what constitutes damage to these economies andeach adopting a monocausal perspective. Figure 2.1 summarizes featuresof these approaches, as follows:1. In the portfolio approach, social damage is a result of interferencewith competitive markets that are presumed to otherwise exist. Capitalflight is driven by economic incentives to escape such interferencegiven profit-maximizing investment strategies. The best way to eliminatecapital flight in this perspective is to remove the damaging governmentinterventions in competitive markets. This largely ignoresthe fact that competitive markets require government regulation evenin advanced economies and that extensive market failures imply thatsignificant government intervention may be required to achievedevelopmental outcomes in developing economies.