draining development.pdf - Khazar University

36 Draining Development2. The social controls approach is almost the mirror image of the portfolioapproach. All social controls over private capital movements arepresumed to reflect a legitimate social contract that is welfare enhancing.As a result, capital outflows that violate social controls imposedby a welfare-developmental state are damaging and illicit, presumablybecause the indirect effects of violating the social contract will besocially damaging. The best way to eliminate capital flight is to reinforcesocial controls. This largely ignores the fact that not all formalsocial controls and regulations in developing countries are legitimate,growth enhancing, or politically viable.3. In the dirty money approach, social damage is the result of violatingthe rule of law. Capital flight is driven by the desire to accumulatewealth by hiding from the rule of law. No substantial view on whatconstitutes social, economic, or political damage is typically offered.This largely ignores the fact that, in developing countries in particular,existing legal frameworks may not adequately encapsulate theeconomic and political conditions necessary to achieve whicheversubstantial idea of the social good is adopted (economic development,social justice, the preservation of specific human rights, and so on).Figure 2.1. Definitions of Capital FlightbroadnarrowSource: Author compilation.Portfolio approachSocial good: Competitive marketsCore driver: “Illicit” policy interference with competitive marketsPolicy response: Market-friendly reformsSocial controls approachSocial good: Benevolent developmental state/mixed economyCore driver: Evasion of legitimate social controls ofprivate capital movementPolicy response: Reinforce controlsIllicit capital flowsSocial good: The rule of law/goodgovernanceCore driver: Hidden accumulationof wealthPolicy response: Globalbans and regulationIllegalcapitalflowsoutcomeorientedruleoriented