draining development.pdf - Khazar University

Governance and Illicit Flows 37Illicit Capital Outflows: An Alternative Policy FrameworkThe discussion above suggests that the search for a conceptual definitionof capital flight in general and of illicit capital outflows from developingcountries in particular has been motivated by differing perceptions ofwhat constitutes the social or developmental good. Implicit differencesin the values and theoretical models of observers explain the significantdifferences in how illicit capital flows have been defined. These hiddendifferences are not conducive for developing effective policy responseson the basis of which some minimum agreement can be reached. Webelieve we can go to the core of the problem by defining illicit capitalflows as outflows that cause damage to the economic development of thecountry, taking into account all direct and indirect effects that are likely,given the specific political settlement.An implicit assumption in many conventional approaches is that allflight capital, however defined, will yield a higher rate of social return indeveloping economies if it can be retained domestically (Schneider2003a; Cumby and Levich 1987; Walter 1987). From a policy perspective,locking in potential flight capital is supposed to reduce the loss of developmentalresources directly and indirectly stabilize domestic financialmarkets and improve the domestic tax base (Cuddington 1986). In contrast,we argue that the problems faced by countries with capital flightcan be different in nature. The widely shared premise of a general negativerelationship between capital outflows and domestic capital accumulationsimply is not valid (Gordon and Levine 1989). Dynamic linksamong capital flows, economic growth, technological change, and politicalconstraints mean that, even in advanced economies, the regulation ofcapital outflows is an uphill and evolving task. In developing countries,too, some capital outflows may be desirable to sustain development.Moreover, the idea underlying some of the illicit capital flow literaturethat adherence to the law is sufficient for identifying the social or economicgood clearly does not always apply.On the basis of our minimalist definition of illicit capital flows, weproceed to develop a simple three-tier typology of economic and politicalconstellations and governance structures and the ways in whichthese pose policy challenges in controlling illicit capital outflows. Specifically,we distinguish between advanced economies (in opposition to