draining development.pdf - Khazar University

38 Draining Developmentdeveloping countries in general), and, within the latter group, we distinguishbetween normal or intermediate developing countries and fragiledeveloping countries.Advanced economies: The differences with respectto developing economiesAdvanced economies are likely to be supported by rule-based states andpolitical institutions such that the social compromises for political stabilityand the economic policies required for sustaining growth—thepolitical settlement—are reflected and codified in an evolving set oflaws. In these contexts, it is not unreasonable to expect that as a firstapproximation, damaging capital flows are likely to be capital flows thatviolate existing laws. Illegal capital flows are likely to be damaging andcan justifiably be described as illicit in this context. However, some damagingflows may not be illegal if laws do not fully reflect these conditionsor have not caught up with the changing economic and political conditionsinvolved in sustaining growth. For instance, the proliferation ofinadequately regulated financial instruments that resulted in the financialcrisis of 2008 was driven by financial flows that were, in many cases,not illegal, but turned out, ex post, to be seriously damaging. A focus onidentifying damaging financial flows independently of the existing legalframework may therefore be helpful even in advanced countries, though,most of the time, a focus on illegal financial flows may be adequate.Advanced economies, by definition, have extensive productive sectors,which is why they have high levels of average income. As a result,formal taxation can play an important role not only in providing publicgoods, but also in sustaining significant levels of formal, tax-financedredistribution. Both help to achieve political stability and sustain existingpolitical settlements. Taxation may be strongly contested by the rich,but an implicit social contract is likely to exist whereby social interdependenceis recognized and feasible levels of redistributive taxation arenegotiated. Significant fiscal resources also provide the resources to protectproperty rights and enforce a rule of law effectively.Tax evasion and capital flight in this context are likely to representindividual greed and free-riding behavior rather than escape routes fromunsustainable levels of taxation. Moreover, if economic policies andredistributive taxation represent the outcome of political negotiations