draining development.pdf - Khazar University

Governance and Illicit Flows 39between different groups, illegal capital flows would also be illicit in thesense of damaging the sustainability of the political settlement andthereby, possibly, having damaging indirect effects on economic growth.Transparency, accountability, and the enforcement of the rule of law cantherefore be regarded as mechanisms for limiting tax-avoiding capitalflight and other forms of illicit capital flows in advanced countries.Nonetheless, even within advanced countries, if legal arrangementscease to reflect economic and redistributive arrangements acceptable tomajor social constituencies, the correspondence between illegal andillicit can break down. The more recent discussion of illicit capital flowsin advanced countries has to be considered in a context in which theincrease in the bargaining power of the rich to define economic laws intheir own interest has exceeded the pace at which other social groupshave accepted these changes. This allows us to make sense of the morerecent preoccupation with IFFs in many countries of the Organisationfor Economic Co-operation and Development (OECD) where the concernwith dirty money has been closely associated with changes in thestructure of many of these economies as a result of the decline in manufacturingand a growth in the service sectors, in particular, finance. Theresult has been not only a gradual change in the formal structure of taxationand redistribution in ways that reflect the regressive changes inpower, but also a growing tendency of the super-rich to evade even existinglegal redistributive arrangements through financial innovations oroutright illegal capital flows. The avoidance and evasion of taxation havenot been uncontested in advanced countries. Many social groups havecriticized these developments and questioned the legitimacy of capitalflows that seek to avoid and evade taxes. This constitutes an importantpart of the concern with illicit capital flows in advanced countries.Palma (2005) points to the significant decline in manufacturing profitsas a share of total profits in advanced countries over the last threedecades and the concomitant search for global financial, technological,and resource rents (see also Smithin 1996). The decline in manufacturingcan at least partly explain the significant change in income distributionin OECD countries, generally in favor of the highest incomegroups. For example, in the United States, the average real income of thebottom 120 million families remained roughly stagnant between 1973and 2006, while that of the top 0.01 percent of income earners increased