draining development.pdf - Khazar University

Governance and Illicit Flows 41The concern here is that some of these financial flows were illicit eitherbecause they were directly damaging to the economy or because they damagedthe political settlement in unsustainable ways and may eventuallybring about economic costs in the form of social protests and decliningpolitical stability. These are obviously matters of judgment, but our definitionprovides a consistent way of structuring the policy debate withoutgetting locked into a monocausal definition.As long as the new sectors grew rapidly, the critique that some capitalflows were illicit (even if legal) remained a fringe argument. However, thefinancial crisis of 2008, largely the result of excessive risk taking by aninsufficiently regulated financial sector, showed, ex post, that some ofthese financial flows were not only questionable in terms of their legitimacyand their impact on social agreements, they were damaging in astraightforward sense of economic viability. If the political process inadvanced countries responds to these pressures by enacting laws that combinesocially acceptable redistributive arrangements with regulatory structuresthat make sense for sustained economic growth, the law could onceagain reflect a broadbased social compromise grounded on maintainingpolitically sustainable economic growth. Under these circumstances, illicitcapital flows will once again become coterminous with illegal capital flows.Even so, the basic features of advanced countries that we discussabove have often created an expectation that a rule of law can and shouldbe enforced at a global level, making illicit capital flows relatively easy toidentify and target. Unfortunately, while this analysis makes sense at thelevel of individual advanced countries, it falls apart as an analyticalframework at a global level. It ignores the obvious fact that global lawsguiding economic policy or capital flows would only be legitimate ifthere were a global social consensus based on the same principles ofredistributive taxation and social provision on which cohesive societiesare constructed at the level of individual countries. It also presumes thata global agency would have the fiscal resources to enforce laws at theglobal level in the same way that individual advanced countries canenforce national laws. None of these presumptions are reasonable giventhe current global gaps among countries in terms of economics and politics.By our definition, the absence of a sustainable global political settlementbased on global redistributive and enforcement capabilitiesmakes problematic any attempt to define IFFs at the global level.