draining development.pdf - Khazar University

42 Draining DevelopmentTo understand this more clearly, the differences between the politicalsettlements in advanced and developing countries need to be spelled out.First, developing countries are structurally different because their internalpolitical stability and economic development are not (and cannotnormally be) organized through formal rules and laws to the extentobserved in advanced countries. In developing countries, the legal frameworkis not an adequate guide for identifying illicit capital flows even as afirst approximation. There are two essential limitations on a purely legalanalysis of what is illicit in the typical developing country. First, in therealm of politics, the internal political stability of developing countries isnot solely or even primarily based on social agreements consolidatedthrough legal fiscal redistributions. For a variety of reasons, includinglimited fiscal space and more intense conflicts given the context of socialtransformations, redistributive fiscal arrangements are typically lesstransparent and less formal compared with those in advanced countries.The political problem involves delivering resources to powerful constituenciesthat would otherwise be the source of political instability in acontext of fiscal scarcity.If politically powerful constituencies have to be accommodated legitimatelyand transparently, acceptable redistributions to more deservinggroups such as the severely poor have to be agreed upon simultaneouslyto achieve political legitimacy. The fiscal sums typically do not add up indeveloping countries for a redistributive package that would pass the testof public legitimacy, as well as provide the redistribution required bypowerful groups. As a result, it is not surprising that the critical redistributionsto powerful constituencies typically occur through patron-clientpolitics and other mechanisms characterized by limited transparency. Ifsuccessful, these arrangements achieve political stabilization by incorporatingsufficient numbers of politically powerful factions within the rulingcoalition. Even in developing countries where significant fiscal redistributiontakes place, critical parts of the overall system of politicalredistribution are not based on transparently negotiated arrangementscodified in fiscal laws and economic policies (Khan 2005).Second, the economies of developing countries are also significantlydifferent from the economies of advanced countries. Their formal orregulated modern sectors are normally a small part of the economy, anda much larger informal sector is unregulated or only partially regulated.