draining development.pdf - Khazar University

Governance and Illicit Flows 43Much of the economy, including the formal sector, suffers from low productivityand does not generate a big enough taxable surplus to pay foracross-the-board protection of property rights and adequate economicregulation. The achievement of competitiveness also often requires periodsof government assistance and strong links between business andpolitics. This is because, even though wages may be low, the productivityof the modern sector is often even lower. Developing countries havepoor infrastructure and poor skills in labor and management, and, inparticular, they lack much of the tacit knowledge required to use moderntechnologies efficiently, even the most labor-intensive ones.The strategies through which developing countries progress up thetechnology ladder while maintaining their internal political arrangementscan differ substantially across countries (Khan and Blankenburg2009). These strategies usually involve creating opportunities and conditionsfor profitable investment in at least a few sectors at a time. Becausethe creation of profitable conditions across the board is beyond the fiscalcapacities of developing countries, these strategies inevitably create privilegesfor the modern sector and, often, for particular subsectors throughgovernment interventions in prices, exchange rates, interest rates, regulations,taxes, subsidies, and other policy instruments. The strategies forassisting learning in countries with industrial policies, such as the EastAsian tigers, are well known. But the growth of modern sectors in alldeveloping countries has required accidents or smaller-scale policyinterventions that overcame the built-in disadvantages of operatingprofitably given the adverse initial conditions (Khan 2009). Some of thisassistance may be formal and legal, but other aspects of assistance maybe informal and even illegal. For instance, some firms may informallyhave privileged access to land, licenses, and other public resources. Someof these privileges may be important in offsetting initial low productivityor the higher costs created by poor infrastructure and the poorenforcement of property rights and the rule of law. Deliberately or otherwise,these arrangements can assist some firms in starting productionin adverse conditions and engage in learning by doing, but they can alsosimply provide privileges to unproductive groups (Khan and Jomo 2000;Khan 2006).Thus, in many cases, business-government links in developing countriesare predatory from the perspective of the broader society. Resources