draining development.pdf - Khazar University

Governance and Illicit Flows 47tain political operations in this political settlement, then financial flowsthat violate these rules can justifiably be considered illicit. In contrast, ifthe informal understanding between competing parties is still vulnerableand live-and-let-live arrangements have not become entrenched (asin Bangladesh, Bolivia, Thailand, and, to an extent, República Bolivarianade Venezuela), attempts to limit financial outflows driven by politicalplayers are likely to be evaded or, if forcefully enforced, can occasionallyhave damaging consequences in raising the stakes during elections.According to our definition, we should not consider all capital outflowsby political actors to be illicit in these contexts, with critically importantpolicy implications. Clearly, these judgments reflect an attempt to takeinto account direct and indirect effects and are open to a degree of disagreement.However, we believe that these judgments have to be madeand that they are best made explicitly.Financial outflows driven by economic actors. Financial outflows drivenby economic actors can be motivated by concerns about expropriationor low profitability (in addition to tax evasion and tax avoidance). Thesefactors help explain the frequent paradox that economic actors in developingcountries often shift assets to advanced-country jurisdictionswhere tax rates are higher and the returns achieved, say, on bank deposits,are nominally lower (Tornell and Velasco 1992). Some of these flowsare damaging, and blocking them (if that were possible) is likely to leavesociety more well off. Others are not damaging, or, even if they are damaging,attempts to block them would not be positive for society after allthe direct and indirect effects are weighed.Financial outflows with net negative effects. The simplest cases involvecapital flight whereby both the direct and indirect effects are negative, suchas those driven by tax evasion or tax avoidance. The direct effect of theseoutflows is likely to be negative if tax revenue and, with it, public investmentis reduced, and, in addition, the indirect effect is also likely to benegative if the taxes are socially legitimate and their loss undermines politicalstability. The capital flight in these cases is clearly illicit. Another clearcutcase is that of theft of public resources with the collusion of politicalactors. A particularly serious example is the two-way capital flow involvedin the odious debt buildup resulting if external borrowing by governments