draining development.pdf - Khazar University

48 Draining Developmentis turned, more or less directly, into private asset accumulation abroad bydomestic residents. Examples include the Philippines and several Sub-Saharan African economies (Boyce and Ndikumana 2001; Cerra, Rishi,and Saxena 2008; Hermes and Lensink 1992; Vos 1992). Odious debt hasno redeeming features, and, if it can be blocked, the developing country islikely to be more well off in terms of direct investment effects. In normalcases where a political settlement involving powerful domestic constituenciesexists, theft on this scale by a subset of the ruling coalition is likely toundermine the political settlement and have additional negative effects ongrowth. Blocking these financial outflows is therefore likely to have a positiveeffect on growth through both direct and indirect effects. The flowsare thus rightly classified as illicit.Many cases are more complex. Consider a plausible case wherein capitalflight is driven by attempts to evade environmental restrictions, laborlaws, or other socially desirable regulations that reduce profits. In principle,these could be welfare-enhancing regulations, and capital flight toevade them could be judged illicit. However, a more careful evaluationsuggests that the issue may vary from case to case. Because developingcountries are often competing on narrow margins with other developingcountries, investors may threaten to leave and begin to transfer resourcesaway from a country. What should the policy response be? If social policiesin the developing country are significantly out of line with competitors,these policies may have made the country uncompetitive. Yet,removing all social protections is also not desirable. The real issue in thiscase is coordination in social policy that takes into account differences ininitial conditions across countries, not an easy task. If such a coordinatedpolicy structure is not possible across countries, the enforcement ofrestrictions on capital flight is unlikely to improve growth becausedomestic investors may become globally uncompetitive. These capitalflows would therefore not be illicit according to our definition becauseblocking capital flight without deeper policy coordination may fail toimprove economic outcomes in a particular country. This has importantpolicy implications: all our effort should not be put into trying to blockcapital flight regardless of the underlying causes. Rather, the policy focusshould be either to achieve the coordination of social policies acrossdeveloping countries or, more realistic, to change policies such that regulationsare aligned across similar countries.