draining development.pdf - Khazar University

52 Draining Developmentpromote growth. Recycling through a foreign jurisdiction may also be amechanism for hiding the source of funds in cases in which much of theinitial capital base of emerging capitalists has involved questionable processesof accumulation that could be challenged by their competitors interms of a formal interpretation of laws. Declaring these flows illicit forthe purpose of blocking them may be a mistake. The direct effect is likelyto be a reduction in investment because these types of accumulationmay continue to remain hidden or be diverted into criminal activities.The expectation of positive indirect effects, for instance by creating disincentivesfor accumulating resources through questionable informalprocesses, may also be misguided given the structural informality indeveloping countries discussed elsewhere above. These are matters ofjudgment in particular cases.Sometimes, capital outflows may appear to be illicit simply becausethey are disallowed by ill-considered laws that cannot be enforced. If thelaws were enforced, society might become even less well off. For instance,in some developing countries, vital imports may be illegal for no obviousreason, forcing importers to engage in illegal financial transfers toget around the restrictions. In many developing countries, remitting foreignexchange out of the country may also be disallowed for many purposes,including vitally important ones. An example is the widespreadpractice of illegally remitting foreign exchange from Bangladesh to foreignemployment agencies that want a commission for arranging overseasemployment for Bangladeshi workers. If, as a result, domestic workersare able to find employment on better terms than in the domesticmarket, their higher incomes are likely to have a positive effect on welfare,and their remittances are likely to support domestic growth. If illegalfinancial outflows involve payments to people smugglers, and mostdomestic workers end up less well off, the direct effects alone wouldmake us classify the financial flows as illicit. A careful analysis is requiredin each case, but, in many cases, the problem may be an inappropriatelegal or regulatory structure.Table 2.1 summarizes some of the examples we discuss. Only flowsfalling in the middle row of the table are properly illicit according to ourdefinition. Defining as illicit the other capital flows listed may be a policyerror even in the case of financial flows in which the direct effect appearsto be damaging. Nor is the legal-illegal divide of much use in the typical