draining development.pdf - Khazar University

58 Draining DevelopmentTable 2.2. Illicit Financial Flows in Different ContextsCountrytype Defining features Main policy concernMain types ofillicit capital flowsPolicy focus inaddressing illicitcapital flowsAdvancedeconomiesIntermediateor normaldevelopersFragiledevelopingcountriesHigh average incomesand long-term politicalstability. Political processresponds effectively toeconomic underperformanceand distributiveconcerns.Lower average incomes,and politics based on acombination of formaland informal (patronclient)redistributivearrangements. Achieveslong-term stabilitywithout sustainedviolence.Breakdown of existingpolitical settlementsresulting in the outbreakof sustained violencethat undermines longertermconditions for themaintenance of basicsociopolitical order.Laws and fiscal programsshould maintain socialcohesion and economicgrowth.Develop, maintain, andexpand viable develop -ment strategies, inparticular the developmentof broadbasedproductive sectors.State building andreconstruction of aviable politicalsettlement to allowsociety to embark on asustainable path ofeconomic development.Mainly flows that violateexisting laws (forexample, tax evasion).Occasionally refer tolegal flows where lawsno longer reflect socialconsensus or economicsustainability.Flows that underminedevelopmental strategies.Capital flight in acontext of a failure toraise domestic profitabilityis problematic,but is not necessarilyillicit. Flows associatedwith internationallycriminalized activitieslike drugs.Not possible to defineillicit flows in a neutralway when elites are inconflict. The effects offinancial flows have tobe judged primarily interms of their effectson the establishmentof a particular politicalsettlement.Strengthen enforcementand regulation. Atmoments of crisis,attempt to bring lawback into line with broadsocial consensus oneconomic and politicalgoals.Economic policies toenhance profitabilityprimarily by addressingcritical market failures.Build governancecapabilities to enforcerestrictions on financialflows that make thesepolicies less vulnerable topolitical contestation.A viable political settlementrequires competinggroups to accept adistribution of benefitsconsistent with theirunderstanding of theirrelative power. Difficultfor outsiders to contributepositively andeasy to prolong conflictsinadvertently.Source: Author compilation.Policy Responses to Illicit FlowsOur discussion above suggests that capital outflows from developingcountries qualify as illicit according to our definition if they have a negativeeconomic impact on a particular country after we take both directand indirect effects into account in the context of a specific politicalsettlement. Both judgments about effects are counterfactual in the sensethat we are asking what would directly happen to growth if a particularflow could be blocked, and then we are asking what would happen afterthe indirect effects arising from adjustments by critical stakeholders tothe new situation have taken place. The latter assessment depends on ourknowledge about the economy and polity of the society as summarized