draining development.pdf - Khazar University

Governance and Illicit Flows 63Our analysis also questions the validity of a core premise of the capitalflight literature, namely, that all flight capital, if retained domestically,will yield a higher social rate of return (Schneider 2003a; Cumby andLevich 1987; Walter 1987). The purpose of our analytical typology is toshow that, from the point of view of economic and political development,blocking all capital outflows from developing countries is notdesirable. Moreover, as we outline in table 2.1, blocking some apparentlydamaging flows can also do more harm than good if these flows aredriven by deeper problems (such as the absence of industrial policy, liveand-let-liverules between competing political factions, or the presenceof domestic monopolies). In these cases, we argue, it is a mistake todescribe the resultant flows as illicit. The policy implication is not thatnothing should be done in such cases. It is rather that the solution is tolook for policies that address the underlying structural problems. In thecase of fragile developers, our analysis points out the dangers of too easilydefining what is illicit. Finally, our sequential impact assessment suggeststhat there are dangers even in simplistically attacking capital flowsthat we do deem illicit. Even in these cases, it is possible that some policyresponses are more effective than others, and policies that tackle illicitcapital flows in isolation from the wider political settlements of whichthey are a part may leave society less well off.Consider the following example on anti–money laundering (AML)policies. The cost-effectiveness of the AML regime promoted by theintergovernmental Financial Action Task Force is doubtful even foradvanced economies (Reuter and Truman 2004; Schneider 2005). 4 Sharman(2008) extends this analysis to developing countries, with a specialfocus on Barbados, Mauritius, and Vanuatu, and finds that AML standardshave had a significant net negative impact on these three developingcountries. Essentially, the costs imposed on legitimate businesses andstates having limited administrative and financial capacity far outweighedthe extremely limited benefits in terms of convictions or therecovery of illicit assets. Yet, according to Sharman, rather than rethinkingthe policy model, its enforcement was strengthened mainly by blacklistingnoncompliant countries and through competition between statesfor international recognition and imitation.Sharman (2008, 651) highlights the case of Malawi, as follows: