draining development.pdf - Khazar University

76 Draining Developmentthe rent seeking on which the stability of the state in these fragile governancecontexts depends (North et al. 2007; North, Wallis, and Weingast2009). Repressive governments may be more inclined to restrain tax evasionby simply avoiding the sources of tax that require a substantial degreeof voluntary cooperation (Hettich and Winer 1999).By contrast, in dividend-collecting contexts, the political importanceassigned to building an effective state has meant that evasion has translatedless into illicit outflows, and developmental states often emerge(Khan 2000). In a dividend-collecting system, economic growth andpolitical stability are encouraged because political leaders and corruptofficials perceive the payoffs in the long term. This dynamic explainshow developing countries often begin to build a national developmentproject despite the initially low tax revenue that undermines their earlycapacity to deliver services to citizens, potentially reinforcing the lack oflegitimacy and the low tax take.Corruption and tax evasion may be rampant not least so as to fundpolitical stability, but illicit flows are recognized as threatening to sustainabledevelopment and are tackled (Khan 2005; North et al. 2007;North, Wallis, and Weingast 2009). This is in contrast to the short-termoutlook of the looting model, which destroys economic value. So, while,in all these contexts, grand tax evasion arises from collusion amongpolitical and business elites and the top levels of government, the evasion–capital flows process is shaped by different political dynamics. Policiesand enforcement may be formulated to permit tax evasion in return forpolitical favors, and they may operate through the overt or tacit complicityof senior tax administrators and fiscal policy officials. Without politicalsupport for the high-profile prosecution of tax evaders, grand evasionresults in rampant illicit capital flows in looting or rent-scrapingcontexts, but the politics of dividend-collecting facilitates a pragmaticfocus on controlling capital flows for domestic investment and politicalstability. 15Petty low-level tax evasion, by contrast, is probably insignificant forillicit capital flows, but affects the underlying political economy context.The average size of African shadow economies was estimated at 41.3 percentof GDP in 1999/2000, increasing to 43.2 percent in 2002/03), thoughthese figures hide significant grand evasion because the lack of commitmentof elites to long-term development morphs into capital flight and