Sustainability and Illicit Financial Flows?: Not Unrelated Concepts

June 27th, 2012

flickr / Fotos Gov/Ba

There are obvious relationships between illicit financial flows, corruption, and tax evasion and environmental sustainability. For example, shell corporations can be used to mask illegal fishing or poaching. Corruption can enable companies to get around environmental compliance laws. And tax evasion can divert valuable resources away from environmental enforcement. In sum, illicit financial flows are human constructs that supplement and enhance damaging human behavior, contributing both to stagnating economic growth and worsening environmental conditions.

But is there another—more direct—way to examine illicit financial flows and the environmental sustainability?

The definition of sustainability isn’t as obvious as you’d think. “Sustainable” in its traditional definition means “capable of being sustained,” or a pattern that can continue, indefinitely, on its own. When related to development, sustainable means using resources in such a way that does not compromise the ability of future generations to meet their needs.

Sustainability is unique to environmental economics, and is not a core concept in development economics, because natural capital (components of the natural world: trees, birds, oil, oceans, etc.) exists in the world in a fixed amount. The other forms of capital—human, social, and built—can be replenished with population and economic growth. While mitigation projects can restore the amount of capital that has previously been degraded, it cannot increase the supply beyond what the earth stated with. Thus, for economic growth to be “sustainable,” it must not deplete our capital in such a way that it cannot be replaced.

So what does this have to do with development?

Illicit financial flows can certainly exist at the same time as economic growth. And while they can also stunt development, in some contexts, illicit financial flows from developing nations may also increase with economic growth. While is all a bit of a paradox—or at the very least makes the interrelationships quite convoluted.

What illicit financial flows—and tax evasion, specifically—create (among many other conditions) is a growth in income inequality.

This, by its nature, is “unsustainable,” although not for the same reasons that depleting natural capital is. You can have economic development coupled with growing income inequality without making future generations worse off. But you can create an economic and political system that makes some parts of the generation better off, while stagnating the growth of others.

For example, the next generation of the Obiang family might be better off, as the price of crude increases, but the rest of Equatorial Guinea might not. The conditions in that country do not support a model of development that enriches the well-being of future generations. And for that reason it is not sustainable.

Maybe that’s too theoretical, though. Sometimes I get lost in my own theorizing. Does anyone have a [more concrete] way of looking at this? Or am I barking up a theory tree here?

Image: AttributionNoncommercialShare Alike Some rights reserved by Fotos Gov/Ba

Written by Ann Hollingshead

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