The concern about illicit capital flows from developing countries reflects a variety of relevant policy issues, but is often motivated by weakly formulated underlying analytical frameworks. We review the literature on illicit capital flows and suggest that the common underlying concern that motivates the different approaches is the identification of flows that potentially damage economic development. Implicitly, if these flows could be blocked, the result would be an improvement in social outcomes. Illicit flows can be illegal, but they need not be if the legal framework does not reflect social interests or does not cover the relevant flows. A minimal definition of an illicit capital flow has to consider both the direct and the indirect effects of the flow and has to assess these effects in the context of the specific political settlement of the country in question. To demonstrate the implications in simplified form, we distinguish among advanced countries, intermediate developers, and fragile developing countries. The types of flows that would be considered illicit are shown to be significantly different in each of these cases. The analysis provides a rigorous way of identifying policy-relevant illicit flows in developing countries. Given the potential importance of these flows, it is vital to have a rigorous framework that at least ensures that we minimize the chances of causing inadvertent damage through well-intentioned policies. Indeed, the analysis shows that many loose definitions of illicit capital flows are problematic in this sense.
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