The capital flight quadrilemma: Democratic trade-offs and international investment

Michael Bennett

doi:10.1080/16544951.2021.1993646

Abstract

ABSTRACT This article argues that capital flight of real investment presents governments with a quadrilemma. First, governments can tailor their policies to attract investors – but this is incompatible with a whole range of alternative policy choices. Second, they can simply accept capital flight – but this is incompatible with a robust capital stock and tax base. Third, they can harmonize its taxes and regulations with other states – but this is incompatible with international independence. Fourth, they can impose capital controls – but this is incompatible with international capital mobility. These incompatibilities make up four different goals, the value of which are described. Strategies may be mixed, but the pursuit of any three goals must always come at the expense of the fourth.

Highlights

Before describing the quadrilemma in detail, I will briefly situate my thesis in the existing literature and define the scope of my inquiry more precisely.The questions I tackle have been raised by two bodies of literature
The central claim of this article has been that countries face a four-way trade-off between capital mobility, investor-limiting policies, international independence, and the capital base
The free movement of investments must come at the expense of at least one of the other goals in the quadrilemma. These other goals all reflect the value of democracy in different ways

Summary

Introduction

Before describing the quadrilemma in detail, I will briefly situate my thesis in the existing literature and define the scope of my inquiry more precisely.The questions I tackle have been raised by two bodies of literature. Investor-friendly policy Capital base erosion International harmonization Capital barriers A state can retain mobility, capital base and investor-limiting policies by harmonizing its taxes and regulations with other states – but they cannot be international independent.

Results

Conclusion