draining development.pdf - Khazar University

114 Draining Development?and normal part of transactions” by the interviewed managers (Baker2005, 169). As a result of his study, Baker estimates that 50 percent offoreign trade transactions with Latin American countries are mispricedby, on average, around 10 percent, adding to a worldwide average mispricingof goods traded between third parties of 5 percent. Similar,slightly larger figures are reported for countries in Africa and Asia, suggestinga level of mispricing at 5 to 7 percent.Studies on International Profit Shiftingin Developing CountriesMost existing empirical studies on tax-induced profit shifting focus onOECD countries. Studies on profit shifting in developing countries arescarce. Most studies on tax-induced profit shifting in developing countries(as well as income shifting undertaken for other reasons) have beenpublished by NGOs. Below, we discuss and criticize some of these studies.It should be emphasized, though, that these studies have the merit ofattracting the attention of a wider public to this important issue.The trade mispricing approachStudies based on the trade mispricing approach start with the idea thatfirms may manipulate prices of internationally traded goods to shiftincome across countries. This idea is known from empirical work onincome shifting in developed countries (see Clausing 2003 and the literaturecited there). The key question is how the manipulation of pricesis identified. There are different identification strategies with differentimplications.As mentioned in the preceding section, Baker (2005) uses interviewsto estimate the extent of mispricing in trade transactions with developingcountries. He quantifies the income shifted out of developing countriesthrough mispricing activities by multiplying the low end of hisinterview-based mispricing estimate (that is, mispricing of 5 percent ofimport and export value, respectively) with the sum of imports andexports of developing countries, which is equal to approximately US$4trillion. Given this, he arrives at what he refers to as a lower-bound estimateof US$200 billion for capital outflows due to trade.