draining development.pdf - Khazar University

116 Draining Development?trillion, giving rise to a yearly tax revenue loss of US$121.8 billion peryear. Using the same approach, Christian Aid (2008) calculates a tax revenueloss of US$160 billion suffered by developing countries in 2008because of trade mispricing.The mispricing approach as employed in these studies has the advantageof simplicity and transparency. It uses publicly available data, and itis straightforward to replicate the results of existing studies. Unfortunately,the results of this type of analysis are difficult to interpret, andthey effectively reveal little reliable information about income shifting inthe context of tax avoidance and evasion. This is so for the followingreasons.First, it is likely that, to some extent, price differences within productgroups simply reflect quality differences. If there are price differenceswithin product groups, it would be natural to assume that developingcountries tend to export low-end, low-price products, whereas developedcountries export high-end products at higher prices. Chineseexports are an example of this pattern, as recently demonstrated bySchott (2008). How this affects the results of income shifting calculationsdepends on whether or not the trade volumes of different countriesin a given product group are considered jointly to identify mispricing.If they are considered jointly and if the quality pattern is as describedabove, the mispricing approach systematically overestimates incomeshifting from developing to developed countries. If they are consideredseparately, this cannot happen, but, in this case, goods that are classifiedas overpriced in one country may be counted as underpriced in anothercountry. This is inconsistent. As long as it is not possible to disentanglequality differences and income shifting, the interpretation of numbersgenerated by the mispricing approach is difficult.Second, identifying the highest and the lowest quartile of observedprices as abnormal prices implies that any price distribution with somevariance would be diagnosed to include overpricing and underpricing,even if the observed price differences are small or are driven by factorsother than mispricing. Empirical analysis should normally allow for thepossibility that a hypothesis—in this case, the hypothesis that income isshifted from developing to developed countries—is not supported bythe data. This is excluded by assumption, unless all prices within a commoditygroup are identical.