draining development.pdf - Khazar University

310 Draining Development?IntroductionThe (in)accuracy of international trade statistics has recently (oncemore) become an issue of much debate. Trade data are often criticallyreviewed (more than other economic statistics) for at least three reasons.First, data on international trade are of considerable economic relevance.Crossborder shipments of goods and services often have sizable effectson a country’s economic activity. Also, for some countries, taxes oninternational trade constitute a significant share of government revenue.Second, a country’s trade data allow, in principle, for full cross-checkswith data from other countries. Individual trade transactions arerecorded separately by both trading partners so that it should be quiteeasy to compare these records. As Naya and Morgan (1974, 124) note,“comparable double accounts are not usually available for domestic economictransactions.” Finally, recent research has reemphasized that tradeactivities are subject to criminal behavior. Fisman and Wei (2009) showthat the level of smuggling of cultural property is related to the level ofcorruption in the country of origin. Baldwin (2006) discusses the effectof value added tax (VAT) fraud on intra-European trade figures.A feature of international trade statistics that has frequently attractedconsiderable attention is the potential asymmetry in partner countrytrade statistics arising from mispricing. More specifically, it has beenargued that the faking of trade invoices is a commonly used method tomove money out of developing countries. If trade declarations aremanipulated such that the stated value of imports exceeds the actualvalue (overinvoicing) or the stated value of exports is below the actualvalue (underinvoicing), financial resources are implicitly transferredabroad without any official record of this having taken place. Conversely,it is assumed that, to proxy for such IFFs (often labeled capital flight),trade statistics may provide some useful empirical indication. Forinstance, Kar and Cartwright-Smith (2008) explore gaps in mirror tradestatistics; also see Bhagwati, Krueger, and Wibulswasdi (1974) for anearly contribution. De Boyrie, Pak, and Zdanowicz (2004) examine thevariation of trade prices at the transaction level.This chapter provides a detailed discussion of issues associated withtrade mispricing. It reviews various incentives for faking trade invoices,