draining development.pdf - Khazar University

Trade Mispricing and Illicit Flows 311critically examines empirical approaches to quantify the extent of mispricing(thereby also highlighting other potential reasons for discrepanciesin bilateral trade statistics), and analyzes differences in mirror tradestatistics at the product level (which may be associated with mispricingbehavior). It also assesses how trade mispricing may be reflected in capitalflight and illicit flow estimates.The plan of the chapter is as follows. The first section reviews evidenceon asymmetries in international trade statistics. IFFs are typicallygenerated by underinvoicing exports and overinvoicing imports. However,dozens of other reasons for the over- and underinvoicing of tradeactivities have been identified in the literature; these reasons includeoverinvoicing of exports to benefit from export subsidies and underinvoicingof imports to avoid payment of import tariffs. As a result, someof these misinvoicing activities may offset each other. In addition, thereare other reasons for incorrect trade invoices and, thus, discrepancies inofficial trade figures. These manipulations may be the result of intended(criminal) behavior such as smuggling or carousel fraud (explainedbelow). Similarly, however, they could simply reflect inaccuracies incompiling trade figures (for example, because of the Rotterdam effect)and thus result from unintended behavior.Based on the discussion of incentives for misreporting trade flows,the chapter next analyzes empirical approaches to quantifying the extentof mispricing. The trade-based approach in Kar and Cartwright-Smith(2008) and the price-based work by Pak and Zdanowicz (with variouscoauthors) are critically reviewed.The chapter then examines how trade mispricing fits into the illicitflow estimates. Kar and Cartwright-Smith (2008) use the gap in tradestatistics (along with other approaches) to provide detailed estimates ofIFFs by country. This section examines the robustness of their findings.For instance, results are compared with estimates derived from theproduct-level approach of Fisman and Wei (2009). Similarly, it may beuseful to relate Kar and Cartwright-Smith’s estimates of illicit flows toother country characteristics that have been found to be associated withtrade mispricing, such as corruption.The final section concludes.