draining development.pdf - Khazar University

Trade Mispricing and Illicit Flows 317Conceptual issuesIt may be useful to address briefly some conceptual issues on the definitionof IFFs. In describing capital flows, one often applies different conceptsto classify capital transactions. For instance, as noted by the InternationalMonetary Fund (IMF), there is an occasional tendency toidentify any capital outflow from a country as capital flight (IMF 1992).Kar and Cartwright-Smith appear to follow this (broadest possible)approach for capital outflows from developing countries; they argue that“the term flight capital is most commonly applied in reference to moneythat shifts out of developing countries, usually into western economies”(Kar and Cartwright-Smith 2008, iii).While this approach may be applicable, a possible shortcoming of thisgeneral definition is that it also covers all standard (or normal) crossbordercapital transactions. Therefore, a number of authors prefer to take amore restrictive approach that includes only a subset of capital movementsand also justifies the negative connotation (capital flight). Walter(1987), for instance, emphasizes the importance of motivations for flight(such as macroeconomic mismanagement or fear of confiscation) byarguing that flight capital is capital that flees. Cumby and Levich (1987)focus on the type of transaction by excluding all freely organized legaltransactions from their definition of capital flight. It might thus seemreasonable to distinguish capital transactions along various dimensions,such as the source of capital, the method of transfer, and the motivationfor the transaction.A similar reasoning may also apply to the definition of IFFs. Kar andCartwright-Smith (2008, iv) provide a comprehensive approach, treatingall unrecorded capital transfers as illegal and note, more generally,that “illicit money is money that is illegally earned, transferred, or utilized.”5 Another plausible definition, by contrast, also takes into accountthe motivation for such behavior. IFFs may then be defined as any capitaltransaction that intentionally moves capital out of a country in a mannerthat is not recorded; trade mispricing is therefore one of (potentiallymany) possible conduits for such conduct. 6Examining asymmetries in trade dataA prominent approach to quantifying the extent of misinvoicing is theanalysis of matched partner country trade statistics. Based on the principle