draining development.pdf - Khazar University

Trade Mispricing and Illicit Flows 319mispricing; for instance, see Bhagwati, Krueger, and Wibulswasdi (1974).However, this approach provides, at best, only a crude empirical indicationof the potential presence of misinvoicing because the assumption ofa fixed conversion factor that varies neither over time nor among tradingpartners is clearly challenging.Mispricing illicit flows. To the extent that discrepancies in trade statisticsindeed reflect mispricing, over- and underinvoicing of trade transactionsmay be completely unrelated to IFFs (narrowly defined). Anobvious reason to underinvoice trade is to avoid the payment of tradetaxes; similarly, overinvoicing allows a trader to benefit from trade subsidies.More specifically, if export duties are ad valorem, the motive toreduce the effective tax rate by underinvoicing exports is indistinguishablefrom a flight-motivated capital outflow in the analysis of mirrorstatistics in international trade. In similar fashion, the overinvoicing ofimports (for other reasons than capital flight) may occur if a firm seeksto reduce its before-tax profits (and, hence, the effective tax on profits)by overstating the cost of imported inputs. As a result, an assumptionhas to be made about the extent to which trade mispricing is, indeed, achannel for illicit flows.Illicit flows trade asymmetries. Conversely, it is questionable whetherthe extent of illicit flows is detectable from asymmetries in aggregatetrade data. Various incentives to fake trade invoices that work exactly inthe opposite direction relative to the capital flight motives can be identified.The effects of these explanations on trade (that is, underinvoicingof imports and overinvoicing of exports) have been widely documented.For instance, Celâsun and Rodrik (1989, 723) note that the introductionof export subsidies in Turkey in the early 1980s led to substantial overinvoicing:“Turkish entrepreneurs, never too shy in exploiting arbitrageopportunities, used the wedge [between the profitability of manufacturesexports and the profitability of other means of earning foreignexchange] to their advantage.” Celâsun and Rodrik conclude (1989, 729–30) that, “once fictitious exports are eliminated, the average growth rateof Turkish exports . . . is not nearly as spectacular as [that] . . . calculatedfrom official statistics.” The existence of obvious incentives for underinvoicingimports has been recently documented empirically by Yang