draining development.pdf - Khazar University

320 Draining Development?Table 10.2. Motives for Mispricing in International TradeTrade Overinvoicing UnderinvoicingExports Capturing export subsidies Capital flight, avoiding export taxesImports Capital flight, lowering domestic profits Evading import dutiesSource: Adapted from Dornbusch and Kuenzler (1993).(2008), who examines an increase in enforcement in Philippine customsthat targets a specific method of avoiding import duties. He nicely illustratesthat increased enforcement (by lowering the minimum valuethreshold for preshipment customs inspection for shipments from asubset of origin countries) reduced the targeted duty-avoidance method,but caused substantial displacement in an alternative method (shippingvia duty-exempt export processing zones).In sum, there are various motives for mispricing in trade invoices.Table 10.2 lists some of these motives. As these effects partly work inopposite directions, they may easily cancel each other out at the aggregatetrade level. For instance, if a shipment is underinvoiced in theexporting country to move capital unrecorded out of the country, andthe shipment carries the same mispriced invoice in the importing countryto evade import tariffs, no discrepancy in mirror trade statistics willoccur. 8 Reviewing the various motives, Bhagwati, Krueger, and Wibulswasdi(1974) argue that underinvoicing of exports, rather than overinvoicingof imports, is more often used as a vehicle of capital flight, alsobecause export controls are less restrictive. Gulati (1987) even finds that,if trade invoices are faked, the underinvoicing of imports more than outweighsthe underinvoicing of exports so that, for a number of countries,(illicit) capital inflows are observed.Kar and Cartwright-Smith (2008). In view of these difficulties, it is interestingto review recent estimates by Kar and Cartwright-Smith (2008) ofcapital flight arising because of trade mispricing. 9 These authors analyzeinternational trade statistics, address the above-mentioned relevant issuesin a consistent and transparent way, and estimate, based on this analysis,the volume and pattern of IFFs. While their efforts have provoked usefuldebate, it should also be clear that the reliability of the estimates cruciallyhinges on the assumptions made and the conventions chosen.