draining development.pdf - Khazar University

Trade Mispricing and Illicit Flows 323Examining transaction-level price dataIn a series of papers, Simon Pak and John Zdanowicz analyze price datain transaction-level trade statistics. In a typical analysis, such as de Boyrie,Pak, and Zdanowicz (2005), the authors examine information from individualexport declarations and entry forms in U.S. external trade. Thedata set is huge; it contains about two million records per year. 12 Specifically,Pak and Zdanowicz are interested in the product code, the partnercountry involved in the trade, and the price quoted in the trade document.With this information, it is possible to analyze, for each productcountrypair, the range of prices recorded in trade transactions. Morenotably, based on this price range, transactions with abnormal prices canbe identified; Pak and Zdanowicz define prices that fall outside the interquartilerange as abnormal. These improperly priced transactions arethen assumed to constitute illegal capital flows, and the capital outflow isdetermined by the dollar value of the over- or underinvoicing of a transactionbased on its deviation from interquartile prices.What is a product? Although Pak and Zdanowicz’s idea of using microleveltrade data is generally intuitive, their approach is not without difficulties.An obvious issue is the definition of a product. Pak and Zdanowiczrely on the harmonized classification of products in internationaltrade statistics. At the most detailed level (for U.S. external trade), thiscommodity code system contains about 20,000 product categories. It isunknown, however, whether these products are, indeed, homogeneous;there may be considerable differences in product characteristics (such asquality) and, thus, in product prices within categories. As a result, theprice range within a category may be wide so that mispriced transactionsremain undetected. Alternatively, a transaction may be mistakenly identifiedas improperly priced if most transactions within a category are inlow-value products, while a single transaction is in an expensive highqualityproduct.The relevance of product definitions has been recently highlighted byJavorcik and Narciso (2008), who argue that there is broader scope for fakinginvoices in differentiated products because it is difficult to assess thequality and thus the price of such products. Examining trade gaps in mirrortrade statistics for German exports to 10 Eastern European countries,