draining development.pdf - Khazar University

Trade Mispricing and Illicit Flows 329In a first exercise, we compute, for each exporter, the average trade gapacross all products. Because there may be sizable product-specific differencesin reported trade values between the exporting and the importingcountry, taking the arithmetic mean of these reporting gaps over oftenhundreds of products is a simple way to identify (hopefully) countryspecificdifferences in trade reporting. Table 10.5 lists the five countrieswith the largest average percentage share of missing exports by importer.As shown, we find, indeed, a strong and consistent mismatch in internationaltrade statistics, with continuous underreporting, for instance, byEquatorial Guinea, Indonesia, and the Philippines. More importantly,reviewing the full distribution of exporting countries, we find that theextent to which countries tend to misreport exports is broadly similaracross trade destinations. The correlation of exporter-specific averagetrade gaps across importing countries is astonishingly high, on the orderof about 0.9. Table 10.6 reports a set of simple bivariate correlationcoefficients; Spearman rank correlations (unreported) provide similarresults. These consistent patterns of misreporting in trade appear to providea useful basis for further research.In Berger and Nitsch (2012), for instance, we use regression analysisto examine the association between observed trade gaps and countryspecificcorruption levels. Holding constant a variety of other determinantsof discrepancies in trade statistics, we find that the reporting gapin bilateral trade is, indeed, strongly associated with the level of corruption,especially in the source country. In countries with corrupt bureaucracies,it seems easier (and perhaps even common practice) to ignorelegal rules and procedures. To the extent that this misbehavior alsoaffects international trade transactions, our findings suggest that reportinggaps in official trade statistics partly reflect illegal activities for whichthe illicit movement of capital may be one motivation.ConclusionA potential vehicle to move capital unrecorded out of a country is themisinvoicing of international trade transactions. Exporters may understatethe export revenue on their invoices, and importers may overstateimport expenditures, while their trading partners are instructed todeposit the balance for their benefit in a foreign account.