draining development.pdf - Khazar University

Trade Mispricing and Illicit Flows 331Table 10.6. Correlation of Exporter-Specific Average Trade GapsCountry United States Germany China United Kingdom Japan AllUnited States 1.0000Germany 0.9245 1.0000China 0.8357 0.7824 1.0000United Kingdom 0.9368 0.9571 0.7986 1.0000Japan 0.9015 0.8572 0.8963 0.8582 1.0000All five importers 0.9700 0.9494 0.9120 0.9564 0.9548 1.0000Source: Author computation based on data of UN Comtrade (United Nations Commodity Trade Statistics Database), StatisticsDivision, Department of Economic and Social Affairs, United Nations, New York, http://comtrade.un.org/db/.Note: The table is based on 202 observations.This chapter critically reviews empirical approaches to quantify theextent of trade mispricing. There are at least two sorts of problems. First,mispricing behavior is hard to identify. The analysis of discrepancies inbilateral trade statistics appears to be of generally limited value becausegaps in trade statistics also typically arise for reasons unrelated to mispricing.The second set of issues refers to the motivations for fraudulenttrade behavior. Even if mispricing is properly identified, there are incentivesfor faking trade invoices other than the desire to transfer capital.Overall, the accuracy and reliability of estimates of IFFs based on trademispricing are questioned. This finding is in line with Bhagwati (1967,63), who argues that, “whereas it is easy to establish the conditions underwhich the faking of trade values . . . will occur, it is in practice extremelydifficult to set about determining whether such faking is actually occurring.It is further impossible to find out how much faking is going on.”Notes1. This difference is based on agreed guidelines for international trade statistics aspublished by the United Nations (1998). Some countries, however, also reportimports on an f.o.b. basis (for example, Australia).2. Ruffles et al. (2003) provide a more detailed description.3. Winston (1974, 64) argues that, “regardless of the sincerity of efforts, it is virtuallyimpossible to control overinvoicing considering the myriad ways it can, infact, be done.”4. For an early attempt, see the European Commission’s initiative Simpler Legislationfor the Internal Market, which is documented at http://ec.europa.eu/internal_market/simplification/index_en.htm.