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Determinants of Trade Misinvoicing

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Abstract

Trade misinvoicing should be seen as an element of de facto capital account openness. Traditional explanations for trade misinvoicing—high custom duties and weak domestic economies—are less persuasive in a world of high growth emerging markets that have low trade barriers. We construct a 53-country data set over a 26 year span, covering both industrialized and developing countries, to study the phenomena of export and import misinvoicing. Capital account openness, differentials in interest rates, political stability, corruption, indebtedness and the exchange rate regime are identified as factors related to misinvoicing.

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Notes

  1. The list of countries is given in Appendix A.

  2. We are thankful to an anonymous referee for suggesting this to us.

  3. The Balance of Payments Statistics as published by the International Monetary Fund provides for an analytically consistent dataset to measure gross flows for an economy. Gross Flows is defined as the sum total of the following variables in the IMF database: Direct investment abroad, direct investment in reporting economy, portfolio investment assets, portfolio investment liabilities, other investment assets and other investment liabilities. The data may be found at elibrary-data.imf.org.

  4. Apart from evading custom duties, there might be an incentive to underreport imports to circumvent quantitative restrictions. We are unable to capture the effect of quantitative restrictions on import misinvoicing due to the lack of availability of uniform and consistent data on duty equivalent for quantitative restrictions for the set of countries under observation. Furthermore, given that except Algeria, Iran and Russia, all other countries under observation are WTO members, the use of quantitative restrictions is expected to have declined in recent years.

  5. Several papers including Romer (1993), Gruben and McLeod (2002) and Tytell and Wei (2004) have also used log of inflation to counter the extremely high rates of inflation observed in certain countries.

  6. A positive real interest rate spread implies that the real deposit rates in the United States are higher than in the home country.

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Acknowledgements

This study has been done under the National Institute of Public Finance and Policy-Department of Economic Affairs (NIPFP-DEA) Research Program. The authors are grateful to Sandhya Krishnan for excellent research assistance.

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Correspondence to Ila Patnaik.

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We would like to thank an anonymous referee for very helpful comments, which has helped to improve the paper.

Appendix

Appendix

1.1 Appendix A

Table 5 List of countries

1.2 Appendix B

Table 6 Summary statistics of key variables

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Patnaik, I., Sen Gupta, A. & Shah, A. Determinants of Trade Misinvoicing. Open Econ Rev 23, 891–910 (2012). https://doi.org/10.1007/s11079-011-9214-4

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