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GTAP Resource #1184

"Interpreting Trade Statistics in Regulated and Deregulated Markets - An Analytical Exercise Based on Indian Experience"
by Biswas, Dr. Amit Kumar and Sugata Marjit


Abstract
The problem of reliability of the official statistics stems from the fact that policy distortions generate multiple prices/incentives for similar goods/activities. Monitoring authorities may be hard put to contain the resultant "process of arbitrage", popularly known as "corruption". Mis-reporting of statistics is a natural outcome of this process. One possible way to crosscheck the data is to avail information from alternative sources. This is impossible in general because different agencies do not collect the same information. One notable exception is the trade statistics. We get information on two-way transactions from the Direction of Trade Statistics (DOTS) yearbook published by International Monetary Fund (IMF) (also from the International Trade Statistics Year book published by the United Nations). An attempt can be made to check the accuracy of the official statistics by consulting any two of the sources. Conceptually, when two countries A and B are trading with each other, after cif/fob adjustments, value wise,
A¡¯s export/ import to B ¡Ô B¡¯s import/ export from A.
But comparison of the Indian official trade data with India¡¯s largest trade partners¡¯ (viz., US, UK, Japan and Germany) reveal discrepancies which cannot simply be explained by so-called ¡®transport costs¡¯, i.e., by c.i.f./f.o.b. ratio. Presuming that the Developed Countries (DCs) have relatively unregulated markets and better monitoring capabilities and it is extremely costly for the officials to coordinate their efforts in unearthing the illegal reporting, we may suggest that the Indian export/import data found in the official statistics of partner countries, is a close proxy of the 'actual' figure provided one is ready to make rough adjustment for ¡®transport' costs¡¯. We perform such corrective adjustment subsequently in this paper.
The principal technique of detecting faked invoicing through the checking of domestic trade data vis-¨¤-vis the one obtained from the partner country statistics, was initiated through a pioneering work by Morgenstern (1963). He first tried comprehensively to prove that there existed corrupt activities among the international traders and went on to measure the extent of misreporting using the partner country statistics. The technique of partner country statistics comparison was developed there with great mastery and elegance.
Though faked invoicing and smuggling in trade activities are high in LDCs, hardly any thorough research has been initiated in the Indian contexts combining export and import mis-invoicing and their impact on country's Balance of Trade (BoT). Only recently Marjit, Dasgupta and Mitra (2000) in their paper have tried to build up a simple export under-invoicing model and verified the fact that with devaluation the extent of under-invoicing fell significantly. They have shown that there is significant differences between actual and official export values in India and the official export is more responsive than the actual one to the changes in the official exchange rate.
Till 1991 Indian foreign exchange market remained highly regulated and it has been characterised by the operation of ¡®Black Market¡¯ for foreign exchange. The term black market exchange rate, usually refers to the unofficial market exchange rate and includes a premium, called the ¡®Black Market Premium¡¯ (BMP) that reflects pent-up excess demand pressures that foreign exchange restrictions are intended to contain. Since 1991 a relatively deregulated foreign exchange market with considerable devaluation and depreciation in the value of rupee has wiped out the premium to a large extent. Future expectations can be another reason for current premium. However, we do not bring in expectations in our framework of analysis.
If currency prices differ in official and illegal transactions, agent will rationally allocate their foreign exchange earnings in two alternative avenues. While the black market provides the premium, it entails a punishment cost following audits in the future. The ¡®overvalued¡¯ currency in official transactions put a ¡®legal¡¯ stamp on the export earnings. If there is any such interior solution, the officially reported export earnings will only reflect a part and not the whole of exports. A similar line of argument can be forwarded in case of imports. Hence, the official statistics will not give the right picture.
What we have tried to do in this paper is related to the literature mentioned above. We observe huge differences between official export figures and corresponding partner countries' statistics regarding imports from India. Similar things happen in case of India's official import figures also. For the period 1960-98, India's official export and import figures are always underreported barring few exceptional years. Here, taking together exports, imports, and merchandise trade balance data from both official and partner country sources, we try to measure this extent of divergence. Highly regulated ¡®overvalued¡¯ domestic currencies means high BMP, so there will definitely be incentives for exporters to under-invoice their export values and sell the rest of foreign currency earnings at market exchange rate. On the other hand if the unit export subsidy rates are sufficiently high, then exporters may even over-invoice if they find that subsidy gains outweigh BMP loss. In case of importers an overvalued exchange rate makes them to over-invoice but they will under-invoice if tariff rates are sufficiently high. In this paper, we have tried to build up theoretical models of exports, imports and BoT, in terms of simple comparative static framework to find out how the corresponding policy instruments are going to affect the extent of trade mis-invoicing. We also check the validity of the results of our models by tallying those with the empirical findings.


Resource Details (Export Citation) GTAP Keywords
Category: 2003 Conference Paper
Status: Published
By/In: Presented at the 6th Annual Conference on Global Economic Analysis, The Hague, The Netherlands
Date: 2003
Version: n/a
Created: Biswas, D. (3/6/2003)
Updated: Bacou, M. (6/30/2003)
Visits: 2,062
- Domestic policy analysis


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