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Can authorities curtail falsified trade & investment data that hide capital movements? Evidence from flows between BRICS and the USA

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  • Das, Subhasish
  • Biswas, Amit K.

Abstract

Usually developing and transitional countries are characterised by foreign exchange and capital scarcities and hence resort to stringent trade and capital control policies. This might become counterproductive and provide incentives to the international traders and investors to go for corrupt practices. This paper investigates how do these tight policies might encourage illegal or hidden capital movements across borders. By presenting both a theoretical and an empirical analysis, where traders and investors rationally misreport to evade stringent trade and investment barriers, we first show that illegal capital outflow takes place through trade misreporting and interestingly, export and import misreporting are cointegrated. Secondly and more importantly illegal capital inflow might take place through overreporting of FDI values and illegal capital outflow and inflow are cointegrated too. Based on the thorough investigation of the BRICS – USA bilateral trade and FDI data, we propose that a less regulated trade and investment regime might benefit these countries more as tight and restrictive policies seem to be self-defeating. Our study comes up with policy conclusions that might minimise the cross-border illegal capital movements.

Suggested Citation

  • Das, Subhasish & Biswas, Amit K., 2023. "Can authorities curtail falsified trade & investment data that hide capital movements? Evidence from flows between BRICS and the USA," Journal of Policy Modeling, Elsevier, vol. 45(5), pages 957-974.
    • Handle: RePEc:eee:jpolmo:v:45:y:2023:i:5:p:957-974
    DOI: 10.1016/j.jpolmod.2023.09.001
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    References listed on IDEAS

    as
    1. Biswas, Amit K. & von Hagen, Jürgen & Sarkar, Sandip, 2022. "FDI Mismatch, trade Mis-reporting, and hidden capital Movements: The USA - China case," Journal of International Money and Finance, Elsevier, vol. 120(C).
    2. Cheung, Yin-Wong & Steinkamp, Sven & Westermann, Frank, 2016. "China's capital flight: Pre- and post-crisis experiences," Journal of International Money and Finance, Elsevier, vol. 66(C), pages 88-112.
    3. Subhasish Das & Amit K. Biswas, 2021. "Trade Mis-Invoicing Between India & USA: An Empirical Exercise," Foreign Trade Review, , vol. 56(1), pages 7-30, February.
    4. Singh, Tarlok, 2023. "The sustainability of current account in the BRICS countries depends on economic policies’ support to structural adaptation," Journal of Policy Modeling, Elsevier, vol. 45(3), pages 570-591.
    5. Tomasz Michalski & Gilles Stoltz, 2013. "Do Countries Falsify Economic Data Strategically? Some Evidence That They Might," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 591-616, May.
    6. Cheung, Yin-Wong & Steinkamp, Sven & Westermann, Frank, 2020. "Capital flight to Germany: Two alternative measures," Journal of International Money and Finance, Elsevier, vol. 102(C).
    7. Biswas, Amit K. & Marjit, Sugata, 2007. "Preferential trade and mis-invoicing: Some analytical implications," International Review of Economics & Finance, Elsevier, vol. 16(1), pages 130-138.
    8. Amit K. Biswas, 2012. "Import tariff led export under-invoicing: A paradox," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 21(3), pages 347-360, April.
    9. Amit Biswas & Sugata Marjit, 2005. "Mis-invoicing and Trade Policy," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 8(3), pages 189-205.
    10. Lavee, Doron & Beniad, Gilat & Moshe-Jantzis, Moran, 2013. "Israel's foreign trade policy: The benefits of its reform," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 255-270.
    11. Mishra, Prachi & Subramanian, Arvind & Topalova, Petia, 2008. "Tariffs, enforcement, and customs evasion: Evidence from India," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 1907-1925, October.
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    More about this item

    Keywords

    Hidden capital movement; Trade mis-invoicing; FDI; Panel VECM; Cointegration;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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