Leonce Ndikumana, a professor of economics at the University of Massachusetts, spoke about a groundbreaking UNCTAD-commissioned study he has written into misinvoicing in commodities trading -- a phenomenon that has led to massive loss of revenues to poor countries who depend on trading commodities like oil, copper and cocoa.
Mr. Ndikumana presented his findings at the Global Commodities Forum at UNCTAD14 on 15 July, 2016 in Nairobi, Kenya.
Q: Can you explain how trade misinvoicing works?
A: Trade misinvoicing consists of manipulations of exports and imports invoices by operators seeking to either secure foreign exchange advantages not reported to the relevant authorities, such as a central bank, and/or to avoid taxation or customs duties. It is detected by comparing the trade statistics of a country with those of its trading partners. Trade misinvoicing can occur both on the export and import side.
Q: How so?
A: On the export side, exporters, both firms or individuals report an amount which is less than the true value of the goods exported, so as to keep the difference abroad. On the import side, importers exaggerate the cost of the goods to be purchased abroad so as to obtain extra foreign exchange from the central bank. The extra foreign exchange is invested or spent abroad.
In both cases, the country incurs a loss in foreign exchange, hence capital flight. Imports may be "underinvoiced" to minimize customs duties. Imports may also simply not be reported at all -- which is basically smuggling (Editor's note: The loss is often larger when goods are exported without reporting. When the goods are imported, the loss is mainly lost customs revenue - otherwise, the country may benefit from having the goods). Also exports may "overinvoiced" -- this benefits operators where tax incentives have been established to promote export-oriented activities.
Q: Why has no-one done a study like this before (by country / by commodity)?
A: So far analysis of trade misinvoicing has been primarily at the aggregate level. This is primarily because aggregate data is more readily available from such sources as the IMF’s Direction of Trade Statistics.
Q: Your study looks at Chilean and Zambian copper, Cote d'Ivoirean cocoa, Nigerian oil, and South African metals. Why these countries? Why these commodities?
A: We selected developing countries that are resource-rich, large in economic terms, and represent the key commodities: oil, leading minerals, and a leading agricultural product -- cocoa.
Q: What conclusions does your study come to?
A: There is substantial trade misinvoicing in all the primary commodities. Its magnitude increased with the volume of total exports and this suggests large losses in terms of foreign exchange and government revenue in the form of taxes and customs duties. (Editor's note: Misinvoicing is a major driver of illicit financial flows from commodity exporting countries.) It all means that there must be greater transparency in international trade, which will need concerted efforts and collaborative action between developed countries and their counterparts in developing and emerging economies.
Q: Does the possible corruption, or even theft, suggested by your study undermine globalization?
A: What is apparent is that commodity dependent developing countries are not reaping the potential benefits from globalization: firstly, they don't receive the full benefits from trade, and secondly they suffer financial haemorrhaging through capital flight, a phenomenon which occurs through various mechanisms -- including trade misinvoicing.
Source: UNCTAD 14 conference held in Nairobi 17-22 July 2015