September 3, 2013
IN THE five years to 2005 Bangladesh had the unfortunate distinction of languishing at the very bottom of Transparency International’s corruption perceptions index. It has fared little better since. When the World Bank’s president, Jim Yong Kim, forcefully stated his commitment to curb crony capitalism under his watch earlier this year, he used Bangladesh as an example of how the bank would punish “insufficient response by the authorities to the evidence of corruption”. The bank had just cancelled funding for South Asia’s largest donor-funded infrastructure project, a $3 billion bridge across the Padma river, citing alleged corruption by Bangladeshi officials.
Yet it is surprising how little attention donors pay to the biggest form of graft in Bangladesh, which, if fixed, would leave the government with enough cash to double health spending and to pay for an infrastructure project as large as the Padma bridge every two years.
The corruption in question is fraudulent trade invoicing. Take exports of spectacles from China to Bangladesh, for example. The Bangladeshi importer asks the Chinese exporter to invoice for $1 for every pair of spectacles, though the price agreed between the two is $10. The importer thus pays only a fraction of the import taxes he owes the state. For the Chinese exporter, underinvoicing makes his product more competitive against those not prepared to falsify invoices. (He also gets round foreign-exchange regulations in China, which require him to turn over his proceeds on the glasses to the central bank.)
In practical terms, the importer pays $1 through official channels (using a letter of credit) and settles the remaining $9 by using the hundi system, an informal system of money transfers. He hands that sum to a hundi dealer in Bangladesh. Another dealer in Dubai, say, uses a money-transfer agent to balance accounts. He sends $9 in hard currency to the importer’s offshore account, out of which he then pays the Chinese exporter. No money crosses Bangladesh’s borders, and the currency movements recorded show no link to the original trade transaction.
The sums of money involved are big. Forrest Cookson, an American economist and expert on Bangladesh’s economy, reckons that if the practice of underinvoicing were stamped out, the government could increase its tax-to-GDP ratio by 1.5 percentage points. As it is, the ratio remains one of the lowest in the world, despite a fourfold explosion in trade in the last decade. Bangladesh also ends up paying a lot more for its imports, because importers who save on duty can afford to trade with more expensive suppliers (thus squandering an estimated $3 billion a year in foreign exchange). The problem has worsened following a surge in trade with China, which has risen sevenfold between 2002 and 2012, to $8.5 billion. Underinvoicing on Chinese imports alone could be as high as $3 billion.
Fraud is more appealing thanks to Bangladesh’s high tariffs and other barriers. Customs officials report the worst cases of underinvoicing on goods with high duties—for example, costume jewellery (often invoiced at just 5% of its real value). But tax evasion is made easy by lax and outdated customs controls. This fraud would be cheaper to fix than reforming the institutions that Bangladeshis commonly perceive to be the most corrupt: the police, the judiciary and political parties. Some efforts are already being made. This summer the government launched a new software system in three of its ports (Benapole, Chittagong and Dhaka), which allows customs officials to check dodgy-sounding values by looking up current market prices.
But full automation is still a long way off. And on June 30th Bangladesh’s mandatory “Preshipment Inspection Programme”, under which the quality, quantity and price of exports were verified by an independent firm before entering Bangladesh, was dropped. The system had helped contain the worst excesses of fraudulent trade invoicing. Customs won the battle to scrap the scheme after the intervention of politicians, some of whom may benefit from the fraud. Losses to the exchequer are likely to keep rising.
Source: The Economist