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Currency Inconvertibility, Trade Taxes and Smuggling

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  • Braga de Macedo, Jorge

Abstract

In the classic analysis of smuggling, importers choose the optimal mix of legal and illegal trade, given trade taxes and the technology of detection. This paper introduces an inconvertible currency into the framework, so that illegal trade is valued at a rate higher than the (fixed) official exchange rate. Sections 1 and 2 show how the smuggling ratio and the domestic price mark-up for the import and export good are simultaneously determined. With balanced legal and illegal trade, changes in the (long-run) black market premium are a weighted average of changes in trade taxes, whereas changes in the smuggling ratios depend on the ratio of trade taxes. Thus, an import tariff and an export subsidy rising at the same rate would keep smuggling ratios constant but would lead to a rising black market premium (sections 3 and 4). In Section 5 we present a model explaining the determination of export and import quantities. The model explains the production of exports and non-traded goods and the consumption of imports and non-traded goods, and assumes that the government confiscates traded goods that are unsuccessfully smuggled. Export production may fall and welfare may rise if trade taxes have a negative effect on the relative price of exports and imports which is stronger than the positive effect on smuggled exports and imports (which is always welfare-reducing). Section 6 introduces a portfolio balance model explaining the short-run behaviour of the black market premium. In this model, rising trade taxes may be associated with a premium which increases even more rapidly if there is unreported capital flight.

Suggested Citation

  • Braga de Macedo, Jorge, 1987. "Currency Inconvertibility, Trade Taxes and Smuggling," CEPR Discussion Papers 162, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:162
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    Citations

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    Cited by:

    1. Issler, João Victor, 1992. "Testing Exports Underinvoicing Under a Dual Exchange Rate Regime: Evidence for Brazilian Exports," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 12(1), April.
    2. Goldberg, Linda S. & Karimov, Il'dar, 1997. "Black markets for currency, hoarding activity and policy reforms," Journal of International Economics, Elsevier, vol. 42(3-4), pages 349-369, May.
    3. Linda S. Goldberg & Ildar Karimov, 1992. "Black-Markets for Currency, Hoarding Activity and Currency Reform," NBER Working Papers 4153, National Bureau of Economic Research, Inc.
    4. Slobodan Djajić, 1999. "Shortages, Hoarding and Parallel‐Market Premia in an Economy with Administered Prices," Review of Development Economics, Wiley Blackwell, vol. 3(1), pages 1-10, February.
    5. Mohsen Bahmani-Oskooee & Gour Goswami, 2006. "Military spending and the black market premium in developing countries," Review of Social Economy, Taylor & Francis Journals, vol. 64(1), pages 77-91.
    6. Ogbulu, Onyemachi Maxwell & Torbira, Lezaasi Lenee, 2017. "Transmission Effect of the Interaction between Parallel and Official Foreign Exchange Markets in Nigeria," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(6), pages 76-90, 06-2017.
    7. Diamandis, Panayiotis F. & Kouretas, Georgios P. & Zarangas, Leonidas, 2007. "Dual foreign currency markets and the role of expectations: Evidence from the Pacific Basin countries," Research in International Business and Finance, Elsevier, vol. 21(2), pages 238-259, June.
    8. Mohsen Bahmani‐Óskooee & Gour G. Goswami, 2005. "The Impact of Corruption on the Black Market Premium," Southern Economic Journal, John Wiley & Sons, vol. 71(3), pages 483-493, January.
    9. Jalal U. Siddiki, 2002. "Unofficial Exchange Rates In Bangladesh: A Cointegration Analysis," Contemporary Economic Policy, Western Economic Association International, vol. 20(3), pages 288-300, July.

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