The World Bank Economic Review, 31(2), 2017, 459–482 doi: 10.1093/wber/lhv061 Advance Access Publication Date: November 18, 2015 Article Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 Political Connections and Tariff Evasion Evidence from Tunisia Bob Rijkers, Leila Baghdadi, and Gael Raballand Abstract Are politically connected firms more likely to evade taxes? This paper presents evidence suggesting firms owned by President Ben Ali and his family were more prone to evade import tariffs. During Ben Ali’s reign, evasion gaps, defined as the difference between the value of exports to Tunisia reported by partner countries and the value of imports reported at Tunisian customs, were correlated with the import share of connected firms. This association was especially strong for goods subject to high tariffs, and driven by underreporting of unit prices, which diminished after the revolution. Consistent with these product-level patterns, unit prices re- ported by connected firms were lower than those reported by other firms and declined faster with tariffs than those of other firms. Moreover, privatization to the Ben Ali family was associated with a reduction in reported unit prices, whereas privatization per se was not. JEL classification: D73, F13, H26 Are politically connected entrepreneurs more likely to evade tariffs? At issue are not only inequity and fiscal losses but also inefficiency since tariff evasion endows perpetrators with a cost advantage over those who are compliant that is not based on performance. The question is especially relevant for devel- oping countries, as they tend to be disproportionately reliant on revenues collected by customs to finance Bob Rijkers (corresponding author) is an economist in Development Economics Research Group at the World Bank; his email address is brijkers@worldbank.org. Leila Baghdadi is an associate professor at the Tunis Business School, University of Tunis, Tunisia, where she holds a WTO chair; her email address is leila.baghdadi@tbs.rnu.tn. Gael Raballand is senior public sector specialist at the World Bank; his email address is graballand@worldbank.org. Disclaimer: The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development / World Bank and its af- filiated organizations or those of the executive directors of the World Bank or the governments they represent. The paper benefited from KCP funding for the project “Job Creation, Structural Change, and Economic Development in MENA with Lessons from East Asia” (TF 014655, project code P127907). This work was also sponsored by the Economic Research Forum (ERF) and has benefitted from both their financial and intellectual support. The contents and recommendations do not necessarily reflect ERF’s views. We would like to thank Caroline Duclos for exceptional research assistance and Rebekka Grun, Melise Jaud, and especially Antonio Nucifora for help obtaining access to the data. We also benefitted from useful comments from Lotfi Ayadi, Varanya Chaubey, Caroline Freund, Bernard Hoekman, Phil Keefer, Beata Javorcik, Chahir Zaki, and seminar participants at the World Bank, the Economic Research Forum’s Annual Conference, and the Centre for the Study of African Economies, Oxford University. We are very grateful to the Tunisian Institut National de la Statistique for generously hosting us for several months, helping assemble the database, and providing incisive feedback. A supplemental appendix to this article is available at https://academic.oup.com/wber. C The Author 2015. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. V All rights reserved. For permissions, please e-mail: journals.permissions@oup.com. 460 Rijkers, Baghdadi, and Raballand public expenditures (Jean and Mitaritonna 2010),1 are characterized by a greater prevalence of problem- atic state-business relationships (Faccio 2006), and often have weaker tax collection capacity (Slemrod and Yithzaki 1999). Using a unique dataset in which importing firms owned by former president Ben Ali and his family Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 confiscated in the aftermath of the Jasmin Revolution are identified, this paper examines whether politi- cally connected enterprises were more likely to evade tariffs during Ben Ali’s tenure. Their behavior is compared with that of public firms and other private sector firms, which can be categorized into two types, notably “onshore” firms and so-called “offshore” firms, which are exempted from having to pay tariffs used in the production of exported output (or output sold to other offshore firms) and conse- quently have less incentive to evade tariffs. Such “offshore” firms can sell up to 30% of their output in the domestic market. If they chose to do so, they have to pay import tariffs over the share of production sold domestically. More specifically, politically connected enterprises are identified in firm-product-source country cus- toms data spanning the universe of import transactions. These are merged with UNCTAD data on HS6 exports to Tunisia by country and year to compute evasion gaps (Fisman and Wei 2004), defined as the discrepancy between exports to Tunisia reported by partner countries minus imports of the same product from that source country reported in Tunisia. Such evasion gaps are a useful proxy for the amount of imports that are underreported (or misreported) and thus not taxed (appropriately) and hence have become a standard indicator of tariff evasion (Fisman et al. 2008; Jean and Maritonna 2010). If con- nected firms are more prone to evade tariffs, evasion gaps should increase with the share of imports accounted for by connected firms. In addition, the correlation between the import share of connected firms and evasion gaps should strengthen with the tariff rate, since evasion is more lucrative when taxes are high. Moreover, gaps can be expected to decrease in product-source lines in which connected firms were operating after they lose such connections as a result of being confiscated. The data also enable us to examine whether the elasticities of connected firms’ reported import val- ues, quantities, and prices, with respect to tariffs, are different from those of nonconnected firms, which is our second test for tariff evasion. If Ben Ali firms are more likely to evade tariffs, one would expect their reported imports to decrease disproportionately faster with tariff increases than those of other firms. Comparing the responsiveness of reported unit prices and import quantities across different groups of firms helps assess to what extent evasion occurs through underreporting of prices and mis- or underreporting of quantities. In addition, a difference-in-difference strategy comparing the import decla- rations of firms privatized to the Ben Ali family with those of firms privatized to non–Ben Ali family members is deployed to identify the impact of becoming connected on reported unit prices. Tunisia, a small open economy at the forefront of the Arab Spring, provides an interesting case study of which firms are most likely to engage in tariff evasion for several reasons. To start, the Ben Ali family had extensive business interests and several of its members have been convicted for (ab)using their politi- cal power for personal gain, limiting competition in the process (Rijkers et al. 2014b). Establishing lead- ing positions in the import of key consumer products including cars and electronics appears to have been an important strategy by which the family reaped rents (Beau et Graciet 2009; World Bank 2014a). Second, Tunisia has been one of the most successful exporters in Northern Africa and is rather reliant on imports, which amount to roughly half of its GDP, with customs revenues accounting for 9% of fiscal revenues. Third and related, its export success is to a large extent due to tax regulations that stipulate that the so-called offshore firms do not have to pay import duties on goods that they (use to produce goods that they) export. As alluded to above, this diminishes their incentives to engage in tariff evasion. 1 Estimates by Cantens et al. (2012) suggest that in low income countries such as Cameroon customs revenues account for between 30% to 60% of state revenues and that the importance of customs revenues as a source income declines when countries get richer. The World Bank Economic Review 461 Fourth, Tunisian customs authorities are considered among the most corrupted of all government insti- tutions by Tunisian citizens and companies (ATCP 2015; ITCEQ 2012). While the Tunisian customs code is consistent with best practices defined by the World Customs Organization,2 its implementation is discretionary (World Bank 2014b).3 The combination of a bewildering complexity of import regimes Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 allowing for suspension of import duties and very weak administrative controls, including a severely defunct IT system, render effective enforcement challenging. Last but not least, Tunisia has great admin- istrative data and authorities willing to share those, enabling us to unambiguously identify politically connected firms as those who were confiscated in the aftermath of the Jasmin Revolution. By providing evidence suggesting that politically connected firms are more likely to evade tariffs, this paper contributes to and combines different strands of literature. To start, a large literature, pioneered by Bhagwati (1964, 1967) and popularized by Fisman and Wei (2004), has used discrepancies between trade flows reported by trading partners to show how tariff evasion varies with product characteristics, tariff rates (Javorcik and Narcisko 2008; Fisman and Wei 2009), enforcement (Mishra et al. 2008), cus- toms organization, and country characteristics such as level of corruption or bureaucracy efficiency (Jean and Mitaritonna 2010; Carre ` re and Grigoriou 2015). However, there is still no research that the authors are aware of that examines which type of entrepreneurs are most likely to evade import taxation.4 Second, by unveiling an additional mechanism by which firms may benefit from political connections, the paper helps explain why political connections tend to be valued highly (Fisman 2001; Faccio 2006; Faccio et al. 2006; Johnson and Mitten 2003). Though quantifying the costs associated with tariff eva- sion is challenging, a highly conservative back-of-the-envelope calculation presented in section V sug- gests that between 2002 and 2009, underreporting of unit prices alone enabled Ben Ali–owned firms to evade 1.2 billion USD worth of import taxes more than other private firms would have; this estimate does not consider other types of tax fraud, such as smuggling or underreporting of quantities. It also does not consider the indirect costs of this type of fraud, in terms of a lack of transparency and market distortions limiting incentives to invest and hampering efficiency. Our findings also resonate with earlier studies on trade-related corruption by Mobaraq and Purbasari (2008) and Khandelwal et al. (2013), which demonstrated that politically connected firms were prone to firm-specific preferential treatment in being granted exclusive and inefficient import licenses. Third, by showing evidence suggestive of abuse of power by the ruling elite, our results also contrib- ute to the literature on state-business relationships in the Middle East and Northern Africa (Acemoglu et al. 2014; Diwan et al. 2014) and (indirectly) the economics of the Arab Spring (Campante and Chor 2012; Malik and Awadallah 2013). The remainder of this paper is organized as follows. The next section briefly reviews related literature and discusses why firms might differ in their propensity to evade tariffs. Testing strategies are presented in section two. Data and descriptive statistics are presented in section three. Product-level regressions are presented in section four, while firm-level regressions are presented in section five. Section six concludes. 2 A new customs code compliant with “best practices” was adopted in 2009 just months before the Jasmin revolution. 3 Like many other countries, Tunisian customs maintain a three-track system whereby customs declarations allocated to the “green corridor” are allowed to pass through customs without any inspection, customs declarations allocated to the “yellow” corridor face document inspections, and customs declarations in the “red” corridor are subject to physical inspections. Customs officers, however, were reluctant to disclose both which firms were allocated to these various cor- ridors and the criteria used to make such allocations. In all cases, containers have to go through a scanner due to a 100% scanning policy, which means that there is a minimal control for any container. Document checks are carried out systematically. Therefore, any firm is subject to controls and therefore subject to discretion from customs officers. 4 In answering this question, we also contribute to the nascent literature on which firms are most likely to evade taxes (see e.g., Slemrod 2007 and Slemrod and Yithzaki 2002 for overviews of the literature). 462 Rijkers, Baghdadi, and Raballand I. Why Do Firms Differ in Their Propensity to Evade Tariffs? Models of tax compliance predict tax evasion, the circumvention of taxes through illegal practices, to increase with the tax rate, and to decrease with the probability of detection, penalties for evasion, risk aversion, and opportunities to avoid taxes (through legal means) (see Alm 1999; Andreoni et al. 1998; Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 Slemrod 2007; and Slemrod and Yithzaki 2002 for reviews of the literature). These factors are likely to vary across different types of firms. Starting with punishment, detection, and risk-aversion, connected firms faced both a lower risk of being caught and lower penalties conditional on being caught and might have been less risk averse as connected entrepreneurs were on average wealthier than nonconnected ones. Customs officials who had been working in the risk management unit during the Ben Ali era told us that fraudulent behavior by Ben Ali firms was less likely to be reported in part because of career concerns and fear of retaliation from the family. Ben Ali entrepreneurs also appear to have been very well informed of customs risk man- agement practices and control criteria. According to customs officials we interviewed, they “continuously adapted their tactics in response to newly introduced [anti-corruption] measures.” Connected firms may also have enjoyed greater opportunities for tax avoidance (through legal means); anecdotal evidence suggests connected firms may have had privileged access to duty exempted import regimes.5 Tax exemptions to promote exports were also very important for offshore firms; since they do not have to pay import tariffs for goods used to manufacture exports (or sold to other offshore firms), their incentives to evade are limited compared to those faced by onshore firms. Moreover, such tariff exemptions may make detecting evasion by offshore firms relatively more challenging than detect- ing fraud by onshore firms. State-owned firms might have had weaker incentives to evade tariffs because they have softer budget constraints and may not be purely profit-oriented and because the compensation of public sector firms does not covary with firm profits to the same extent as is the case in private sector firms (Brockmeyer et al. 2015).6 Moreover, financial reporting is typically weak in Tunisian SOEs and overinvoicing imports is often used to reduce possible taxable profits, which can in turn help generate extra funding for the SOE (Banque Mondiale 2014). At the same time, the relative inefficiency of SOEs may incentivize evasion to stay cost-competitive. In sum, managers of public sector firms face mixed incentives. Since connected entrepreneurs arguably have some sway over policy making, one may wonder why they do not simply exempt themselves from having to pay tariffs at all, or use their political clout to remove (or at least lower) tariffs. In practice, Ben Ali firms did not on average face lower tariffs, as is demonstrated in section III. One possible explanation is that they benefitted to some extent from tariffs, as these reduce foreign competition (Grossman and Helpman 1994; Goldberg and Maggi 1999). This explanation is consistent with evidence suggesting that sectors in which connected firms were active were more likely to be subjected to new restrictions on foreign investment (Rijkers et al. 2014b), which enhanced the market power of connected firms. Moreover, evasion is all the more advantageous when competitors are forced to pay higher taxes. Reducing tariffs would not only help connected firms but also their competitors. Another possible explanation is that the scope for influencing tariff setting might have been limited by Tunisia’s WTO membership and international trade agreements, which predated the aggressive expansion of the Ben Ali business empire after the turn of the millennium. 5 For example, the customs regime “vente  a quai” was predominantly used by ENNAKL, a firm owned by Ben Ali’s son- in-law Sakhr El Matri, and allowed firms to import goods destined for sale on the domestic market without having to pay import taxes. Unfortunately, analyzing the (ab)use of such duty suspension regimes is beyond the scope of this paper due to data limitations. Note, however, that if connected firms used duty exempted import regimes more inten- sively, detecting evasion would be more difficult. 6 Evidence from the United States suggests private firms have higher proposed tax deficiency ratios than public firms (see Slemrod 2007 and the references therein). The World Bank Economic Review 463 In short, connected entrepreneurs may be more likely to evade tariffs because they face a lower risk of being caught and lower penalties conditional on being caught and because they might be less risk averse. At the same time, they might also be more successful at lobbying for tax breaks, which would diminish their incentives to evade tariffs. Offshore firms are able to avoid taxes when they export and thus have Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 weaker incentives for evasion, while public sector firms face mixed incentives. II. Econometric Strategy Two complementary strategies are deployed to test whether connected firms are more likely to evade taxes. The first, product-level, approach relates trade evasion gaps to the relative importance of Ben Ali owned importers and examines how such gaps changed in the aftermath of the Jasmin Revolution. The second, firm-level approach assesses whether the value, quantity, and price of connected firms’ imports decline more rapidly with tariffs than those of nonconnected firms. A difference-in-difference strategy comparing privatizations to the Ben Ali family with other privatizations is deployed to isolate the impact of becoming connected on reported unit prices. Do Evasion Gaps Increase with the Presence of Connected Firms? If imports into Tunisia are reported correctly, then they must be close to reported exports to Tunisia. Since exports are typically reported as Free on Board7 (FOB), that is, excluding transport and insurance costs, while recorded imports are often calculated in terms of Cost Insurance Freight8 (CIF), small dis- crepancies reflecting transportation and insurance costs are expected.9 Yet, it is not clear why such dis- crepancies should be systematically correlated with tariffs once product and destination characteristics are controlled for and tax compliance is perfect. By contrast, a correlation between tariffs and trade gaps, defined here as the difference between exports to Tunisia reported by source countries and imports reported into Tunisia at the HS6-country-year level, is suggestive of tariff evasion. If Ben Ali firms are more likely to evade tariffs than other firms, then the evasion gap should be higher when Ben Ali firms are present, especially for products subject to high tariffs. To assess whether trade gaps vary with the prevalence of Ben Ali importers in a particular product-source line, the following specification is estimated: À Á À Á TradeGappst ¼ log Epst À log Ipst ¼ bT LogðTariffpst þ 1Þ þ bBA BenAlipst þ bO Offshore pst þbP Public pst þ bTBA Ben Ali pst à LogðTariff pst þ 1Þ (1) þbTP Public pst à LogðTariff pst þ 1Þ þ bTO Offshore pst ÃLogðTariff pst þ 1Þ þ bN logðNTBpt þ 1Þ þ ups þ st þ epst ; where Epst stands for exports to Tunisia of product p reported by partner country s at time t, Ipst stands for imports of product p from country s reported by Tunisian customs at time t, ups is a vector of source- country-product dummies, st, is a vector of time dummies, and Ben Alipst is a proxy for the share of imports of product p from country s in year t imported by politically connected firms. Similarly, Publicpst is a proxy for the import share of public enterprises, and Offshorepst a proxy for the import share of offshore firms. Note that, implicitly, the omitted category here is onshore private firms. If Ben Ali firms are more prone to tariff evasion, especially for products that are subject to high tariffs, 7 The seller loads the goods on board the ship nominated by the buyer. The seller must clear the goods for export. 8 The seller must pay the costs and freight including insurance to bring the goods to the port of destination. 9 Such discrepancies are typically negative (meaning reported imports in Tunisia are higher than exports reported by part- ners) and can be amplified by classification errors and/or exchange rate fluctuations. Additional discrepancies may arise because different countries use different accounting systems. 464 Rijkers, Baghdadi, and Raballand then bTBA > 0: Similarly, one might hypothesize public enterprises and offshore firms to be less likely to evade tariffs, in which case: bTO < 0, and bTP < 0. To examine whether potential evasion is due to underreporting of prices or mis- and/or underreporting of quantities, the same regression is estimated using evasion quantity gaps and evasion unit price gaps as dependent variables. Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 Four different proxies for the import shares of different types of firms are used, notably: (i) the aggre- gate share of the value of all reported imports in a given HS6-country-year cell, (ii) the aggregate share of the total reported quantity imported in that cell, and (iii) the share of all firms that report importing product p from country s at time t. Neither of these proxies is ideal; the latter implicitly assumes homo- geneity across importers within an HS6-country pair. The first two measures arguably better account for the relative size of different types of firms, yet they may themselves be affected by differential underre- porting and/or misclassification. Indeed a problem with this identification strategy is that underreporting or even nonreporting of imports can be very difficult to detect. In the extreme case in which Ben Ali firms imported goods but simply did not report them at all, they would not appear in the data altogether. To remedy this problem, (iv) the predicted import share of the different types of firms is used as an alterna- tive proxy, which is constructed using a combination of tax and firm census data and an input-output table that does not rely on reported imports but rather on production data (see the supplemental appen- dix or the working paper version of this article (Rijkers et al. 2015) for details and results using these alternative proxies). One potential limitation of this strategy is that evasion gaps may be misattributed to the Ben Ali fam- ily when in fact their competitors are the ones who are evading tariffs. To address this limitation, we not only resort to firm-level analysis but also exploit the fact that the Jasmin Revolution was associated with a loss of connections for the confiscated firms. Since firm-level and tariff data are not available for the post–2009 period, the relative importance of the different categories of firms is fixed at their 2009 levels. A difference-in-difference variant of equation (1) is estimated; Trade Ga ppst ¼ bT LogðTariff pst þ 1Þ þ bPT Postt LogðTariff ps09 þ 1Þ þbBA Ben Ali pst þ bPBA Postt Ben Ali ps09 þ bO Offshore pst þbPO Postt Offshore ps09 þ bP Public pst þ Postt bP Public ps09 þbTBA Ben Ali pst LogðTariff pst þ 1Þ þ bPTBA Postt Ben Ali ps09 LogðTariff ps09 þ 1Þ þ bTP Public pst LogðTariff pst þ 1Þ (2) þbPTP Postt Public ps09 LogðTariff ps09 þ 1Þ þbTO Offshore ps09 LogðTariff pst þ 1Þ þ bPTO Postt Offshore ps09 LogðTariff ps09 þ 1Þ þ bN logðNTB pt þ 1Þ þbPN Postt logðNTB p10 þ 1Þ þ u ps þ st þ e pst : Since the last year for which NTB data are available is 2010, the values for 2011, 2012, and 2013 are all imputed using the 2010 value. If connected firms were more likely to engage in tariff evasion, this effect should diminish after the Jasmin Revolution, especially in product lines subject to high tariffs, where evasion is expected to be greatest; in this case bPTBA < 0. Do Connected Firms Report Lower Import Values, Quantities, and Prices (When Tariffs are Higher)? If Ben Ali firms are more likely to evade tariffs than nonconnected firms, their reported imports can be expected to decline more strongly with tariffs than those of nonconnected firms. To test whether their reported imports are indeed differentially sensitive to tariffs a simple import demand function is esti- mated at the product-source country level: The World Bank Economic Review 465 lnIijpst ¼ bY logYit þ bL log Lit þ bA logageit þ bBA BenAlii þ b0 Offshorei þbp Publici þ bT LogðTariffpst þ 1ÞbTBA BenAlipst à LogðTariffpst þ 1Þ (3) þbTP Publicpst à LogðTariffpst þ 1Þ þ bTo Offshorepst Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 ÃLogðTariffpst þ 1Þ þ bN logðNTBpt þ 1Þ þ aj þ ups þ st þ epst ; where Iipst are imports by firm i operating in sector j of product p from country s at time t, Yit is the log of firm i’s output in year t, Lit is the amount of workers employed by firm i at time t, and aj is a vector of five-digit activity dummies (Ben Ali importers are active in seventy distinct five-digit sectors) ups is a vec- tor of product-source dummies. Controlling for output, employment, firm age, and detailed activity helps control for size heterogeneity and differences in technology across different types of importers. In addition, inclusion of product-source dummies mitigates potential bias associated with sorting into importing particular products from particular countries. Section V also presents specifications in which industry-product-source-year dummies are included (in which case the effects of tariffs and nontariff measures cannot be separately identified) to control for industry-product-source specific shocks. Of focal interest is the coefficient bTBA; if Ben Ali firms are more likely to underreport or misclassify imports, one would expect a negative coefficient. These regressions are estimated using import values, quantities, and prices as dependent variables. The identifying assumption underpinning this strategy is that once their output, labor usage, age, and sector are accounted for, there is no reason why Ben Ali firms would import less of goods that are subject to higher tariffs than other firms importing the same product from the same source country in the same year would other than their proclivity to evade taxes.10 This assumption might be flawed, for instance if Ben Ali firms are better negotiators and more successful at bargaining for lower prices for products sub- ject to high tariffs. Alternatively, if it were easier for Ben Ali firms to substitute away from using high- tariff imports (perhaps because they are more likely to obtain import licenses) than for other firms, then a negative coefficient bT might be misinterpreted as evidence for tariff evasion. The strategy obviously also does not detect pure smuggling, though it helps detect difference due to misclassification and under- invoicing of imports conditional on reporting. Another potential limitation is that political connections may be endogenous; the Ben Ali family may have bought or set up firms that were particularly cost efficient and/or had a comparative advantage in navigating the complex Tunisian bureaucracy. To examine this issue, we exploit the fact that five of the connected firms were privatized into the Ben Ali family, rendering it feasible to compare their pre- and postprivatization customs declarations for the same firm by source-country. By comparing the evolution of the unit prices of these firms with those of firms privatized to non–Ben Ali family members, we attempt to isolate the impact of becoming connected from the impact of changing public to private own- ership. Formally, the following difference-in-difference strategy is adopted: logPipst ¼ bPriv PostPrivatizationit þ bBAPriv PostBenAliPrivatizationit þ uips þ eipst ; (4) where Pipst is the unit prices reported by firm i importing product p from source country s at time t, uips is a firm-product-source country fixed effect, and PostPrivatizationit and PostBenAliPrivatizationit are dummy variables that take the value 1 after a firm has been privatized or privatized to the Ben Ali family, respectively, and zero otherwise. Identification is thus based on comparing the unit prices of the same product imported from the same source country by the same firm before and after becoming privately owned. If Ben Ali firms are more likely to underreport, then one would expect bBAPriv < 0: The sample of competitors is confined to firms operating in the same five-digit industries as (to be) privatized firms 10 If for some other reason than tariff evasion Ben Ali firms import relatively more goods subject to high-tariffs, the coef- ficient estimates on the tariff will be spuriously attributed to evasion. 466 Rijkers, Baghdadi, and Raballand that report importing the same products from the same origin in the same years as (to be) privatized firms in at least two different calendar years. Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 III. Data and Descriptive Statistics In the aftermath of the Tunisian revolution, assets of the Ben Ali clan were confiscated. The confiscation process, which is still ongoing, affects 114 individuals, including Ben Ali himself, his relatives, and his in-laws, and concerns the period from 1987 until the outbreak of the revolution. We obtained from the Tunisian authorities a list of 662 firms that were owned by the Ben Ali clan and confiscated in the aftermath of the revolution (before December 2014) and were able to identify 206 of these firms as importers by merging the business register, the Repertoire National des Enterprises (RNE), with annual firm-HS6 product-origin data on import transactions for the period 2000–2009 from Tunisian customs. The RNE contains information on the age, sector, and employment of all regis- tered nonagricultural firms operating in Tunisia, including for firms not employing any salaried workers, that is, the self-employed (see Rijkers et al. 2014a). Moreover, it has information on firms’ tax status and whether or not firms are publicly or privately owned. These data are complemented with informa- tion on output declared to the Tunisian tax authorities from the Tunisian Ministry of Finance. Thus, not all Ben Ali–owned importers are identified. However, the vast majority are included in our sample, which is most likely skewed towards the largest and economically most relevant firms since these are easier to identify (and hence also easier to confiscate). In order to calculate evasion gaps and assess how they relate to tariffs, the Tunisian HS6-product- origin import data are merged with bilateral tariff data by product from WITS, which is available for 2002–2009, though missing for 2007 and 2009, for which tariff data from 2006 and 2008, respectively, are used instead; data on nontariff measures by product are available for the period from 2000 to 2010 and information on imports and exports to Tunisia by HS6 product and year from COMTRADE for the period from 2002 to 2013. To ensure the results reflect systematic mismatches, rather than erratically reported incidental transactions, the sample is confined to (i) products which account for more than 0.01 percentage points of cumulative total exports to Tunisia reported by partner or more than 0.01 per- centage points of cumulative imports reported in Tunisia over this period.11 In addition, (ii) the focus is on the top fifteen source countries in terms of total import value reported in Tunisia or total export value declared in source countries12 and (iii) HS6-source country-year combinations for which both reported imports in Tunisia and reported exports by partner countries are positive.13 The resulting sample com- prises 1,386 products and sixteen countries,14 which cover 69.75% of all exports to and 61.03% of all 11 This reduces the sample from 5,449 to 1,493 products, which together account for 91.05% of exports to Tunisia del- cared by partners and for 92.05% of imports declared in Tunisia. 12 These countries account for 84.26% of import value declared in Tunisia over the period and for 78.92% of all exports to Tunisia reported by partners. Focusing only on products that account for more than 0.01 percentage points of cumulative imports reported in Tunisia or 0.01 percentage point of cumulative exports to Tunisia reduces these num- bers to 76.97% and 73.32%, respectively. 13 Such source-product combinations account for 81.44% of all exports to Tunisia reported by partners and 73.65% of imports reported in Tunisia. We also examined whether the likelihood of imports being “orphaned,” that is, existing in Tunisian customs declarations without having a corresponding matching declaration in the alleged source country, was related to the importance of Ben Ali firms but could not reject the null hypothesis that this was not the case. Results are omitted to conserve space but available upon request. 14 The countries are Algeria, Argentina, China, France, Germany, Italy, Japan, Libya, the Netherlands, the Russian Federation, Spain, Turkey, the United States of America, Ukraine, and the United Kingdom. Note that we have sixteen rather than fifteen countries because we are including countries in that are in the top fifteen source countries, either based on imports declared in Tunisia or based on exports to Tunisia reported partner countries. While the ranking of different source countries using these different criteria usually line up well, there are a few exceptions where this is not The World Bank Economic Review 467 imports declared in Tunisia. In addition, product-level information on nontariff measures from the World Bank (Malouche et al. 2013) is used. Table 1 presents descriptive statistics for different types of firms. The 206 connected importing firms are on average larger and more diversified than other private firms; while they comprise only 0.7% of all Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 importing firms, they account for 2.3% of all imports over the period considered. Even more striking, 124 public firms (0.44% of all firms in our sample) together account for more than a quarter of all import value over the period. By contrast, private “onshore” importers, which represent nearly three- quarters of all importing firms, tend to be the smallest and the least diversified, accounting for 38% of reported exports. “Offshore” importers that specialize in exports are comparatively large. Note also that connected firms do not, on average, face lower tariffs or fewer nontariff measures. Table 1. Descriptive Statistics on Firm Characteristics—By Type of Firm Descriptive statistics firms Firm type Ben Ali Offshore Onshore Public All Economic significance Number of firms N 206 7074 20869 124 28273 % of all firms % 0.73 25.02 73.81 0.44 100 % of overall imports % 2.29 32.53 38.64 26.54 100 % of source-product-years with at least % 7.22 36.62 81.16 12.40 one importer of this type Firm characteristics By firm-year N 865 27926 82691 782 112264 Y Mean 14.389 13.268 13.138 17.057 13.202 Sd 2.690 1.934 2.021 2.684 2.036 L Mean 2.436 2.983 1.925 2.470 2.198 Sd 2.180 1.861 1.630 3.102 1.770 Age Mean 9.279 7.607 12.755 30.197 11.562 Sd 10.776 6.746 11.250 18.585 10.731 Log total imports Mean 12.690 12.421 11.391 14.011 11.676 Sd 2.444 2.410 2.092 3.438 2.245 #source countries Mean 5.318 3.294 3.267 8.944 3.329 Sd 5.900 3.646 3.696 9.604 3.812 #products Mean 25.383 13.127 9.256 46.219 10.600 SD 43.069 18.219 16.556 73.868 18.712 #source countries*products Mean 36.091 17.139 12.687 80.004 14.444 SD 65.748 29.027 28.400 146.05 31.984 By source-country and year N 31219 478618 1049102 62563 1621502 Log imports per source-country Mean 9.115 9.457 9.184 9.585 9.279 Sd 8.789 9.166 8.912 9.177 8.992 Log (1þTariffs) Mean 3.540 3.432 3.334 3.259 3.366 Sd 0.692 0.997 0.831 0.751 0.883 Log (1þNTBs) Mean 0.060 0.024 0.037 0.058 0.035 Sd 0.309 0.202 0.255 0.293 0.243 Source: Authors’ analysis based on data from Tunisian customs, the World Bank, COMTRADE, WITS, and La Commission Nationale de Gestion d’Avoirs et des ´ cupe Fonds objets de Confiscation ou de Re ´ ration (see appendix A). the case. Notably, Argentina is ranked as the fifteenth largest source country based on Tunisian import data, but the sixteenth largest source country based on export data reported by partners. By contrast, Japan is considered the fif- teenth largest source country based on import data reported in Tunisia but the twenty-first largest importer based on data reported by partners. 468 Rijkers, Baghdadi, and Raballand Table 2 presents descriptive statistics on average evasion gaps at the source-country-year level for the entire sample and by dominant importer type, by tariff level. It discriminates between, respectively, Ben Ali, offshore, onshore, and public sector–dominated products, depending on which type of firm is the dominant importer based on aggregate import value; that is, goods for which Ben Ali (public/onshore/ Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 offshore) firms account for more than 50% of the value of all reported imports from a given country in a given year are classified as Ben Ali (public/onshore/offshore) dominated. Goods for which there is not a single dominant importer are classified into a residual “mixed” category. Table 2. Evasion Gaps Descriptive statistics evasion gaps (Log exports reported by partner minus log imports reported in Tunisia at the HS6-source-country-year level) All By dominant importer Ben Ali Offshore Onshore Public Residual Mean Std. dev. N mean mean mean mean mean Evasion gap—values (Log export value reported by partner—log import value reported in Tunisia) All À0.001 1.875 49347 0.356 0.071 À0.036 À0.234 0.098 High tariff 0.099 1.939 24896 0.797 0.090 0.094 À0.101 0.170 Low tariff À0.104 1.801 24451 À0.108 0.033 À0.136 À0.293 0.048 N 760 16068 29692 2106 721 Evasion gap—quantities (Log export quantity reported by partner—log import quantity reported in Tunisia) All À0.015 2.172 48724 0.134 0.080 À0.083 0.129 0.087 High tariff 0.080 2.173 24646 0.318 0.104 0.037 0.389 0.127 Low tariff À0.112 2.167 24080 À0.056 0.033 À0.176 0.014 0.059 N 749 15,908 29,303 2,059 705 Evasion gap—unit prices (Log unit price reported by partner—log unit price reported in Tunisia) All 0.020 1.026 48724 0.216 À0.006 0.056 À0.357 0.028 High tariff 0.022 0.951 24646 0.465 À0.017 0.065 À0.473 0.048 Low tariff 0.018 1.098 24080 À0.042 0.014 0.049 À0.306 0.014 N 749 15,908 29,303 2,059 705 Notes: Sample is confined to product-source-year combinations(i) in which imports reported in Tunisia and exports reported in partner countries are strictly posi- tive, (ii) from countries that are among the top fifteen source countries in terms of cumulative import value (either as declared by partners or as declared by Tunisian customs) over the period 2002–2009, and (iii) products that account for at least 0.01 percentage points of import value (either as declared by partners or as declared by Tunisian customs) over this period. In this sample, Ben Ali–dominated goods account for 4.75% of aggregate import value, offshore-dominated goods for 44.17%, onshore-dominated goods for 35.63%, state-dominated goods for 14.56%, and mixed goods for 1.04%. Source: Authors’ analysis based on data described in the text. Average log evasion gaps in terms of import value are very small. The value of imports recorded in Tunisia is on average 0.1 percentage points higher than the export value reported in partner countries. Arguably more informative are differences in evasion gaps between goods subjects to high tariff vis- a-vis gaps goods subject to low tariffs. Average evasion gaps for goods subject to high tariffs, that is, subject to a tariff rate of at least 36 percentage points, are positive and approximately 9.9 percentage points. By contrast, gaps for goods subject to low tariffs are minus 10.4 percentage points. Thus, goods subject to higher tariffs seem more prone to tax evasion, and such evasion is likely taking place through misclassifi- cation of goods. The World Bank Economic Review 469 More striking are the differences across dominant importers. Log evasion gaps for goods for prod- ucts for which onshore firms are the dominant importer are À0.04 on average, but 0.09 for goods subject to high tariffs. Log evasion gaps for goods for which offshore firms are the dominant importer are around 0.07 and do not seem to vary much with tariffs. By contrast, log gaps for Ben Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 Ali–dominated products are on average approximately 0.36 and a striking 0.80 for goods subject to high tariffs. Gaps are consistently negative for goods for which public firms are the most prominent importers, which is consistent with overinvoicing of imports. Thus, prima facie, the results are sug- gestive of evasion of tariffs by politically connected firms, as well as overreporting of imports by public firms. Average log evasion gaps in terms of quantities and prices, presented in panels B and C, respec- tively, are also small on average, notably 0.02. Quantity gaps are on average somewhat higher for goods subject to high tariffs (0.08) and negative for goods subject to low tariffs (À0.11), which hints at misclassification. The difference in average evasion price gaps between goods subject to low and high tariffs is very small. The standard deviation of price gaps is much lower than that of quantity gaps. Evasion strategies seem to vary by firm type; while all firm types appear to misclassify goods to some extent (as is evidenced by the fact that across the different dominant importer types evasion gaps are con- sistently higher for goods subject to high tariffs than for goods subject to low tariffs), price underreport- ing is most egregious in Ben Ali–dominated product lines subject to high tariffs, for which gaps are as high as 0.47.15 Can differences between connected and other firms operating in the same five-digit industry and importing the same product from the same country in the same year be detected? Table 3 presents information on average firm-level import values, quantities and unit prices, normalized by the product-source-industry-year average (which is normalized to be equal to 1), and documents descriptive statistics consistent with the product-level patterns; the declared value of Ben Ali firms’ imports exceeds that of the average firm by 18%, and their declared import quantities are 21% higher than the average. Yet, their reported unit prices are on average 4.8% lower than those reported by a representative firm. For goods subject to low tariffs, Ben Ali firms’ import prices are on a par with those of other firms, whereas for goods subject to high tariffs, their reported prices are 8.1% lower than the average. Onshore firms on average report lower import values and quantities, but their reported prices are very close to average prices. Public firms pay unit prices, which are on average 7.4% higher than other firms that simultaneously import the same HS6 product from the same country. To sum up, exploratory descriptive statistics are indicative of considerable tariff evasion. They also suggest that connected firms are more likely to evade tariffs than other firms and that they were more likely to use undervaluation of prices as an evasion strategy than other firms. By contrast, underreporting and/or misclassification of import quantities seems to have been an evasion strategy that all types of firms engaged in. The next sections test these hypotheses more rigorously by estimating the models dis- cussed in section II. 15 Quantity gaps are also high for these product lines, yet the highest average quantity gaps are observed for goods for which public firms are the dominant importers, which are subject to high tariffs. By contrast, price gaps for goods pre- dominantly imported by public firms are on average negative (irrespective of the tariff); the overreporting of import values for products predominantly imported by SOEs is thus driven by overreporting of prices, rather than overreport- ing of quantities (and all the more remarkable given the existence of nontrivial average quantity gaps for such products). 470 Rijkers, Baghdadi, and Raballand Table 3. Firm Level Reported Import Values, Quantities, and Prices—by Source-Origin Mean import values, quantities, and prices normalized by product-origin-year-industry weighted average (product-origin-year-industry average ¼ 1) Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 Firm Type Ben Ali Offshore Onshore Public All (N ¼ 8140) (N ¼ 15880) (N ¼ 23775) (N ¼ 237) (N ¼ 48,032) Mean import value Std. dev. N All 1.183 1.030 0.934 1.403 1.383 48032 High tariffs 1.214 1.032 0.923 1.458 1.440 33147 Low tariffs 1.131 1.020 0.955 1.355 1.246 14885 Mean import quantity Std. dev N All 1.205 1.009 0.923 1.340 1.466 48032 High tariffs 1.253 1.010 0.911 1.414 1.518 33147 Low tariffs 1.124 1.007 0.960 1.273 1.342 14885 Mean unit prices Std. dev N All 0.952 1.022 1.014 1.086 0.791 48032 High tariffs 0.919 1.027 1.023 1.056 0.764 33147 Low tariffs 1.008 1.000 1.000 1.114 0.851 14885 Notes: sample is confined to (five-digit) sector-product-source combinations in which (i) at least one Ben Ali firm and at least one other firm of a different type are simultaneously importing during the same year, (ii) for which tariff data exist, (iii) in which imports reported in Tunisia and exports reported in partner countries are strictly positive, (iv) from countries that are among the top fifteen source countries in terms of cumulative import value (either as declared by partners or as declared by Tunisian customs) over the period 2002–2009, and (v) products that account for at least 0.01 percentage points of import value (either as declared by partners or as declared by Tunisian customs) over this period. In addition, (vi) observations that fall in the top and bottom 1% of normalized prices, quantities, and values are excluded. The sample comprises nine public firms, 1,787 onshore firms, 1,145 offshore firms, and 113 BA firms. Source: Authors’ analysis based on data described in the text. IV. Results: Evasion Gaps This section first presents the main results, before examining to what extent tariff evasion was driven by misrepresenting quantities or prices. The section ends with an analysis of the evolution of evasion gaps in the aftermath of the Revolution. Basic Results Table 4 examines the determinants of log evasion gaps using two different models; in the first, simplistic model (presented in columns 1–3), the evasion gap is modeled as a function of the tariff rate and the share of imports accounted for by, respectively, Ben Ali firms, offshore firms, and public enterprises, with onshore firms being the reference group. The second, and preferred, model (referred to as the “interacted” model, presented in columns 4–6) adds interaction terms between the tariff and the value share of Ben Ali importers, offshore importers, and public importers. The coefficient on the tariff can thus (loosely)16 be interpreted as providing a crude approximation to the evasion elasticity of onshore firms. Standard errors are clustered at the product level. Progressively more elaborate sets of dummies are added when moving from the left side of the table to the right; columns 1 and 4 include country-year effects, columns 2 and 5 add product fixed effects, while columns 3 and 6 control for both country-year and country-product fixed effects. Although the specification in column 6 is in principle our preferred specification as it offers the most rigorous test for differences in evasion across firms, it is important to bear in mind that including both country-year and country-product fixed effects absorbs a lot of the var- iation of interest. 16 The approximation is crude because the value shares used to proxy the importance of different types of firms are them- selves endogenous to evasion. The World Bank Economic Review 471 Table 4. The Determinants of Evasion Value Gaps The determinants of evasion gaps Dependent variable: log evasion value gaps by HS6-source country-year Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 (1) (2) (3) (4) (5) (6) coef/se coef/se coef/se coef/se coef/se coef/se Log (Tariffþ1) 0.058*** 0.012 0.018 0.078*** 0.040 0.050 (0.022) (0.051) (0.053) (0.023) (0.053) (0.056) Ben Ali % 0.419*** 0.422*** 0.174 À0.850* À0.534 À0.759 (0.133) (0.120) (0.150) (0.474) (0.462) (0.480) Offshore % À0.034 À0.288*** À0.464*** 0.246 0.150 0.011 (0.061) (0.051) (0.06) (0.182) (0.164) (0.219) Public % À0.312*** À0.339*** À0.459*** À0.229 À0.612 À0.621 (0.076) (0.082) (0.089) (0.324) (0.404) (0.436) Ben Ali %* Log (Tariffþ1) 0.370*** 0.279** 0.275** (0.133) (0.13) (0.136) Offshore %* Log (Tariffþ1) À0.080 À0.130*** À0.143** (0.053) (0.047) (0.061) Public %* Log (Tariffþ1) À0.025 0.085 0.050 (0.095) (0.120) (0.130) Log (NTB þ 1) 0.016 À0.064 À0.078 0.013 À0.061 À0.076 (0.022) (0.040) (0.050) (0.022) (0.040) (0.050) Country*year FE Yes Yes Yes Yes Yes Yes Product FE Yes Yes Country*product FE Yes Yes N 49347 49347 49347 49347 49347 49347 Number of products 1386 1386 1386 1386 1386 1386 R2 0.036 0.258 0.627 0.037 0.258 0.627 R2-Adjusted 0.034 0.234 0.534 0.035 0.235 0.534 Notes: Standard errors are clustered by product. ***p ¼ < 0.01, **p<0.05, *p ¼ 0.10. The sample is confined to product-source-year combinations (i) in which imports reported in Tunisia and exports reported in partner countries are strictly positive, (ii) from countries that are among the top fifteen source countries in terms of cumulative import value (either as declared by partners or as declared by Tunisian customs) over the period 2002–2009, and (iii) products that account for at least 0.01 percentage points of cumulative import value (either as declared by partners or as declared by Tunisian customs) over this period. Source: Authors’ analysis based on data described in the text. The results presented in column 1 are consistent with substantial tariff evasion; the tariff rate is a strongly significant predictor of the evasion gap, and the estimated evasion elasticity is 0.058. Once product and country-product dummies are included (columns 2 and 3), the coefficient on the tariffs drops and loses statistical significance, which is presumably at least in part due to the fact that tariffs do not vary dramatically across countries and over time and that out of necessity it was assumed that they were equal to tariffs in the preceding years for two years for which tariff data were missing altogether (see the appendix). The ability to nonetheless identify significant interactions between the tariff rate and the import shares accounted for by different firms (columns 4–6) is due to variability in these import shares (rather than the tariffs themselves) over time. Turning to the main result, connected firms are more likely to evade tariffs. To start with, evasion gaps are strongly positively correlated with the share of import value accounted for by Ben Ali firms in the simple specification (column 1). This association is robust to controlling for product fixed effects (column 1) but not to country-product fixed effects (column 3). More importantly the interaction between the Ben Ali proxy and the tariff measure is consistently positive and significant in the preferred interactive specifications (columns 4–6), consistent with the hypothesis that connected firms are more likely to evade tariffs. This result is robust to controlling for product (column 5) and even country- 472 Rijkers, Baghdadi, and Raballand product fixed effects (column 6). The regressions thus strongly reject the null hypothesis that connected firms do not differ in their evasion propensity from other firms and are instead consistent with connected firms evading more. By contrast, offshore firms seem less likely to engage in tariff evasion; once product and product- Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 source dummies are conditioned, the coefficient on offshore importers is negative and statistically signifi- cant in the simple specification and the interaction between the tariff and the import share of offshore firms is significantly negative in the interacted specification. Evasion gaps are also significantly nega- tively correlated with the share of imports accounted for by public firms in the simple specification with- out interaction terms, pointing towards possible overinvoicing of imports by such firms. Misrepresentation of Quantities or Prices? To assess whether the documented evasions gaps are due to (i) underreporting of misclassification of import quantities or (ii) underreporting of prices, table 5 presents estimates of the same regressions using as dependent variable log evasion gaps in weights (columns 1–4) and unit prices (columns 5–8). It repli- cates the models that only condition on country-year dummies (presented in columns 1, 3, 5 and 7), as well as the models that condition on country-year as well as country-product dummies (presented in col- umns 2, 4, 6 and 8). The results presented in column 1 are consistent with misclassification and underreporting of quanti- ties; quantity gaps significantly increase with tariffs, with a 10% increase in tariffs being associated with an increase in evasion gaps of approximately 0.56 percentage points. Once product-country dummies are introduced (column 2), the coefficient on the tariff drops and becomes statistically insignificant, pre- sumably in part because there is not a lot of temporal variation in tariffs at the product-country level in the majority of our sample. Different types of firms do not appear to differ substantially in their propen- sity to underreport quantities as the coefficients on the import shares of Ben Ali, offshore, and public firms, and their interactions with the tariff level are not statistically significant. Thus, the hypothesis that different types of firms misreport quantities to the same extent is not rejected. By contrast, firms do appear to differ in the extent to which they misrepresent prices; unit price dis- crepancies vary strongly with the import shares of different types of importers, even though they are not significantly correlated with the tariff rate. Connected firms seem more likely to underreport prices since price gaps are strongly and significantly increasing with the share of Ben Ali firms in the simple specifica- tion and, moreover, the interaction between the share of imports accounted for by Ben Ali firms and the tariff is consistently statistically significant in our preferred specification. For offshore firms, again, the opposite pattern is observed; such firms appear less likely to engage in price underreporting.17 Note also that unit price gaps are strongly decreasing with the share of imports claimed by public firms. In sum, the results are consistent with the hypothesis that politically connected firms are more likely to evade tariffs than other firms and suggest that underreporting of unit prices is the main driver of the association between evasion value gaps and Ben Ali presence. By contrast, such underreporting is signifi- cantly less prevalent where offshore firms account for a larger share of import value, especially when tar- iffs are high. Public firms seem to overreport imports. The results also suggest that misreporting of import quantities was an important evasion mechanism for all types of firms, even though the null hypothesis that such misreporting did not vary across firms is not rejected (perhaps in part because the variance in quantity gaps is larger than the variance in unit price gaps). Robustness checks using alterna- tive proxies for the import share of different types of firms, alternative sample restrictions and alterna- tive specifications, can be found in the supplemental appendix or the working paper version of this article (Rijkers et al. 2015). 17 Gaps are negatively correlated with the share of imports claimed by offshore firms in the simple specification and with the interaction between the offshore share and the tariff in the interacted specification. Table 5. The Determinants of Evasion Gap Quantity and Price Gaps Evasion gaps—prices or quantities? Dependent variable: Log quantity gap (by HS6-country-year) Log price gap (by HS6-country-year) Q Q Q Q P P P P (1) (2) (3) (4) (5) (6) (7) (8) coef/se coef/se coef/se coef/se coef/se coef/se coef/se coef/se Log (Tariffþ1) 0.056** À0.016 0.063** À0.007 À0.001 0.031 0.012 0.052 The World Bank Economic Review (0.025) (0.063) (0.026) (0.067) (0.009) (0.030) (0.011) (0.033) Ben Ali % 0.104 À0.150 0.021 À0.009 0.297*** 0.321*** À0.890*** À0.786** (0.134) (0.168) (0.548) (0.595) (0.081) (0.102) (0.227) (0.324) Offshore % 0.034 À0.372*** 0.123 À0.221 À0.068*** À0.092** 0.124* 0.218* (0.067) (0.070) (0.204) (0.226) (0.020) (0.038) (0.064) (0.117) Public % 0.093 0.006 0.041 À0.361 À0.418*** À0.470*** À0.295* À0.274 (0.091) (0.119) (0.408) (0.638) (0.050) (0.069) (0.170) (0.308) Ben Ali % * Log (Tariffþ1) 0.024 À0.041 0.347*** 0.327*** (0.153) (0.170) (0.069) (0.093) Offshore % * Log (Tariffþ1) À0.026 À0.045 À0.055*** À0.093*** (0.058) (0.064) (0.017) (0.033) Public % * Log (Tariffþ1) 0.016 0.114 À0.037 À0.061 (0.119) (0.189) (0.051) (0.091) Log (NTB þ 1) 0.026 À0.024 0.025 À0.023 À0.012 À0.047* À0.014 À0.045* (0.025) (0.060) (0.025) (0.060) (0.011) (0.025) (0.011) (0.026) Country*year FE Yes Yes Yes Yes Yes Yes Yes Yes Country*product FE Yes Yes Yes Yes N 48724 48724 48724 48724 48724 48724 48724 48724 Number of products 1386 1386 1386 1386 1386 1386 1386 1386 R2 0.032 0.611 0.032 0.611 0.034 0.495 0.036 0.496 Adjusted R2 0.030 0.513 0.030 0.513 0.032 0.368 0.033 0.369 Notes: Standard errors are clustered by product. ***p ¼ < 0.01, **p<0.05, *p ¼ 0.10. The sample is confined to product-source-year combinations (i) in which imports reported in Tunisia and exports reported in partner coun- tries are strictly positive, (ii) from countries that are among the top fifteen source countries in terms of cumulative import value (either as declared by partners or as declared by Tunisian customs) over the period 2002–2009, and (iii) products that account for at least 0.01 percentage points of cumulative import value (either as declared by partners or as declared by Tunisian customs) over this period. Source: Authors’ analysis based on data described in the text. 473 Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 474 Rijkers, Baghdadi, and Raballand The Evolution of Evasion Gaps after the Revolution What happened to evasion gaps after the Jasmin Revolution, which involved the ousting of President Ben Ali? Table 6 presents descriptive statistics on the evolution of mean evasion gaps before and after the revolution, distinguishing between products dominated by Ben Ali firms and other products. Note Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 that the sample is confined to products that were imported from the same source country both before and after the Jasmin Revolution. Table 6 documents the change in average evasion gaps after the revolu- tion, showing that they decreased, though not significantly, by approximately 16.2% on average in product lines where Ben Ali firms had been dominant (column 1). By contrast, they increased signifi- cantly, by 5.7% on average, in other product lines (column 2). Thus, the difference in average evasion gaps between previously Ben Ali–dominated product lines and other product line reduced substantially by 21.9% (column 3) and this change was statistically significant at the 10% level. Table 6. The Evolution of Evasion Gaps After the Revolution The evolution of log evasion gaps in the afermath of the revolution Previously Ben Ali–dominated products Other products Difference-in-difference (1) (2) (1-2) Change in average log value gaps All À0.162 0.057** À0.219* High tariff À0.164 0.061** À0.225 Low tariff À0.094 0.058* À0.152 N 858 55,705 55,933 Change in average log weight gap All 0.050 0.093*** À0.042 High tariff 0.311 0.086** 0.224 Low tariff À0.175 0.103*** À0.278* N 835 53,988 54,823 Change in average log price gap All À0.165*** À0.028** À0.138 High tariff À0.434*** À0.033** À0.401*** Low tariff 0.121 À0.023 0.144 N 835 53,988 54,823 Notes: ***p ¼ < 0.01, **p<0.05, *p ¼ 0.10. Tests for whether differences in means are statistically significant are based on regressions of the form log gap ¼ a1þb1*Postþ b2*BA dominatedþ b3*Post*BA dominated, where Post is a dummy taking the value 1 for years after 2010 and 0 otherwise, and BA dominated a dummy variable indicating whether a Ben Ali firms accounted for more than 50% of reported imports. Standard errors are clustered at the product level. The sample is confined to product-source-year combinations (i) in which imports reported in Tunisia and exports reported in partner countries are strictly positive (ii) imported both at least once between 2002 and 2009 and at least once between 2010 and 2013, (iii) from countries that are among the top fifteen source countries in terms of cumulative import value (either as declared by partners or as declared by Tunisian customs) over the period 2002–2009, and (iv) products that account for at least 0.01 percentage points of import value (either as declared by partners or as declared by Tunisian customs) over the period 2002–2009. Source: Authors’ analysis based on data described in the text. The World Bank Economic Review 475 The increase in value gaps in non–Ben Ali–dominated product lines has been driven by a significant increase in quantity gaps, which is consistent with a rise in informal trade with Libya and Algeria docu- mented by Ayadi et al. (2013). Price gaps declined significantly on average. They declined most rapidly in previously Ben Ali–dominated product lines subject to high tariffs. Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 Table 7 presents regressions that replicate our preferred specifications but now interact all variables with a post-revolution indicator that takes the value 1 for 2011, 2012, and 2013 and zero otherwise. Due to data limitations, all explanatory variables for this period are imputed using the latest available data, which for the firm-level proxies and the tariff is 2009, while it is 2010 for the nontariff measures. The results pre- sented in columns 1–3 show that after the revolution, price gaps decreased significantly faster the greater the share of imports accounted for by Ben Ali firms during his reign. By contrast, evasion gaps increased more quickly in product lines in which public firms and offshore firms had been important importers. Table 7. The Evolution of Evasion Gaps The evolution of evasion gaps Dependent Variable: Log value gap Log quantity gap Log price gap Log value gap Log quantity gap Log price gap V Q P V Q P (1) (2) (3) (4) (5) (6) coef/se coef/se coef/se coef/se coef/se coef/se Post*Log (Tariffþ1) 0.004 0.010 À0.013 À0.057** À0.053* À0.015 (0.022) (0.024) (0.012) (0.026) (0.03) (0.016) Post*Ben Ali % À0.051 0.120 À0.221* À0.282 À1.123* 0.765* (0.179) (0.194) (0.123) (0.469) (0.619) (0.420) Post*Offshore % 0.045 À0.007 0.048* À0.474** À0.518** À0.041 (0.062) (0.068) (0.029) (0.230) (0.248) (0.119) Post*Public % 0.196 À0.116 À0.805 0.366*** À1.440 0.589* (0.130) (0.161) (0.081) (0.600) (0.877) (0.301) Post*Ben Ali %*Log (Tariffþ1) 0.076 0.382** À0.283** (0.141) (0.179) (0.120) Post*Offshore % *Log (Tariffþ1) 0.150** 0.152** 0.025 (0.063) (0.068) (0.032) Post*Public*Log (Tariffþ1) 0.307* 0.397 À0.069 (0.176) (0.255) (0.087) Post* Log (NTB þ 1) À0.028 À0.020 0.006 À0.022 À0.020 0.006 (0.021) (0.024) (0.012) (0.022) (0.025) (0.012) Simple Controls Ben Ali%, Offshore%, Public%, log (NTBþ1), log (Tariffþ1) (all held constant at their last observed pre-Revolution levels in the post 2010 period) Yes Yes Yes Yes Yes Yes Interacted Controls Ben Ali%*Log (Tariffþ1), Offshore%*Log (Tariffþ1), Public%*Log (Tariffþ1) (all held constant at their last observed pre-Revolution levels in the post 2010 period) Yes Yes Yes Country*year FE Yes Yes Yes Yes Yes Yes Country*product Yes Yes Yes Yes Yes Yes N 55933 54823 54823 55933 54823 54823 Number of products 1217 1217 1217 1217 1217 1217 R2 0.524 0.237 0.358 0.525 0.500 0.358 Adjusted R2 0.470 0.217 0.283 0.470 0.441 0.283 Notes: Standard errors are clustered by product. ***p ¼ < 0.01, **p<0.05, *p ¼ 0.10. Sample is confined to product-source-year combinations (i) in which imports reported in Tunisia and exports reported in partner countries are strictly positive and (ii) which were imported both before and after the revolution, (iii) from countries that are among the top fifteen source countries in terms of cumulative import value (either as declared by partners or as declared by Tunisian customs) over the period 2002–2009, and (iv) products that account for at least 0.01 percentage points of import value (either as declared by partners or as declared by Tunisian cus- toms) over this period. Source: Authors’ analysis based on data described in the text. 476 Rijkers, Baghdadi, and Raballand The interacted specifications, presented in columns 4–6, show that unit price gaps diminished espe- cially rapidly with the presence of Ben Ali firms for products subject to higher tariffs. By contrast, quan- tity gaps appear to have increased for such products. To summarize, after the Revolution, evasion gaps diminished, though not significantly, in product lines Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 where Ben Ali firms had been dominant, whereas they increased significantly in other product lines. This led to a significant reduction (albeit at the 10% level) in the difference in average evasion gaps between previ- ously Ben Ali–dominated product lines and other product lines. This reduction was driven by a significant reduction in price gaps in product lines subject to high tariff where Ben Ali firms had been dominant. V. Firm-Level Results One drawback of testing for differential tariff evasion using evasion gaps is that such gaps are only observed at the product level, whereas the focus of this paper is on assessing the evasion propensities of different groups of firms. The complementary firm-level testing strategy discussed in section II mitigates this and assesses whether and, if so, how reported import values, quantities, and prices of the various types of firms vary differentially with tariffs; this is the objective of the first part of section V. The second part assesses the impact of firms becoming owned by connected entrepreneurs on the evolution of reported unit prices. Differential Elasticities with Respect to Tariffs The firm-source-product level regressions presented in table 8 mimic the product-level regressions, but the explanatory variables are modified to account for firm-level differences; the explanatory variables are the log of the tariff, firm-type dummies, and interactions between various firm-type dummies and the log of the tariff, as well as log of the number of nontariff barriers. Onshore firms are the reference category. Dependent variables are, respectively, the log of total import value (columns 1 and 4), the log of import quantity (columns 2 and 6), and the log of import price (columns 3 and 6) measured at the firm-product-country-year level. The specifications presented in columns 1–3 control for country-year, product, and sector dummies, while those presented in columns 4–6 include product-country-sector-year dummies, which sets a high bar for identification but precludes separate identification of the impact of tariffs and nontariff measures, as these do not vary within product-source-years. The results accord with conventional economic wisdom; import values reported by onshore firms (the reference category) decline significantly with tariffs (column 1), mostly because their reported import quantities tend to decrease as tariffs rise (column 2), although the latter association is not statistically sig- nificant. By contrast, their reported unit prices do not appear to vary with tariffs; the coefficient on the tariff in the unit price regression presented in column 3 is very close to zero. The import demands of off- shore firms are significantly less elastic with respect to tariffs, presumably because they are exempted from having to pay them. Other explanatory variables also have the expected sign; firms that produce higher levels of output import significantly more both in terms of reported value and quantities but don’t pay significantly higher or lower unit prices. Of focal interest, import values reported by Ben Ali firms don’t appear more elastic with respect to tariffs than those of imports of onshore and offshore firms, but their reported import prices decline sig- nificantly as tariffs rise. By contrast, their reported quantities are significantly less elastic with respect to tariffs than those of onshore firms. These results are robust to controlling for source-product-year- industry fixed effects (columns 4–6). Overall, these firm-level results are consistent with tariff evasion through underreporting of unit pri- ces by connected firms. The World Bank Economic Review 477 Table 8. Elasticity of Reported Import Values, Quantities, and Prices with Respect to Tariffs at Firm-Product-Source Country Level The elasticity of imports with respect to tariffs at the firm-product-source country level Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 Dependent variable: Log V Log Q Log P Log V Log Q Log P (1) (2) (3) (4) (5) (6) coef/se coef/se coef/se coef/se coef/se coef/se Log (Tariffþ1) À0.133* À0.133 0.001 (0.073) (0.098) (0.059) Ben Ali *Log (Tariffþ1) 0.098 0.211*** À0.113** 0.092 0.194*** À0.102* (0.062) (0.078) (0.057) (0.071) (0.074) (0.054) Offshore*Log (Tariffþ1) 0.251*** 0.152* 0.099 0.193* 0.042 0.150** (0.066) (0.081) (0.055) (0.081) (0.092) (0.060) Public *Log (Tariffþ1) À0.070 0.223 À0.293** 0.127 0.562*** À0.434*** (0.144) (0.183) (0.129) (0.170) (0.140) (0.141) Ben Ali firm À0.279 À0.498* 0.218 À0.185 À0.425* 0.239 (0.226) (0.289) (0.190) (0.242) (0.249) (0.156) Offshore 0.251*** 0.152* 0.099* À0.372 À0.009 À0.363* (0.213) (0.300) (0.214) (0.277) (0.358) (0.205) Public 1.168** 0.177 0.991** 0.633 À0.877* 1.510*** (0.515) (0.651) (0.460) (0.664) (0.499) (0.495) Log Y 0.136*** 0.142*** À0.006 0.157*** 0.159*** À0.002 (0.027) (0.029) (0.016) (0.022) (0.024) (0.016) Log L 0.100*** 0.029 0.071** 0.099*** 0.055* 0.044 (0.024) (0.033) (0.029) (0.021) (0.029) (0.027) Log Age À0.028 À0.009 À0.019 À0.037 À0.023 À0.014 (0.027) (0.042) (0.030) (0.028) (0.040) (0.026) Log (NTB þ 1) À0.039 À0.091 0.052 (0.057) (0.072) (0.045) N 48032 48032 48032 48032 48032 48032 Number of firms 3052 3052 3052 3052 3052 3052 Sector FE Yes Yes Yes Country*Year FE Yes Yes Yes Product FE Yes Yes Yes Product*Country*Sector*Year FE Yes Yes Yes R2 0.363 0.577 0.703 0.471 0.672 0.790 Adjusted R2 0.352 0.569 0.698 0.377 0.614 0.753 Notes: Standard errors are robust and clustered by firm. ***p ¼ < 0.01, **p<0.05, *p ¼ 0.10. Notes: sample is confined to (five-digit) sector-product-source com- binations in which (i) at least one Ben Ali firm and at least one other firm of a different types are simultaneously importing during the same year, (ii) for which tariff data exist, (iii) in which imports reported in Tunisia and exports reported in partner countries are strictly positive, (iv) from countries that are among the top fifteen source countries in terms of cumulative import value (either as declared by partners or as declared by Tunisian customs) over the period 2002–2009, and (v) products that account for at least 0.01 percentage points of import value (either as declared by partners or as declared by Tunisian customs) over this period. In addition, (vi) observations that fall in the top and bottom 1% of normalized prices, quantities, and values are excluded. The sample comprises nine public firms, 1,787 onshore firms, 1,145 offshore firms, and 113 Ben Ali firms. Source: Authors’ analysis based on data described in the text. How costly was tariff evasion by connected firms? Accurately quantifying the costs of tariff evasion is challenging, but one admittedly crude yet conservative method to answer this question is to assume that unit price differentials between connected firms and the median import price reported by other private sector firms importing the same product from the same country at the same time are due to evasion. By multiplying that price differential by the quantity imported by connected firms and the tariff rate one can arrive at an estimate of the additional tax loss associated with being connected (private firms on average evade; this measure allows us to assess how much more connected firms evaded than other firms). Doing this and summing overall import transactions by connected firms in our database for which tariff data exists and for which there is at least one counterpart declaration by a private firms 478 Rijkers, Baghdadi, and Raballand suggests that in 2009 alone, connected firms evaded approximately 217 million US dollars’ worth of taxes more than other firms would have. Over the period 2002–2009, they cumulatively evaded 1.2 billion US dollars’ worth of taxes more than other private firms would have. These estimates are very conservative. If, instead of using median prices reported by other firms, the average price reported by other firms is Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 used, the number rises to 2.6 billion USD. Also, this price discrepancy can only be calculated when tariff data are available and when at least one private sector firm is importing the product at the same time as Ben Ali firms; such observations account for less than half the value of all import transactions reported by connected firms between 2000 and 2009. Most importantly, this method only considers underreporting of prices, not other types of tax fraud; if Ben Ali firms were able to grant themselves exemptions, then they would not need to underreport, in which case they are likely to report higher prices than non- connected firms. It also does not consider underreporting of quantities, including smuggling—that is, goods that are simply not declared to Tunisian customs do not feature in this calculation. Moreover, this calculation does not consider the indirect cost of tariff evasion in terms of inefficiency and a basic lack of transparency. The cost advantage that such tariff evasion endows connected firms with distorts investment incentives and undermines competition. During the Ben Ali era, expansion of the market share of connected firms was associated with reduced entry, higher exit, and stronger concen- tration (Rijkers et al. 2014b). Do Firms Report Lower Prices after Becoming Connected? The observation that import and unit prices reported by connected firms decline more rapidly than those of nonconnected firms could be an artifact of selection; for example, Ben Ali entrepreneurs buying firms that were more cost-effective or more likely to engage in evasion to start with. To assess whether this explains the patterns documented above, a difference-in-difference strategy comparing the evolution of unit prices of firms privatized to the Ben Ali family with other privatizations is used. Note that power is limited due to the relatively small number of privatizations (twenty-five) for which imports of the same product from the same source country are observed both pre- and postprivatization. The results are presented in table 9, with dummy variables indicating whether a firm was (i) privatized (in year t) and (ii) privatized to the Ben Ali family (in year t) as key explanatory variables. The dependent varia- ble is the log unit price. All specifications include firm-source country-product fixed effects. Identification is thus based on comparing the evolution of prices reported by the same firm for the same product net of time varying source country-product specific shocks. Column 1 presents estimates in which standard errors are clustered at the firm-product level, while in columns 2 and 3 standard errors are clustered at the firm level. Column 3 excludes one firm that was privatized to the Ben Ali clan and known to have made extensive use of duty suspension regimes and thus had limited incentives to evade tariff by underreporting prices. Privatizations to the Ben Ali family are associated with a decline in unit prices of approximately 18%, whereas privatizations per se are not. The price decrease associated with becoming connected is signifi- cant at the 5% level when standard errors are clustered at the firm-product level (column 1) but insignifi- cant when standard errors are clustered at the firm-level (column 2). Once one of the privatized Ben Ali firms that made extensive use of duty suspension regimes (column 3) is excluded, however, the coeffi- cient on Ben Ali privatizations drops considerably to -0.56 and becomes statistically significant at the 5% level, even when standard errors are conservatively clustered at the firm level. Thus, the results suggest that privatization per se was not on average associated with a reduction in reported unit prices, but privatization to politically connected entrepreneurs was, though it should be borne in mind that these results are based on a small number of privatizations. VI. Conclusion While it is often assumed that politically connected firms are more likely to evade taxes, empirical examination of this hypothesis has been hampered by the difficulties associated with obtaining data on The World Bank Economic Review 479 Table 9. Import Prices: Before and after Being Privatized to the Ben Ali Family The Evolution of Log Unit Prices Before and After Privatization Dependent Variable: log price Standard errors clustered by Firm-product Product Product Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 excluding outlier firm (1) (2) (3) coef/se coef/se coef/se Post-Privatization À0.003 À0.003 À0.008 (0.051) (0.069) (0.071) Post-Privatization*Ben Ali Owned À0.179** À0.179 À0.556** (0.080) (0.230) (0.280) Firm*Product*Source Country FE Yes Yes Yes Porduct*Source Country*Year FE Yes Yes Yes N 55452 55452 38409 Firms 1016 1016 984 Privatized Firms 23 23 22 Privatized to the Ben Ali family 5 5 4 #products 365 365 295 #firm*prodcuts 9382 9382 6374 R2 0.849 0.849 0.857 Adjusted R2 0.794 0.794 0.794 Notes: Robust standard errors in parentheses. ***p ¼ <0.01, **p<0.05, *p ¼ 0.10. Sample confined to source-product-years in which (to be) privatized firms are importing, and source-product combinations imported by at least one privatized firm both at least once before and at least once after privatization. Competitor firms are included if they import at least twice from the same source-product country combination and operate in the same sector as (to be) privatized firms. Source: Authors’ analysis based on data described in the text. political connections and demonstrating tax evasion. Using unique data on firms with ownership con- nections to the Ben Ali family confiscated in the aftermath of Tunisia’s Jasmin revolution, this paper documents evidence suggesting such politically connected firms were more likely to evade tariffs. To start, evasion gaps measured at the source country-product-year level were strongly correlated with import share accounted for by firms owned by the family. The correlation between the import share of connected firms and evasion gaps was especially strong for goods subject to high tariffs and due to underreporting of prices. While misreporting of quantities was an important evasion tactic for all types of firms, the hypothesis that connected firms were not more or less likely to underreport quantities than other firms is not rejected. Higher evasion gaps in product lines dominated by Ben Ali firms appear driven by their higher pro- pensity to underreport prices; average unit prices reported by Ben Ali firms were lower than those reported by other firms importing the same product and, moreover, declined significantly faster with tar- iffs than those reported by nonconnected firms. In addition, privatizations to the Ben Ali are associated with reductions in reported unit prices, whereas privatizations per se are not. Last but not least, after the ousting of Ben Ali, unit price gaps diminished especially rapidly in product lines in which Ben Ali firms had been dominant that were subject to high tariffs. The evidence suggests tariff evasion in Tunisia led to considerable fiscal losses but also resulted in sub- stantial inequality and a lack of transparency. Politically connected entrepreneurs, who were well off, seem to have been especially likely to profit from tariff evasion. This endowed them with a cost advantage over those who were compliant that was not based on efficiency or performance. According to conserva- tive estimates, underreporting of unit prices alone enabled Ben Ali firms to evade at least 1.2 billion USD worth of import taxes on account of their connections between 2002 and 2009. While the Jasmin Revolution has drastically diminished uncompetitive regulatory privileges enjoyed by the Ben Ali family, it has not put a halt to tariff evasion. On the contrary, tariff evasion in Tunisia has escalated since the Jasmin Revolution. 480 Rijkers, Baghdadi, and Raballand Appendix A. Data Construction Variable Description Source Firm types Downloaded from https://academic.oup.com/wber/article-abstract/31/2/459/2897303 by International Monetary Fund user on 08 August 2019 Ben Ali firm Dummy variable taking the value 1 if the firm is owned, fully or in part, by a CC and MoF member of the Ben Ali clan. Offshore firm A dummy variable taking the value 1 if a firm is privately owned by entities INS other than the Ben Ali clan and operates in the tax regime ‘totalement exportatrice’, commonly referred to as the “offshore” sector. Firms in this tax regime do not have to pay output and import taxes, provided they export at least 70% of their output or sell it to other “offshore” firms. Onshore firm A dummy variable taking the value 1 if a firm is privately owned and neither INS operates in the “totalement exportatrice” tax regime nor is owned by the Ben Ali clan. Public firm A dummy variable taking the value 1 if a firm is state owned. INS Firm characteristics Y Output as reported in firm’s annual tax declaration. MoF L Number of salaried employees (annual average over four quarters). INS Age The age of the firm defined as the difference between the current year minus INS the year in which it first registered. Sector Classification of a firm’s main activity based on the Nomenclature d’Activite ´s INS Tunisienne (NAT) 1996 five-digit classification, the most disaggregated sec- tor classification available in Tunisia. Post Privatization Dummy value that takes the value 1 after a firm has been privatized and zero MoF while the firm is still public or is never privatized. Post-Privatization*Ben Ali Owned Dummy value that takes the value 1 after a firm has been privatized and is MoF owned by the Ben Ali family, and zero while the firm is still public, is never privatized, or privatized to owners not belonging to the Ben Ali clan. Trade policy data Tariff Bilateral tariff between Tunisia and a partner country at year t for a certain WITS product (HS6); note that for years for which such information is missing, the last year for which such information is available is used. Tariff data are missing altogether for 2007 and 2009; for these years we use the values from 2006 and 2008, respectively. Nontariff Barrier (NTB) This variable measures the sum of all import-related nontariff barriers at the WITS product-year level. The raw data contain the year of creation of these non- tariff measures, but not the year of their removal. Trade Exports Exports of a certain product (HS6) from a specific country (s) at a year t COMTRADE Imports Imports of a certain product (HS6) from a specific country (s) at a year t COMTRADE Evasion gaps Value gap Log export value reported by partner—log import value reported in Tunisia, COMTRADE measured at the HS6-country-year level. Quantity gap Log Export Quantity Reported by Partner—Log Import Value Reported in COMTRADE Tunisia, measured at the HS6-country-year level. Price gap Log export unit price reported by partner—log import unit price reported in COMTRADE Tunisia, measured at the HS6-country-year level. Definition of tariff categories High tariff The tariff rate is greater than or equal to 36 Low tariff The tariff rate is strictly smaller than 36. 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