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The Review of Economics and Statistics The Review of Economics and Statistics VOL.XC FEBRUARY 2008 NUMBER 1 CAN ENFORCEMENT BACKFIRE? CRIME DISPLACEMENT IN THE CONTEXT OF CUSTOMS REFORM IN THE PHILIPPINES Dean Yang* Abstract—Increased enforcement can displace crime to alternative law- ical analyses of enforcement’s impact have addressed breaking methods. This paper examines a customs reform in the Philip- pines that raised enforcement against a specific method of avoiding import displacement as a mere side note, at most examining the duties. Increased enforcement applied only to shipments from some existence or amount of displacement.1 Evidence on the countries, so shipments from other countries serve as a control group. determinants of crime displacement could shed light on the Increased enforcement reduced the targeted duty-avoidance method, but caused substantial displacement to an alternative method. The hypothesis importance of economic motives in the decisions of law- of zero change in total duty avoidance cannot be rejected. Displacement breakers more generally. was greater for products with higher tariff rates and import volumes, Moreover, existing studies typically conclude that dis- consistent with the existence of fixed costs of switching to alternative duty-avoidance methods. placement is a minor phenomenon, finding either no evi- dence of displacement or that it is small in magnitude.2 But in theory, displacement can be large in magnitude, espe- I. Introduction cially when enforcement is selective—that is, when it tar- CONOMIC theory posits that criminal activity arises gets just one of several alternative lawbreaking methods. Efrom rational assessment of the costs and benefits of Substantial displacement is particularly likely when alter- lawbreaking. In the wake of Becker’s (1968) economic native methods have higher fixed costs but lower variable model of crime, there has been great interest in the econom- costs than previously used methods.3 ics of illegal activity (Ehrlich, 1973; Andreoni, 1991; Free- This paper is an empirical study of the possible unin- man, 1996; among others). In particular, establishing the tended consequences of selective law enforcement and ex- impact of law enforcement on crime is central, and several amines crime displacement in the context of customs reform papers have made important strides in this area (Levitt, in the Philippines. In 1990, the Philippine government 1997; Corman & Mocan, 2000; Bar-Ilan & Sacerdote, 2001; raised enforcement in customs against a specific method of Di Tella & Schargrodsky, 2004; among others). avoiding import duties. The reform constituted a quasi There has been a long-standing concern in crime studies experiment: the increased enforcement applied only to ship- that increased enforcement can lead criminal activity to be ments from a subset of countries, so that corresponding displaced to alternative lawbreaking methods (Reppetto, shipments from all other countries serve as a comparison 1976). A simple model predicts that, when alternative law- group. Increased enforcement reduced the targeted method breaking methods involve fixed costs of entry, crime dis- of duty avoidance but led to substantial displacement to an placement should respond positively to the size of illicit alternative duty-avoidance method (shipping via duty- profits threatened by enforcement. But there is little empir- exempt export processing zones), amounting to 2.7% of ical evidence on the relationship between crime displace- total imports from treatment countries. The hypothesis that ment and basic economic factors: for the most part, empir- the reform led to zero change in total duty avoidance cannot be rejected. Displacement was greater for products with Received for publication May 26, 2005. Revision accepted for publica- tion November 8, 2006. higher tariff rates and import volumes, consistent with the *Gerald R. Ford School of Public Policy and Department of Economics, existence of fixed costs of switching to alternative duty- University of Michigan; Bureau for Research and Economic Analysis of avoidance methods. Development (BREAD); and National Bureau of Economic Research (NBER). Special thanks are due to Caroline Hoxby, Larry Katz, Michael Kremer, 1 See Chaiken, Lawless, and Stevenson (1974), McPheters, Mann, and and Dani Rodrik. I also appreciate the suggestions of Daron Acemoglu, Schlagenhauf (1984), Ayres and Levitt (1998), Levitt (1998), Braga et al. Abhijit Banerjee, Becky Blank, Francesco Caselli, David Cutler, John (1999), and Di Tella and Schargrodsky (2004), among others. See also DiNardo, Esther Duflo, Ray Fisman, Ed Glaeser, Elhanan Helpman, Hesseling’s (1994) overview. Seema Jayachandran, Asim Khwaja, Louis Maccini, Sharon Maccini, 2 For example, DiNardo and Lemieux (2001) find small amounts of Marc Melitz, Ben Olken, Andrei Shleifer, two anonymous referees, and displacement from alcohol to marijuana consumption in response to key informants in the Philippines and elsewhere. Thanks for research increases in state-level drinking ages. support are due to the Social Science Research Council’s Program in 3 This possibility is reminiscent of the potential perverse impact of Applied Economics, the MacArthur Network on the Effects of Inequality managerial incentives in the multitask principal-agent problem (Holm- on Economic Performance, and the Rockefeller Foundation. strom & Milgrom, 1991; Prendergast 2002). The Review of Economics and Statistics, February 2008, 90(1): 1–14 © 2008 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology Downloaded from http://www.mitpressjournals.org/doi/pdf/10.1162/rest.90.1.1 by guest on 28 September 2021 2 THE REVIEW OF ECONOMICS AND STATISTICS While studying the impact of enforcement in customs can A standard problem when assessing the impact of in- shed light on the economics of crime displacement, it is also creased enforcement is establishing a credible counterfac- important for the public finances of nearly all developing tual, with which the causal impact of the new enforcement countries.4 Smuggling and customs corruption are rife in can be separated from time trends in crime rates, from the many countries,5 and trade taxes are an important source of impact of other simultaneous enforcement efforts, or from government revenue.6 In 1995, import duties accounted for reverse causation (higher crime rates leading to more en- an average of 23% of central-government tax revenue forcement). To establish the causal impact of increased among developing countries, but the fraction was as high as enforcement, this paper takes advantage of the fact that—for 31% in the Philippines, 32% in Cote d’Ivoire, and 37% in the 28-month study period—the Philippines’ PSI program the Dominican Republic.7 Most commonly, an importer only covered imports from a subset of countries. Then, underreports the value of an incoming shipment so as to pay during the course of the study period, the Philippine gov- ernment increased enforcement against duty avoidance for lower import duties (a practice known as underinvoicing), imports from PSI-covered countries, by expanding inspec- and customs officials may agree to overlook the fraud in tions to a previously exempt shipment category (shipments return for bribes. Government revenue ultimately suffers, below a certain dollar value). The key element of the and a government having difficulty collecting trade taxes identification strategy is the existence of a plausible control may have to resort to more distortionary methods of public category—imports from countries not covered by the Phil- finance in the long term. ippine PSI program—against which changes in imports The customs reform examined in this paper is also of from PSI countries can be compared. Because changes over more general interest, as it was an example of a very time in a treatment group are compared with corresponding common approach to fighting smuggling and customs cor- changes in a control group, this difference-in-difference ruption: hiring private firms to conduct preshipment inspec- identification strategy purges the empirical estimates of time tion of imports (known as PSI). When a government imple- trends in the use of various duty-avoidance methods, as well ments a PSI program, foreign inspectors verify the tariff as general changes in customs enforcement that should classification and value of individual incoming shipments affect imports from all countries equally (such as changes in before they leave their origin countries. In nearly all cases, legal sanctions against smugglers and salaries of customs however, the responsibility for collecting customs duties officials). The empirical analysis finds that when the Phil- remains in the hands of the importing country’s customs ippine government increased enforcement by expanding officials, who may choose to ignore PSI reports on specific inspections to low-value shipments, imports from treatment shipments. PSI programs can fail to reduce import duty countries shifted differentially to an alternative duty- evasion if enforcers fail to use the new information avail- avoidance method: shipping via duty-exempt export pro- able to them in the PSI reports, or if importers can find cessing zones. alternative methods of avoiding duties (that may involve Section II outlines a simple model of crime displacement, avoiding PSI, or bringing shipments into the country outside applied to import duty evasion. Section III presents empir- of formal customs channels so that shipments never appear ical evidence on the economics
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