Informal Cross Border Trade In East Africa

1
Informal Cross Border Trade In East Africa

• Issues for EAC Regional Integration and Economic
  Growth
• By Victor Ogalo
• CUTS ARC, Nairobi
• voo_at_cuts.org
• BIEAC-II Regional Workshop,
• May 27-28, 2010

2
Informal Cross- Border Trade

• A significant proportion of cross-EAC border
  trade is in the form of ICBT.
• Women constitute larger proportion of small scale
  informal cross border trade.
• Despite efforts to promote trade integration
  among EAC Partner States, formal trade links is
  still facing several constraints.
• Some of these constraints push traders to ICBT
  but there are also exclusive incentives/
  advantages that promote existence of ICBT.
• While it may be relatively easy to eliminate
  constraints to formal trading, the same may not
  provide better incentives for traders in the
  informal sector to turn to formal trading.

3
Objective

• How important is ICBT in EAC? How does it affect
  EAC regional integration, esp., goals of
  increasing production, trade, and investment?
• What is the nature of the link/relationship
  between ICBT and formal trade?
• Can ICBT hamper EAC efforts to expand its formal
  trading relationship? What could be done to
  address challenges (or promote benefits) of ICBT?
• What policy measures would have potential to
  encourage traders switch from ICBT to formal
  trade or coexist with limited challenges?

4
Methodology

• Undertake an in-depth review and analysis of
  existing studies/surveys on ICBT.
• Where necessary, conduct targeted interviews with
  key stakeholders at selected EAC border-points
• Consider expert inputs, opinions and insights
  collected from presentation of the study at the
  national and regional workshop to finalise it for
  eventual dissemination within and across EAC for
  policy advocacy.

5
Understanding ICBTDefinition and Magnitude

• No universally accepted definition of the
  informal sector to start with
• Many definitions
• unofficial, underground, hidden, invisible,
  shadow, parallel, second, unrecorded, black,
  moonlighting, unmeasured, unobserved economy,
• Juakali and mamalishe are sub-components of
  informality
• Schneider (2006) defines the informal economy as
  entailing a market-based production of legal
  goods and services that are deliberately
  concealed from public authorities and escape
  detection in official gross domestic product
  (GDP) statistics.

6
Reality of Informal Economy
7
Reality of Informal Economy
8
Key X-tics of ICBT in EAC

• 1. Nature of informality

9
Key X-tics of ICBT in EAC

• 2) Education and Gender
• Earlier studies showed low level of education
  (most with primary education and below) and most
  players women.
• Recent studies show cross-border trade becoming
  complex and most participants have above
  secondary education
• Majority fall in 20-40 years age bracket
• 44.2 percent have secondary
• 25.8 percent with professional/semi-professional
  diploma and certificate
• 10 percent with degree constitute

10
Key X-tics of ICBT in EAC

• 3) Type of goods
• staple food commodities such as maize, beans,
  rice, fish, groundnuts, bananas, and even food
  aid that have a direct impact on regional food
  security
• low quality consumer goods such as shoes,
  clothes, textile and vehicle and bicycle parts
  and even fake drugs
• some of the ICBT goods reflect the same ones that
  benefit from export promotion schemes, such as
  textiles.

11
Key X-tics of ICBT in EAC

• 4) Awareness of cross-border trade regulations
• A remarkable finding
• many ICBT traders are well aware of various
  general provisions of the CU including most of
  the regulatory requirements.
• However, they attribute their continued
  engagement in ICBT to presence of physical and
  technical barriers in formal trade.
• But also to incentives inherent in ICBT
• As well as to socio-economic problems hindering
  beneficial engagement in formal trading

12
Key X-tics of ICBT in EAC

• 5) Transport and storage facilities
• Long distance wholesalers key players.
• Once at border, towns, divide goods into small
  quantities and involve different modes of
  transport across the border.
• Main modes of transport used
• vehicles, bicycles, head/hand, motorcycles, wheel
  chairs, animals (donkeys), push carts,
  boats/canoe etc.
• People with disabilities on wheel chairs help in
  moving small/light but valuable products e.g.
  Sugar/salt/soap/cooking oil/plastics.

13
Key X-tics of ICBT in EAC

• 6) Size of consignments
• Flows usually consist of small quantities
• Where big consignments are involved they usually
  divided into smaller quantities to avoid
  attention when passing across borders
• A significant amount of small quantities passed
  through official crossing points.
• But it is done repeatedly and quantities passed
  end up being significant
• Piled in stores which are jointly hired until a
  reasonable volume is reached

14
State of ICBT in EAC

• Several surveys have inadequately tried to
  establish the profile, quantum and impact of ICBT
  and factors that drive growth of ICBT in EAC.
• Others (Masheti, 2009 UNECA, 2009) have delved
  into gender dimensions
• Differing definitions of ?ICBT and diverse
  monitoring methodologies
• independently of the methodology used, all
  reviewed surveys suggest ICBT represents a
  significant proportion of regional cross-border
  trade in EAC

15
State of ICBT in EAC
16
Push/Pull Factors for ICBT Growth

• Lack of knowledge of benefits of trading within
  EAC and information on existing trading
  opportunities.
• Lack of written (or non-transparency in) rules,
  meaning difficulty for trader to know their
  rights.
• Payment of customs duties on goods that are not
  supposed to attract duties because of lack of
  knowledge.
• Complicated documents that have to be filled in
  and complicated processes of filling them.

17
Push/Pull Factors for ICBT Growth

• 5. Some traders lack proper documents to enable
  them benefit from paying little or no customs
  duty.
• 6. Payment of bribes (in the name of
  facilitation payments) to some corrupt customs
  and border officials.
• 7. High transaction and compliance costs
• 8. Hard to acquire certificates of origin issued
  away from border stations
• 9. Poor infrastructure to official border posts
  push traders to other better roads with no
  official border-crossing posts

18
Push/Pull Factors for ICBT Growth

• 10. Difficulties in getting entry permits e.g.
  Until early 2010 Burundians require visa provided
  at prohibitive costs in order to enter Tanzania.
• 11. Non-recognition of partner states trade
  documents where documents have not been
  harmonised regionally
• 12. Delays in processing of tax refunds is a
  disincentive to doing formal trade.
• 13. Fear of robbery, loss of goods and no safe
  affordable accommodation in border towns.

19
Push/Pull Factors for ICBT Growth

• 14. Lack of jobs in the formal sector.
• 15. Increase in rural-urban migration in search
  of non-existent employment.
• 16. Retrenchments, low pay in formal jobs,
  inflation and currency devaluations all create
  pressures on real wages and search for informal
  income supplements.
• 17. Lack of proper education making some traders
  timid of seeking apt information.
• 18. 90 day pass permits are an inconvenience to
  continuous trade

20
Push/Pull Factors for ICBT Growth

• 19. Ease of entry into the ICBT.
• 20. Certain ICBT activities are profitable and
  viable only to small businesses.
• 21. Currency depreciation e.g., depreciation of
  KSh. make imports from Kenya somewhat expensive
  thereby raising pressure for informal trade.
• 22. Tariff and cross-border price differentials
• 23. Political stability and economic recovery in
  neighbouring economies

21
Conclusions

• a) Where no policies or hostile/strenuous country
  policies exist to formal X-border trade, a
  parallel ICBT is encouraged.
• b) Trade is supposed to be freer in EAC but
  customs officials hostile to even legal trade.
• c) Tax evasion particularly in ICBT creates
  unhealthy competition with those who have paid
  often punitive taxes.
• d) But greater harm to our economies is caused by
  big formal traders in category B and C.
• e) Informal economy here to stay as alternative
  to lack of formal jobs need to find them
  enabling envt without hurting our economies

22
Conclusions

• e) Traders do not know essential basics of the CU
  Protocol and the opportunities and challenges it
  poses in their day-to-day activities despite
  the Protocol having provisions that are aimed at
  accruing financial gains to traders within the
  EAC. Traders exhibit no proper knowledge of
  Provisions such as
• a tariff-free environment (Articles 2 10),
• substantive tax reduction, trade liberalization
  (Art 3-4),
• a standard system of valuation of goods based on
  principles of equity, uniformity and simplicity
  (Art 4),
• reduction of trade documentation adoption of
  common standards of trade documentation and
  procedures (Art 6/7),
• non discrimination of goods/traders among EAC
  members (Art 15/21),
• enabling subsidies (Art 17/18),
• special economic arrangements Art 32)

23
Recommendations

• Undertake aggressive publicity dissemination of
  the EAC Treaty, the CU Protocol, the Communitys
  policies and other applicable laws and principles
  as provided for under Article 39 of the Protocol.
• Involve non state actors in formulation
  implementation from design to implementation
• Educate government agencies on protocol including
  attitude change among customs officials and other
  border officials and monitor compliance including
  to requirements of international law/treaties and
  conventions.
• ICBT is worldwide reality and requires official
  recognition including revising EAC CM to
  recognise it and provide it apt environment