Informal Cross Border Informal Cross Border Trade In East AfricaTrade In East Africa

Issues for EAC Regional Integration Issues for EAC Regional Integration and Economic Growthand Economic Growth

By Victor OgaloBy Victor Ogalo

CUTS ARC, NairobiCUTS ARC, Nairobi

voo@cuts.orgvoo@cuts.org

BIEAC-II Regional Workshop, BIEAC-II Regional Workshop,

May 27-28, 2010May 27-28, 2010

Informal Cross- Border Trade Informal Cross- Border Trade A significant proportion of cross-EAC border A significant proportion of cross-EAC border

trade is in the form of ICBT. trade is in the form of ICBT. Women constitute larger proportion of small Women constitute larger proportion of small

scale informal cross border trade.scale informal cross border trade. Despite efforts to promote trade integration Despite efforts to promote trade integration

among EAC Partner States, formal trade links among EAC Partner States, formal trade links is still facing several constraints. is still facing several constraints.

Some of these constraints push traders to ICBT Some of these constraints push traders to ICBT but there are also exclusive incentives/ but there are also exclusive incentives/ advantages that promote existence of ICBT. advantages that promote existence of ICBT.

While it may be relatively easy to eliminate While it may be relatively easy to eliminate constraints to formal trading, the same may constraints to formal trading, the same may not provide better incentives for traders in the not provide better incentives for traders in the informal sector to turn to formal trading.informal sector to turn to formal trading.

Objective Objective How important is ICBT in EAC?How important is ICBT in EAC? How does it How does it

affect EAC regional integration, esp., goals of affect EAC regional integration, esp., goals of increasing production, trade, and investment?increasing production, trade, and investment?

What is the nature of the link/relationship What is the nature of the link/relationship between ICBT and formal trade?between ICBT and formal trade?

Can ICBT hamper EAC efforts to expand its Can ICBT hamper EAC efforts to expand its formal trading relationship? What could be formal trading relationship? What could be done to address challenges (or promote done to address challenges (or promote benefits) of ICBT?benefits) of ICBT?

What policy measures would have potential to What policy measures would have potential to encourage traders switch from ICBT to formal encourage traders switch from ICBT to formal trade or coexist with limited challenges? trade or coexist with limited challenges?

Methodology Methodology Undertake an in-depth review and analysis of Undertake an in-depth review and analysis of

existing studies/surveys on ICBT. existing studies/surveys on ICBT.

Where necessary, conduct targeted interviews Where necessary, conduct targeted interviews with key stakeholders at selected EAC border-with key stakeholders at selected EAC border-points;points;

Consider expert inputs, opinions and insights Consider expert inputs, opinions and insights collected from presentation of the study at the collected from presentation of the study at the national and regional workshop to finalise it national and regional workshop to finalise it for eventual dissemination within and across for eventual dissemination within and across EAC for policy advocacy.EAC for policy advocacy.

Understanding ICBTUnderstanding ICBTDefinition and Magnitude Definition and Magnitude

No universally accepted definition of the No universally accepted definition of the informal sector to start withinformal sector to start with

Many definitions:Many definitions:– unofficial, underground, hidden, invisible, shadow, unofficial, underground, hidden, invisible, shadow,

parallel, second, unrecorded, black, moonlighting, parallel, second, unrecorded, black, moonlighting, unmeasured, unobserved economy, unmeasured, unobserved economy,

JuakaliJuakali and and mamalishemamalishe are sub-components of informality are sub-components of informality

Schneider (2006) defines the informal Schneider (2006) defines the informal economy as entailing a economy as entailing a market-based market-based production of legal goods and servicesproduction of legal goods and services that are that are deliberately concealeddeliberately concealed from public from public authorities and escape detection in official authorities and escape detection in official gross domestic product (GDP) statistics.gross domestic product (GDP) statistics.

Reality of Informal Economy Reality of Informal Economy

Reality of Informal Economy Reality of Informal Economy

Key X-tics of ICBT in EAC Key X-tics of ICBT in EAC

1. Nature of informality1. Nature of informality

Key X-tics of ICBT in EAC Key X-tics of ICBT in EAC 2) Education and Gender 2) Education and Gender Earlier studies showed low level of Earlier studies showed low level of

education (most with primary education education (most with primary education and below) and most players women.and below) and most players women.

Recent studies show cross-border trade Recent studies show cross-border trade becoming complex and most participants becoming complex and most participants have above secondary educationhave above secondary education– Majority fall in 20-40 years age bracketMajority fall in 20-40 years age bracket– 44.2 percent have secondary44.2 percent have secondary– 25.8 percent with professional/semi-25.8 percent with professional/semi-

professional diploma and certificate professional diploma and certificate – 10 percent with degree constitute10 percent with degree constitute

Key X-tics of ICBT in EAC Key X-tics of ICBT in EAC 3) Type of goods 3) Type of goods staple food commodities staple food commodities such as maize, such as maize,

beans, rice, fish, groundnuts, bananas, beans, rice, fish, groundnuts, bananas, and even food aid that have a direct and even food aid that have a direct impact on regional food security impact on regional food security

low quality consumer goodslow quality consumer goods such as such as shoes, clothes, textile and vehicle and shoes, clothes, textile and vehicle and bicycle parts and even fake drugsbicycle parts and even fake drugs

some of the ICBT goods reflect the same some of the ICBT goods reflect the same ones that benefit from export promotion ones that benefit from export promotion schemes, such as textiles.schemes, such as textiles.

Key X-tics of ICBT in EAC Key X-tics of ICBT in EAC 4) Awareness of cross-border trade 4) Awareness of cross-border trade

regulationsregulations A remarkable finding:A remarkable finding:

– many ICBT traders are well aware of various many ICBT traders are well aware of various general provisions of the CU including most general provisions of the CU including most of the regulatory requirements. of the regulatory requirements.

– However, they attribute their continued However, they attribute their continued engagement in ICBT to presence of physical engagement in ICBT to presence of physical and technical barriers in formal trade.and technical barriers in formal trade.

– But also to incentives inherent in ICBTBut also to incentives inherent in ICBT– As well as to socio-economic problems As well as to socio-economic problems

hindering beneficial engagement in formal hindering beneficial engagement in formal tradingtrading

Key X-tics of ICBT in EAC Key X-tics of ICBT in EAC 5) Transport and storage facilities5) Transport and storage facilities Long distance wholesalers key players. Long distance wholesalers key players. Once at border, towns, divide goods into Once at border, towns, divide goods into

small quantities and involve different small quantities and involve different modes of transport across the border. modes of transport across the border.

Main modes of transport used Main modes of transport used – vehicles, bicycles, head/hand, vehicles, bicycles, head/hand,

motorcycles, wheel chairs, animals motorcycles, wheel chairs, animals (donkeys), push carts, boats/canoe etc(donkeys), push carts, boats/canoe etc. .

– People with disabilities on wheel chairs help People with disabilities on wheel chairs help in moving small/light but valuable products in moving small/light but valuable products e.g. Sugar/salt/soap/cooking oil/plastics.e.g. Sugar/salt/soap/cooking oil/plastics.

Key X-tics of ICBT in EAC Key X-tics of ICBT in EAC 6) Size of consignments6) Size of consignments Flows usually consist of small quantities Flows usually consist of small quantities Where big consignments are involved Where big consignments are involved

they usually divided into smaller they usually divided into smaller quantities to avoid attention when quantities to avoid attention when passing across borders passing across borders

A significant amount of small quantities A significant amount of small quantities passed through official crossing points.passed through official crossing points.

But it is done repeatedly and quantities But it is done repeatedly and quantities passed end up being significantpassed end up being significant

Piled in stores which are jointly hired Piled in stores which are jointly hired until a reasonable volume is reacheduntil a reasonable volume is reached

State of ICBT in EAC State of ICBT in EAC Several surveys have inadequately tried Several surveys have inadequately tried

to establish the profile, quantum and to establish the profile, quantum and impact of ICBT and factors that drive impact of ICBT and factors that drive growth of ICBT in EAC.growth of ICBT in EAC.

Others (Masheti, 2009; UNECA, 2009) Others (Masheti, 2009; UNECA, 2009) have delved into gender dimensionshave delved into gender dimensions

Differing definitions of ―“ICBT” and Differing definitions of ―“ICBT” and diverse monitoring methodologiesdiverse monitoring methodologies

independently of the methodology used, independently of the methodology used, all reviewed surveys suggest ICBT all reviewed surveys suggest ICBT represents a significant proportion of represents a significant proportion of regional cross-border trade in EACregional cross-border trade in EAC

State of ICBT in EAC State of ICBT in EAC

Push/Pull Factors for ICBT GrowthPush/Pull Factors for ICBT Growth1.1. Lack of knowledge of benefits of trading Lack of knowledge of benefits of trading

within EAC and information on existing within EAC and information on existing trading opportunities.trading opportunities.

2.2. Lack of written (or non-transparency in) Lack of written (or non-transparency in) rules, meaning difficulty for trader to rules, meaning difficulty for trader to know their rights.know their rights.

3.3. Payment of customs duties on goods Payment of customs duties on goods that are not supposed to attract duties that are not supposed to attract duties because of lack of knowledge.because of lack of knowledge.

4.4. Complicated documents that have to be Complicated documents that have to be filled in and complicated processes of filled in and complicated processes of filling them.filling them.

Push/Pull Factors for ICBT GrowthPush/Pull Factors for ICBT Growth5. Some traders lack proper documents to 5. Some traders lack proper documents to

enable them benefit from paying little enable them benefit from paying little or no customs duty.or no customs duty.

6. Payment of bribes (in the name of 6. Payment of bribes (in the name of ‘facilitation payments’) to some corrupt ‘facilitation payments’) to some corrupt customs and border officials.customs and border officials.

7. High transaction and compliance costs7. High transaction and compliance costs8. Hard to acquire certificates of origin 8. Hard to acquire certificates of origin

issued away from border stationsissued away from border stations9. Poor infrastructure to official border 9. Poor infrastructure to official border

posts push traders to other better roads posts push traders to other better roads with no official border-crossing postswith no official border-crossing posts

Push/Pull Factors for ICBT GrowthPush/Pull Factors for ICBT Growth

10. Difficulties in getting entry permits e.g. 10. Difficulties in getting entry permits e.g. Until early 2010 Burundians require visa Until early 2010 Burundians require visa provided at prohibitive costs in order to provided at prohibitive costs in order to enter Tanzania.enter Tanzania.

11. Non-recognition of partner state’s trade 11. Non-recognition of partner state’s trade documents where documents have not documents where documents have not been harmonised regionally;been harmonised regionally;

12. Delays in processing of tax refunds is a 12. Delays in processing of tax refunds is a disincentive to doing formal trade.disincentive to doing formal trade.

13. Fear of robbery, loss of goods and no 13. Fear of robbery, loss of goods and no safe affordable accommodation in border safe affordable accommodation in border towns.towns.

Push/Pull Factors for ICBT GrowthPush/Pull Factors for ICBT Growth

14. Lack of jobs in the formal sector. 14. Lack of jobs in the formal sector. 15. Increase in rural-urban migration in 15. Increase in rural-urban migration in

search of non-existent employment. search of non-existent employment. 16. Retrenchments, low pay in formal jobs, 16. Retrenchments, low pay in formal jobs,

inflation and currency devaluations all inflation and currency devaluations all create pressures on real wages and create pressures on real wages and search for informal income supplements.search for informal income supplements.

17. Lack of proper education making some 17. Lack of proper education making some traders timid of seeking apt information.traders timid of seeking apt information.

18. 90 day pass permits are an 18. 90 day pass permits are an inconvenience to continuous trade inconvenience to continuous trade

Push/Pull Factors for ICBT GrowthPush/Pull Factors for ICBT Growth

19. Ease of entry into the ICBT.19. Ease of entry into the ICBT.20. Certain ICBT activities are profitable 20. Certain ICBT activities are profitable

and viable only to small businesses. and viable only to small businesses. 21. Currency depreciation e.g., 21. Currency depreciation e.g.,

depreciation of KSh. make imports from depreciation of KSh. make imports from Kenya somewhat expensive thereby Kenya somewhat expensive thereby raising pressure for informal trade.raising pressure for informal trade.

22. Tariff and cross-border price 22. Tariff and cross-border price differentialsdifferentials

23. Political stability and economic 23. Political stability and economic recovery in neighbouring economies recovery in neighbouring economies

Conclusions Conclusions a) Where no policies or hostile/strenuous country a) Where no policies or hostile/strenuous country

policies exist to formal X-border trade, a policies exist to formal X-border trade, a parallel ICBT is encouraged.parallel ICBT is encouraged.

b) Trade is supposed to be freer in EAC but b) Trade is supposed to be freer in EAC but customs officials hostile to even legal trade.customs officials hostile to even legal trade.

c) Tax evasion particularly in ICBT creates c) Tax evasion particularly in ICBT creates unhealthy competition with those who have unhealthy competition with those who have paid often punitive taxes.paid often punitive taxes.

d) But greater harm to our economies is caused d) But greater harm to our economies is caused by big formal traders in category B and C.by big formal traders in category B and C.

e) Informal economy here to stay as alternative e) Informal economy here to stay as alternative to lack of formal jobs; need to find them to lack of formal jobs; need to find them enabling env’t without hurting our economiesenabling env’t without hurting our economies

ConclusionsConclusions e) e) Traders do not know essential basics of the CU Traders do not know essential basics of the CU

Protocol and the opportunities and challenges Protocol and the opportunities and challenges it poses in their day-to-day activities despite it poses in their day-to-day activities despite the Protocol having provisions that are aimed the Protocol having provisions that are aimed at accruing financial gains to traders within at accruing financial gains to traders within the EAC. Traders exhibit no proper the EAC. Traders exhibit no proper knowledge of Provisions such as knowledge of Provisions such as

– a tariff-free environment (Articles 2 & 10), a tariff-free environment (Articles 2 & 10), – substantive tax reduction, trade liberalization (Art 3-4), substantive tax reduction, trade liberalization (Art 3-4), – a standard system of valuation of goods based on principles a standard system of valuation of goods based on principles

of equity, uniformity and simplicity (Art 4), of equity, uniformity and simplicity (Art 4), – reduction of trade documentation & adoption of common reduction of trade documentation & adoption of common

standards of trade documentation and procedures (Art 6/7), standards of trade documentation and procedures (Art 6/7), – non discrimination of goods/traders among EAC members non discrimination of goods/traders among EAC members

(Art 15/21), (Art 15/21), – enabling subsidies (Art 17/18), enabling subsidies (Art 17/18), – special economic arrangements Art 32) special economic arrangements Art 32)

RecommendationsRecommendations Undertake aggressive publicity & dissemination of Undertake aggressive publicity & dissemination of

the EAC Treaty, the CU Protocol, the Community’s the EAC Treaty, the CU Protocol, the Community’s policies and other applicable laws and principles policies and other applicable laws and principles as provided for under as provided for under Article 39Article 39 of the Protocol. of the Protocol.

Involve non state actors in formulation & Involve non state actors in formulation & implementation from design to implementationimplementation from design to implementation

Educate government agencies on protocol Educate government agencies on protocol including attitude change among customs officials including attitude change among customs officials and other border officials and monitor compliance and other border officials and monitor compliance including to requirements of international including to requirements of international law/treaties and conventions.law/treaties and conventions.

ICBT is worldwide reality and requires official ICBT is worldwide reality and requires official recognition including revising EAC CM to recognition including revising EAC CM to recognise it and provide it apt environment recognise it and provide it apt environment