Informal Cross Border Trade In East Africa Issues for EAC Regional Integration and Economic Growth By Victor Ogalo CUTS ARC, Nairobi BIEAC-II Regional Workshop, May 27-28, 2010

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.

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?

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.

Understanding ICBT Definition 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.

Reality of Informal Economy

Key X-tics of ICBT in EAC 1. Nature of informality

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 years age bracket –44.2 percent have secondary –25.8 percent with professional/semi- professional diploma and certificate –10 percent with degree constitute

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.

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

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.

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

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

State of ICBT in EAC

Push/Pull Factors for ICBT Growth 1. Lack of knowledge of benefits of trading within EAC and information on existing trading opportunities. 2. Lack of written (or non-transparency in) rules, meaning difficulty for trader to know their rights. 3. Payment of customs duties on goods that are not supposed to attract duties because of lack of knowledge. 4. Complicated documents that have to be filled in and complicated processes of filling them.

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

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 state’s 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.

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 day pass permits are an inconvenience to continuous trade

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

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 env’t without hurting our economies

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)

Recommendations  Undertake aggressive publicity & dissemination of the EAC Treaty, the CU Protocol, the Community’s 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