Informal Cross Border Trade in Africa

Despite being a source of income to about 43 percent of Africa’s population, informal cross border trade (ICBT) is generally regarded as illegal commercialization of cross border activities. ICBT can have positive macroeconomic and social ramifications such as food security and income creation particularly for rural populations who would otherwise suffer from social exclusion. If properly harnessed, ICBT has the potential to support Africa’s on-going efforts at poverty alleviation.

As a subject yet to be fully mainstreamed in trade policy disciplines, there is no universal definition of ICBT. It generally refers to trade in processed or non-processed merchandise which may be legal imports or exports on one side of the border and illicit on the other side and vice-versa, on account of not having been subjected to statutory border formalities such as customs clearance. There is no established means of transportation and these may range from haulage by beasts of burden, porters, canoes, to hired motorized transport such as buses and motorcycles.

Most baseline surveys indicate that the majority of informal cross border traders are women. According to the United Nations Development Fund for Women (UNDFW), in the SADC region, women constitute about 70 percent of the informal cross border traders. In the Western and Central parts of Africa, women constitute nearly 60 percent of informal traders.

Traders engage in ICBT as a source of income and economic activity. Most traders have no education and raise capital from their own resources or through loans from friends and relatives. Traders are generally not bankable nor do they have assets that Banks would accept as collateral. They can also be formally registered firms evading regulations and taxes or aiming to avoid border crossing posts.

Because ICBT appears to be so large and is heavily linked to food security and development, it is important to obtain accurate measurements of the phenomenon. First, more accurate trade data can improve the statistical measurements of balance of payments and external accounts, improving trade measurement and modeling on a global scale. Second, capturing ICBT can facilitate the development of more accurate domestic food balance sheets. Third, measurement of this type of trade can provide a more accurate picture of important aspects related to informal trade, including information on informal labor markets and movement patterns of staple foods during periods of crises. Each of these provides the opportunity for better policy making using reliable and accurate data.

Due to ICBT’s magnitude and the potential implications that it can have on food security and safety, tariff revenues, and poor households’ income, the approach to ICBT taken by governments and regional institutions in Africa has changed significantly since 2005. However, while initiatives for measuring ICBT in Africa are growing in number and scope, they remain fragmented and not systematic. A coordination effort remains a priority. ICBT may have important positive effects on poor households in terms of income and food security in the short term, but it could remain an obstacle to investment and economic growth in the long term. Governments and regional institutions have tended to adopt a positive approach when trying to formalize informal trade, that is, by encouraging informal traders to trade legally and declare their merchandise, in particular by reducing the cost of formal trade.

A recent study on the measurement of cross-border trade by USAID (2015-2018) notes the largely fragmented nature of current research. The study points out that while primary data on formal and informal trade are being collected for targeted corridors and value chains in West Africa formal cross-border trade data for East and Southern Africa are being collected and reported by national statistical agencies. Primary data collection on informal trade in staple foods is occurring in East Africa, but it is ragmented geographically and a centralized platform with publicly available data does not exist. In Southern Africa, a methodology has been developed for collecting informal trade data, but data collection activities have not yet commenced. There have been several individual country-level programs focused on survey data collection.

ICBT Patterns in selected regions, borders and products

ICBT contributes between 30-40 percent of total intra-SADC trade. Some studies estimate that average value of informal cross border trade in the Southern African Development Community (SADC) region stands at an impressive $17.6 billion per year. Items traded mainly include foodstuff such as maize, rice and beans although additional products such as handicrafts and minerals are also commonly traded in the region. The cross-border trade monitoring system currently includes 29 borders from 10 different SADC countries. In Southern Africa, maize trade is the most informally traded foodstuff, averaging approximately 80% of the total recorded ICBT in foodstuff between 2005 and 2012. More specifically, the disaggregated data points to the fact that Mozambique, Zambia, South Africa and Tanzania are generally the major source countries while DRC, Malawi and Zimbabwe are the major destinations. Existing research on the key causes of ICBT in Southern Africa point to the fact that traders engage in the practice for wealth creation and as a mean of survival. Lack of other income generation and employment opportunities in the formal sector is also pointed out as the key factor for engaging in ICBT. Nevertheless, in Southern Africa, ICBT has proven to have a positive impact on the economy, especially with regard to its potential to cushion the impacts of food crises as was the case in the 2005-2006 periods.

ICBT in Eastern Africa is relatively more discernible when compared to other parts of the continent. Countries such as Uganda, Tanzania, Ethiopia and Somalia are generally recognized as sources of non-processed tradable goods consumed in Kenya and South Sudan. Kenya is a major source of manufactured goods sold informally into the region. With regard to non-processed goods, food items are the most traded to satisfy the huge demand in the horn of Africa and to mitigate ecological variations. All the countries in the region except South Sudan trade in re-exports.

In West Africa, informal cross border trade is estimated to range from 20 percent of GDP in Nigeria to 75 percent in Benin. A large proportion of the products traded within or exported from the region are raw or semi processed, particularly agro-industrial products originating from or being destined to four West African countries: Nigeria, Cote d’Ivoire, Ghana and Senegal.

Key determinants of Informal Cross Border Trade in Africa

As highlighted above, a variety of factors are responsible for the proliferation of ICBT in Africa. Although the key causes vary from one region to the other, theoretically speaking, the main determinants of ICBT in Africa could be categorized as: Lack of trade facilitation makes trading along the border lengthy and costly. Crossing formal borders can take days at times and costs of clearance, processing fees, tariffs and taxes are generally above the value of goods being traded informally. Documentary requirements should be reduced and RTAs, STRs and existing tax regimes should be reviewed to factor in ICBT. RECs should be used as a springboard to monitor and evaluate ICBT activities. They could provide an excellent medium for intensification of regional cross border trade policy dialogue. Inadequate border infrastructure including proper warehousing facilities, community markets, transport networks and especially functional and adequately staffed border institutions and agencies makes it unattractive, inefficient and sometimes downright dangerous to trade via formal routes.

Lack of adequate public and private transportation systems causes delays, forcing traders to miss community market days and their consumable goods especially agricultural produce to perish. Border infrastructure issues should be addressed in order to enhance the movement and security of traders and their goods. Limited access to finance also plays a prominent role since traders are not bankable and transactions are cash based or bartered. Most traders lack working capital and tangible business assets making it difficult for them to get financing. The absence of banks in the rural areas makes access to financial services virtually impossible. Since policymakers generally regard ICBT as illegal, the scope and opportunities for developing ICBT related trade finance facilities have not been adequately explored. Access to finance could provide a tremendous incentive for informal traders to join the formal economy.

Limited market information makes it difficult for informal cross border traders to tap into regional and local market opportunities. In most African regions, the provision of information on cross-border markets is at best, minimal. Since most traders operate outside regular business circles, market information on prices, demand and supply is generally not available to them. They generally rely on informal sometimes unreliable information networks. Information on policies, regulations, agreements and protocols for the facilitation of cross-border trade is equally difficult to obtain. These should be published in reader friendly language and conspicuously displayed at border points in order to enhance communication and expedite implementation. More must be done to provide market intelligence services at key border points to facilitate flow of information on prices, demand and supply but also policies and regulations affecting cross-border trade. Corruption & Insecurity at the border fuels ICBT. Corrupt law-enforcement agencies often take advantage of the local traders’ lack of knowledge on customs procedures to take bribes. Traders carrying money run the risk of having money seized. Some regions have recorded high incidences of rapes. Lack of effective policing at border points and market ports increases the incidence of crimes against traders, forcing them to travel in groups to protect themselves, or simply use informal routes.

Low knowledge, education and business management skills are also at the core of addressing the ICBT issue. ICBT traders are generally less educated and often lack basic business management skills. Business skills are generally acquired via traditional means and numeracy as well as literacy levels are notoriously low in some regions. This is exacerbated by a lack of knowledge and understanding of customs procedures and regional trade protocols. Conducting border community sensitization campaigns and empowering local traders with basic knowledge on management and customs procedures could go a long way in addressing the ICBT issue.

Impacts of Informal Cross Border Trade

Depending on border specificities, regional and local circumstances, ICBT impacts consumers, producers and the government differently. In terms of revenue collection, governments are generally on the losing end. Countries with low revenue bases but higher incidence of ICBT along their borders such as Ethiopia, Benin, Togo, Niger, Mali, Congo, South Sudan, Somalia may experience macroeconomic imbalances due to revenue losses. Coastal countries such as Benin and Togo spend foreign exchange importing merchandise that are later informally sold across its borders on local currencies hence exerting a drain on their economies. However, this doesn’t mean that governments should criminalize the practice. Uganda showed that although its government lost potential revenues from ICBT, the economy as whole was better with foreign exchange earnings on ICBT amounting to (positive informal trade balances) of US$ 717 million and US$ 461 million respectively for 2009 and 2010.

Consumers usually come out as winners, but not all the time. ICBT generally benefits consumers by increasing the availability of goods at affordable prices. However, consumption of tradable goods not subjected to customs clearance and other border formalities may in some cases lead to loss of consumer welfare. Most foodstuff and other commodities traded informally are not subject to Sanitary and Phytosanitary (SPS) measures thus making consumption riskier. Failure to subject goods to standards inspection exposes consumers to health, safety and environmental risks.

For producers, it depends. Where traded goods are counterfeits or adulterated merchandise, ICBT may have a negative effect on competition. Local producers could fall victim to copyrights infringement, or find themselves unable to compete against cheaper (sub-standard) products from Asia and gradually see their market shares erode. This is exacerbated by the fact that African countries generally have weak regulatory frameworks and capacity to protect intellectual property rights and competition. Even ICBT in foodstuff, in spite of its many food security benefits, can in some cases adversely affect the livelihoods of farmers. This is especially true when the crops are brought in more cheaply from neighboring countries, creating a glut, decreasing prices in the local market and leaving local farmers with no market for their products.

Generally, the positive impacts of ICBT outweigh the negative ones. The knock-on effects of ICBT on employment creation, income generation and the improvement of welfare for the participants is an important contribution to the economy from informal trade. In Southern and Eastern Africa, ICBT has proven to lessen the impact of food crises and help reduce price volatility. ICBT can lead to wider market access and a greater availability of goods at affordable prices and can also contribute to macroeconomic stabilization. The example of Uganda where ICBT accounted for 33.8 percent and 24.6 percent of total exports trade in 2009 and 2010 respectively provides empirical evidence and demonstrates how beneficial ICBT can be to some African economies. What is needed is to improve our understanding of the dynamics and structure of ICBT in key regions and borders. Data collection/estimation capacities should be strengthened as a basis for further economic analyses on the exact impact of ICBT and the most ideal policy responses.

Policy Recommendations

If properly harnessed, ICBT has the potential to support Africa’s on-going efforts at poverty alleviation. The prevalent belief that ICBT should be criminalized demonstrates policy makers’ failure to understand the underlying conditions of ICBT and its potential impact on national and regional economies. The Ugandan example serves as a stark reminder to African policy makers that by minimizing the importance of ICBT, they could be overlooking a significant proportion of their total trade. Moving forward, it will be critical for African countries and RECs to establish/strengthen ICBT data collection and analytical capacities in order to effectively measure ICBT’s contribution to their respective economies and design appropriate policy responses. The assessment of ICBT in Africa also confirms the importance of creating a policy, regulatory, institutional and business environment which enhances the role of informal cross border traders, legitimizes their activities (where the trade is found beneficial to the economy) and gradually mainstreams them into the formal economy. In view of which, the following policy recommendations are made:

For Governments - Mainstream ICBT in national and regional economic policy dialogues; Strengthen/establish ICBT data collection and analytical capacities at key border points in order to gauge ICBTs contribution to the economy; Intensify cross border policy dialogue to build an understanding of local cross border dynamics; Improve border infrastructure such as cross border storage facilities, stalls in key border markets and checkpoints; Prioritize a gender based approach to ICBT which address some of the pervasive constraints that afflict women; Facilitate the establishment of ICBT associations and business linkages between ICBTs and established companies; Accelerate the implementation of regional trade agreements; Curb corrupt practices at the borders and checkpoints; Support licensing of small traders; and Enhance security for people and their goods at border and market points.

For Regional Economic Communities - Establish or strengthen existing STRs by designing programs suited for ICBT; Reduce documentary requirements and put in place transparent procedures and processes; Increase access to market information at key border points; and Integrate ICBT into regional trade strategies

For International and Non-Governmental Organizations - Prioritize ICBT in national development plans and aid for trade assistance; Address issues related to access to finance especially for rural communities; Provide support to African countries to develop ICBT data collection and analytical capacities; Study the contribution of informal networks to cross-trade integration. Studies should aim at: (i) assessing the economic benefits of cross-border informal network; (ii) understanding the specificities of border markets; and (iii) shedding light on the relationships between traders and public institutions in border areas.