Trade facilitation and informal cross border trade

Project Active from to Firms and Trade

Informal cross border trade (ICBT) – trade activities which are unrecorded in official trade statistics – is pervasive in Africa. Economic theory suggests that the presence of informal trade depends on the relative costs of trading informally and formally (Golub, 2015; Eberhard-Ruiz & Moradi, 2018). Some of the factors spurring informal trade are expensive document requirements, high and unclear taxation, long waits at border posts and unclear procedures (Little, 2010; Titeca & Kimanuka, 2012; Brenton et al., 2013). Informal trade can offer lower transaction costs, incentivising individuals to trade through this channel, some of whom might otherwise not engage in cross-border trade at all. Non-tariff barriers and tariffs are found to be associated with informal trade between Benin and its neighbours (Mitaritonna et al., 2017). This research builds upon these studies to understand whether cross-border traders switch trading routes (between informal and official routes) when trade costs change.

Specifically, this study examines the effect of the operation of One Stop Border Posts (OSBPs), a type of trade facilitation, on ICBT between Uganda and its neighbours. By combining two custom points into one single border facility, OSBPs are constructed with the aim of achieving speedier border crossings, reducing informality and corruption (TMEA 2016).

The study examines this relationship in two steps.

  1. Firstly, it examines whether informal trade flow patterns change when an OSBP comes into operation. The study exploits spatial and time variation of the introduction of an OSBP using ICBT survey data collected by the Uganda Bureau of Statistics (UBOS) and Bank of Uganda (BoU). This dataset captures under-declared goods as well as goods traded through routes near, but not at, border points. Using the same dataset, Eberhard-Ruiz & Moradi (2018) find that the launch of the East African Community has increased this type of informal trade. Even though these data do not capture smuggling routes – defined as routes without any security – informal exports between Uganda and its neighbours remain substantial, totalling USD 549 million in 2017.
  2. Complementing this empirical analysis, it will conduct structured surveys to examine the choice of trading routes of informal cross-border traders, and whether the recent operation of the OSBP has implicated such decisions. The sample is drawn from a mapped census of shops and market traders at Busia – a ‘twin’ town between Uganda and Kenya, known for its high levels of informality (Soi & Nugent, 2018; Bhan, 2016). Lastly, it will conduct semi-structured interviews with truck drivers and brokers, who play a large role in informal cross-border trade.