Africa’s internal trade sluggish

An analysis by Eye Witness News

In spite of the numerous trade agreements
signed by African countries, the share of internal trade remains low as
reflected by official statistics.

 

These agreements have led to tariffs removal within the trading blocs, at least in principle.

 

An analysis by Eye Witness says that shortcomings that limit trade include
 non-tariffs barriers, red tape and insufficient infrastructure.

 

Tariff barriers remain high outside areas covered by the agreements.

 

Enhancing trade integration between
African countries could yield large economic gains. This idea motivated
the latest initiative for integration, the continental free trade area.

 

However, a large part of cross-border
trade between African countries is informal. It either avoids customs
entirely, or goes through official posts but is not recorded. Informal
trade is difficult to measure. Most studies have
relied on estimates based on partial surveys, or on accounting
exercises. They concluded that a substantial share of Africa’s regional
trade was informal, on the order of 30% to 40%.

 

Informal trade is pervasive for
agricultural goods as well as many industrial goods. Some traders are
entirely informal; others are registered businesses but escape trade
regulations and duties nonetheless.

 

This gap in the measurement of actual
trade is problematic for trade policy. Why is it so pervasive, and what
should governments do about it?

 

Our recently published study goes someway
to filling the gap by looking into the magnitude, composition and
determinants of informal trade in Benin.

 

WHAT WE FOUND

 

In 2011, the national statistics of Benin
identified 171 non-official border points to conduct a survey of
informal trade. As in many African countries, informal trade is
pervasive in Benin. It operates in the open, and is tolerated,
for the most part, by officials. Each border post was surveyed for a
period of ten days. Each trader crossing the border (in either
direction) was asked a short questionnaire about products and quantities
traded, prices, origin and destination.

 

The rate of response to the survey was
high. This means that, for the first time, there’s a representative
sample covering all informal trade at a country’s borders that can be
compared with the official trade data such as customs
data.

 

Using this data, our study confirms that
informal trade is, in effect, a vital part of the trade system. For
example, informal trade makes up the major part of trade in domestic
products between Benin and Nigeria. Official statistics
underestimate total trade by 50% for imports, and by about 85% for
exports.

 

These figures are broadly in line with
previous estimates for sub-Saharan countries. This confirms that trade
statistics on the continent suffer from a serious blind spot.

 

Our study also shows that formal and
informal trade differ by product composition. Informal trade isn’t
restricted to livestock and a few agricultural goods. Product and sector
diversity is high. For example, industrial products,
such as textiles, agro-food, and transportation equipment are traded
heavily on this channel.

 

Another noteworthy feature is that the
product overlap between the formal and informal channels is very low:
most goods are traded exclusively on one or the other.

 

This suggests that official statistics are also massively underestimating the product diversity in regional trade.

 

So why are some products traded formally, while others are exclusively traded informally?

 

REASONS FOR TRADE INFORMALITY

 

We estimate that products facing high
tariffs are more likely to be traded informally. Non-tariff barriers,
such as sanitary and phyto-sanitary regulations, or technical barriers
to trade (such as labelling requirements, quality
standards), are also associated with more informality.

 

This suggests that complying with these
regulations represents a cost for traders. They are therefore willing to
avoid them by skipping the customs controls.

 

This raises serious questions around
issues of product quality. There’s no doubt that controlling product
quality and enforcing regulations is necessary for consumer protection.
Frequent cases of food poisoning in Nigeria, and
their association with informal trade show the importance of this
issue.

 

The difficulty lies in distinguishing
between enforcement and excessive requirements. For example, our
research shows that a lot of perishable products are traded exclusively
on the informal channel. This suggests that traders
aren’t avoiding formal channels because they want to smuggle products
that don’t meet health and safety standards. They simply want to sell
products that would otherwise be spoiled if kept for too long.

 

HOW TO ADDRESS TRADE INFORMALITY

 

There is a great deal of evidence that
trade costs are high in sub-Saharan Africa. This is due to inadequate
infrastructure, excessive regulations and requirements at customs, as
well as harassment and bribery. The pervasiveness
of informal trade is a symptom of this.

 

Reducing tariffs should help formalise
some of this informal trade. But it is difficult to predict by how much.
It’s possible that incentives to go informal remain high for many
traders, even under the continent’s proposed free
trade agreement, especially if preferential treatment is costly or
difficult to obtain.

 

Some authors suggest giving specific
support to informal traders, for instance, access to simplified trade
regimes. The rationale for this is that there are too many obstacles –
procedural and infrastructural – preventing informal
traders from operating within the official framework.

 

Informal trade is, in effect, a vital
part of the trade system on the continent, improving food security, and
providing a source of income for a substantial share of the population.
By reducing trade costs for a large share of
(less visible) trade operators, specific facilitation measures could
offer valuable opportunities to reduce poverty.