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Informal cross-border trade in Africa and approaches in promoting formalization

The term “informal sector” was used for the first time by the International Labour Organisation in a report drafted in 1972, titled  Employment, incomes and equality – a strategy for increasing productive employment in Kenya, following a mission conducted to Kenya to study the causes of unemployment in the country. 

After observing that the informal sector plays an essential role in the Kenyan economy (as it provides income-earning opportunities for a large number of people – even if at low incomes), ILO made an attempt to draw the lines of this compartment of the economy in the country. As a result of this exercise, the report pointed out how the main characteristics of the informal sector are the following: a) ease of entry (because the relevant activities are conducted without any registration, authorization or license, although required for their exercise); b) reliance on its own capitals; c) family ownership; d) small scale of operation; e) labour-intensive and adapted technology; f) skills acquired outside the formal school system; and g) competitiveness (due to the unregulated nature of this sector).

For what concerns the point g), a clarification comes from a recent study from the Journal of African Economies[1] which reveals that traders go informal especially when faced with greater formalities and higher taxes to be paid. Hence, the important point raised by the authors that highly regulated and tax-burdened trade activities favour the expansion of the informal economy.

In Africa, informal trade is also a phenomenon that characterizes cross-border transactions. In this context, the term is usually referred to those trade activities that are conducted by those individuals who trade across borders without fulfilling statutory border formalities such as customs clearance, with the consequence that their operations are not captured in trade statistics of Customs. 

In 2002, ILO adopted the Resolution concerning decent work and the informal economy. This document, after admitting that there is no universally accurate or accepted description or definition of informal economy, clarifies that informal cross-border trade should not be confused with smuggling and other criminal and illegal activities, such as trade in drugs or other illicit goods (ex. arms, protected fauna or flora species, etc.), as these activities are the subject of criminal law, and are not appropriate for regulation or protection under labor or commercial law. Such Recommendation was followed in 2015 by the Recommendation No. 204 on Transition from the Informal to the Formal Economy, that recognising the lack of protection of workers in the informal economy, provides guidance on how to improve their protection and facilitate transition to the formal economy

Currently, in many parts of the world public authorities (and Customs in particular), adopt strategies aimed at promoting the transition from the informal to the formal sector of cross-border traders. There are many approaches that can be used for this purpose (for a comprehensive reconstruction with examples of policies adopted by some countries, read here), but in Africa, most of these approaches basically rely on the simplification of formalities and requirements for low value transactions for small scale traders. 

A lesson, for instance, comes from COMESA, EAC and SADC, that have developed Simplified Trade Regimes (STRs) to facilitate small-scale traders in their import or export operations within their respective territories. All these regimes are based on the World Customs Organisation (WCO) Revised Kyoto Convention on the Simplification and Harmonization of Customs Procedures, that at the Transitional Standard 4.13 allows the parties to the Convention to exonerate from payment of customs duties and taxes for transactions under a minimum value and/or when the amount of duties and taxes is under a minimum threshold to be specified by the national legislation, while the WCO Guidelines to the Revised Kyoto Convention encourage Customs to renounce to collect duties and taxes for negligible amounts of revenue that incur costly paperwork for both the Customs administration and the importer/exporter. 

The COMESA STR, for instance, allows informal cross border traders also not holding any registration or trade license permit, to trade on a duty-free basis within a threshold value which is currently of US$ 2,000[2].

In order to implement the STR, COMESA Member States have to participate to the COMESA Free Trade Area (FTA). However, those States that are non-participating to such FTA, can apply STR equivalents under specifically concluded bilateral preferential arrangements[3]

In order to qualify for the STR, goods must be originating from a COMESA country and be included in a Common List agreed by both the exporting and importing country. For goods that have been grown or wholly produced in the COMESA Region and appear on the Common List, the trader is required to complete a simplified customs declaration form that can be filled out directly at the border post, and submitted to a customs official who will stamp and certify it. If the goods being traded are included in the Common List of products eligible for the STR, no Certificate of Origin is required. Obviously, goods imported and exported by such traders must also comply with the normal food safety, plant and animal health regulations including environmental protection. Accordingly, in case such goods require specific import or export permits, these ones must be preliminarily obtained and submitted to Customs or the other competent authorities at the border. 

The STR initiatives responds to a key challenge of lengthy customs procedures and documentation requirements that often turn informal trade away from compliance, particularly small-scale trade.

Similar to COMESA, in the EAC, the EAC STR, allows informal cross border traders to trade on a duty-free basis within a threshold value which is currently of US$ 2,000 and always on condition that the goods in question are included in a specifically approved list. In this case however, a Simplified Certificate of Origin (SCO) needs to be annexed to the (simplified) customs declaration, which can both be obtained at the border post. The relevant instructions with the list of the goods eligible to the scheme are available here.

The countries that have implemented such initiatives, have been able to convert part of informal trade to the formal trade. However, what in most cases is missing, is the establishment of a separated system of registration of the simplified forms for declaration of goods, a solution that could help African States to better quantify the dimension of this sub-sector and its incidence with respect to the economies of their respective countries. 

[1] Bensassi, S.,  Jarreau J., Mitaritonna, C., Regional Integration and Informal Trade in Africa: Evidence from Benin’s Borders, Journal of African Economies, Volume 28, Issue 1, January 2019.

[2] The first threshold level at the launch of the STR in 2010 was USD 500. However, as small-scale traders complained that this amount was too little and did not allow them an opportunity to grow their businesses and incomes, the COMESA Council decided to raise the threshold to USD 1000 in 2011. This was further raised to the current threshold of USD 2000 by a Council of Ministers Decision in the year 2014. On April 2020, COMESA launched an analytical review of the current threshold of the STR study to review the suitability of the current threshold, so that findings of this study can inform decision making by the policy organs on whether it should be maintained or reviewed upwards or downwards, and to which level.

[3] For instance, Ethiopia and DRC, which are not participating under the COMESA FTA, fall under this category.

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