89743 POLICY NOTE No. 41 July 2014 Paul Brenton, Nora Dihel, Mombert Hoppe, Carmine Soprano IMPROVING BEHAVIOUR AT BORDERS TO PROMOTE TRADE FORMALIZATION: The Charter for Cross-Border Traders HIGHLIGHTS  Informal cross-border trade is a major feature of African 1. BACKGROUND – Why informal trade matters economies: it creates jobs Informal trade supports the livelihood of hundreds of thousands of (especially for women and youth), supports livelihoods and households in Africa, reaches markets and clients that are underserved by contributes to food security. formal channels, and contributes to regional food security. Despite Yet, small traders in Africa still numerous benefits, conducting cross-border transactions remains expensive face high duties, burdensome for small traders in Africa. For example, small traders in Malawi and bureaucracy, corruption, Zambia pay 62 percent more in per unit terms for border costs than large harassment and other difficulties formal traders. While there are systems in place to facilitate cross-border at the border. trade such as the current Simplified Trade Regime (STR) that eases certain customs processes, a host of registration and other requirements remain in place and increase small traders’ costs to uncompetitive levels.  The Charter for Cross-Border This note presents an overview of key challenges faced by small Traders tries to address those traders across Africa, and proposes the Charter for Cross-Border Traders challenges by introducing a framework of rights & obligations as a potential solution to address them. Special attention is given to the case for traders and border officials, of Malawi and Zambia, where the Charter is currently being piloted by the and a SMS-based mechanism to World Bank in collaboration with the respective Governments, Traders’ report abuses. This is Associations, and border officials as part of the first joint policy action complemented by intense emerging from the Diagnostics Trade Integration Studies (DTIS) carried training and large-scale out in the two countries. dissemination for target beneficiaries, and relies on a network of local stakeholders Informality in general and informal cross-border trade (ICBT) in including Government, border particular, are major features of African economic and social landscapes. agencies, traders associations and Despite the inherent difficulty in measuring it, the informal sector is CSOs. thought to account for about 38.4% of Sub-Saharan African economies on average [Schneider et al., 2010], and to be worth a $17.6-billion/year in the Southern African Development Community (SADC) [Southern Africa  The Charter also supports the Trust, 2008]. Available data on African countries’ informal trade also show enhancement of existing that these flows are substantive. For example, about three million preferential regimes (e.g. STR) for 1| www.worldbank.org/afr/trade small traders, and advocates for lower duties, simplified procedures and improved behavior at borders. metric tons of staple food commodities were traded in 2013 in East Africa Leeman 2009; Perberdy and Rogerson 2000; (FEWSNET, 2014). Similarly, total volumes of Macamo 1998; Muzvidziwa 1998; Perberdy and informal cross-border trade of maize, rice and Crush 1998). ICBT is then of critical economic and beans in Southern Africa are estimated at social importance for many households in Sub- respectively 139,243; 8,485 and 15,380 metric tons Saharan Africa, particularly so in poor households in the 2011/12 season [FEWSNET, 2012]. Such without other income earners (e.g. absent or major transactions of staple foods, depicted in table unemployed husband). Improving opportunities for 1 below with data for the period between 2007-08 formal cross-border trade by women, notably in and 2011-12 seasons, are critical to food security in agricultural products, could therefore generate the region. economic growth and promote food security, as This informal trade is also essential for welfare and well as reduce poverty among vulnerable poverty reduction, as poor people are intensively households (Ityavayar, 2013). engaged in the informal production and trading of the goods and services that are actually crossing African borders. Allowing these traders to flourish and gradually integrate into the formal economy would boost trade and the private sector base for future growth and development. TABLE 1: Informal Cross-Border Trade in Southern Africa (metric tons/season) 160,000 140,000 ©Stevie Mann/World Fish 120,000 In the case of Malawi and Zambia, national 100,000 Maize trends well reflect the regional ones presented 80,000 Rice above. Both countries trade significantly more basic 60,000 Beans commodities than is reflected by official statistics, 40,000 and cross-border trade also goes beyond 20,000 agricultural commodities. Data collected by Njiwa et al. in 2011-12 suggests 0 2007-08 2008-09 2009-10 2010-11 2011-12 that about 40% of $7 mln.-worth trade at three major Zambian borders i.e. Chirundu, Source: FEWS NET, 2012. Livingstone/Victoria Falls (Zimbabwe) and Mwami/Mchinji (Malawi) is informal - most of that trade actually takes place with Malawi. Also, on a Another recurrent feature of ICBT, as well monthly basis the number of informal traders using as a consistent finding of most studies, is that a those border posts is estimated at between 15- majority of individual traders are women, for whom 20,000, 12-13,000 and 20-30,000 respectively. this activity is the main or the only source of FEWS Net data indicates that informal income (World Bank 2012; Lesser and Moisé- exports of beans, maize and rice from Zambia to 2| www.worldbank.org/afr/trade neighboring countries add up to tens of thousands Figure 1c: rice exports of tons every year. Out of the three products, maize (tons) represents the largest volumes of informal exports 16,000 (124 thousand tons between 2005 and 2011, 12,000 compared to 50 thousand tons of rice and 31 8,000 thousand tons of beans). For beans and rice these 4,000 flows are much larger than formal exports. Figure 1 - and 2 provide an overview of, respectively, 2005 2007 2009 2011 Zambia’s informal exports and imports of maize, Informal rice and beans between 2005 and 2011. Formal Source: World Bank, 2013B FIGURE 1: Zambia’s informal exports of maize, rice and beans1. FIGURE 2: Zambia’s informal imports of maize, rice and beans2. Figure 1a: beans exports (tons) Figure 2a: beans imports 12,000 10,000 (tons) 8,000 2,500 6,000 2,000 4,000 2,000 1,500 - 1,000 2005 2007 2009 2011 500 Informal Formal - 2005 2007 2009 2011 Informal Formal Figure 1b: maize exports (tons) Figure 2b: maize imports 300,000 (tons) 250,000 12,000 200,000 150,000 9,000 100,000 50,000 6,000 - 3,000 2005 2007 2009 2011 Informal - Formal 2005 2007 2009 2011 Informal Formal 1 Each graph only includes exports to countries for which FEWS Net 2 reports data for beans (DRC, Tanzania, Zimbabwe), maize (DRC, Each graph only includes imports from countries for which FEWS Malawi, Mozambique, Tanzania, Zimbabwe) and rice (DRC, Malawi, Net reports data for beans (Malawi, Tanzania), maize (Malawi, Zimbabwe) Mozambique, Tanzania) and rice (Malawi, Tanzania). 3| www.worldbank.org/afr/trade 1. THE PROBLEM – Challenges faced Figure 2c: rice imports (tons) by cross-border traders 3,000 Usually traders choose the informal path to avoid burdensome administrative procedures taxes, 2,000 as well as to escape from abuses committed at the 1,000 border. Indeed, informality flourishes when the transaction costs incurred by operating through - official channels are perceived to be too high, are 2005 2007 2009 2011 Informal not compensated by sufficient benefits and/or the Formal required procedures are not transparent. Such conditions are particularly burdensome for people Source: World Bank, 2013B with small consignments that may not cover the fixed costs of complying with formal sector procedures. In the case of cross-border trade, this It must also be noted that Malawi is amongst the notably includes high customs duties and taxes, as main destinations of informal food exports from well as procedures at the border which can be time- Zambia (figure 3) consuming, inefficient, or unclear (e.g. customs, Finally, data surveyed by Southern Africa sanitary and phytosanitary standards, immigration Trust [2008] suggests that ICBT in Zambia/Malawi procedures, technical regulations etc.). In also concerns manufactured products in addition to particular, small traders face highly regressive costs agricultural commodities. Those include small and have little choice but to trade informally. In this electronics, household appliances, clothes, shoes, case they pay on average around 62% more per ton cosmetics and plastic articles, among others. to move a ton of commodity across the border than large traders do – they would however pay almost FIGURE 3: Zambia's imports of beans, maize and double the current informal rate if they switched to rice from Malawi the small formal route. In this sense, they are trapped in informality. 6,000 Figure 4 offers an example of this for the Informal 5,000 Kasumbalesa border (Zambia/DRC). Formal 4,000 FIGURE 4: Border Costs at Kasumbalesa 3,000 (USD/ton maize) 2,000 1,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: authors' calculations based on FEWS Net and Comtrade/WITS data for dried beans (code 05423), maize and maize meal (code 044 and 04721), and rice (code 042). Source: World Bank, 2013B. Source: World Bank, 2013B 4| www.worldbank.org/afr/trade Due to high illiteracy rates, small traders are also likely to find it even harder to comply with complex requirements and controls, and may not have the capacity and resources needed to take advantage of regional agreements such as duty-free entry in COMESA and SADC countries for their products. Similarly, they may fail to benefit from the potential advantages offered under STR regimes - these provide for simplified certificate of origin procedures and, for selected items on a Common List of products, also eliminate the need for licensed clearing agents to process consignments worth less than US$ 1,000. Lack of clear information on export and import The situation is not at all different in procedures (including the STR), and opaque or Malawi. Traders carrying, for instance, agricultural arbitrary application of rules are also serious products across the border are required to provide challenges for traders. The latter issue, in particular, a number of export/import documentation often means that they are not able to claim the including trade licenses, phytosanitary certificates, advantages they are entitled to, even when they are certificates of standards compliance, foreign aware of them. In this case it is much easier and exchange certificates, and certificates of non-GMO less risky to pay a bribe and pass than to argue with conformity. As a result, for the smaller ones it is officials. often much cheaper and more practical to use The centralization of certain procedures, informal routes and thus avoid border procedures notably the issuance of export/import permit and completely. SPS certification for agricultural products, A World Bank case study [2013A] has measured represents an additional challenge: it makes them the total costs of exporting rice from Malawi into costly for all traders, yet prohibitively so for the Zambia using a big (30-ton), medium-sized (7-ton) smaller ones. For instance, traders at and small (2-ton) truck. Due to poor economies of Livingstone/Victoria Falls (Zambia/Zimbabwe scale, for the smaller traders those costs end up border) can obtain a permit from the Ministry of being $3.98/ton higher than the amount paid by the Agriculture in Livingstone to import products in medium-scale trader, and $50.23/ton more than Zambia, yet must go to Harare if they want to do what a larger trader would pay (see figure 5). the same in Zimbabwe. This permit is deemed Moreover, in order to use the formal route small expensive and only has a limited validity in time, traders should be formally registered as exporters, making it not worthwhile to trade agricultural and have a valid taxpayer identification number products, at least through official channels. (TPIN) and bank account. The incentive for them to avoid formal sector trade requirements is obviously very strong. 5| www.worldbank.org/afr/trade FIGURE 5: Total costs (USD/ton) of exporting 3. OUR PROPOSED SOLUTION: rice from Malawi into Zambia per The Charter for Cross-Border Traders size of trader. To strengthen the rights of small traders 200 and facilitate their cross-border transactions, the World Bank, in collaboration with the the Ministry 150 of Commerce, Trade and Industry of Zambia, and the Ministry of Industry and Trade of Malawi has 100 developed a “Charter for Cross-Border Traders”. No STR The initiative responds to the need, clearly 50 STR expressed by stakeholders in those countries, for improving the treatment of traders at the border 0 and increasing the efficiency of trade flows, as well Large Medium Small traders traders traders as for introducing effective mechanisms for the (30-ton) (7-ton) (2-ton) reporting of abuses, based on extensive use of modern technology. It also builds on the Source: World Bank, 2013A importance of actively involving key players such as border agencies and traders associations, and of Among the challenges faced by cross- conducting regular training and sensitization among border traders, hostility by border officials deserves target beneficiaries on key issues related to cross- special attention. Despite policy-makers’ growing border trade. interest in facilitating transactions and some The document is being currently piloted at the progress made at certain border points, crossing Mwami/Mchinji border. some of Zambia’s borders remains a challenge due to officials’ attitude towards small traders. Similarly, The Charter for Cross-Border Traders the Cross-Border Traders Association of Malawi enshrines a basic set of rights and obligations for maintains that the majority of informal traders traders and officials, and ultimately aims to improve actively avoid the formal border crossing as many behavior at borders and to promote the gradual members complain of harassment and humiliation, formalization of informal cross-border trade. The ranging from goods over-valuation to delays, bad idea of a charter might be relatively new in the language and physical violence. Women, who in context of African cross-border trade problems, but Malawi account for approximately 80% of cross- public displays of consumers and passengers rights border traders, are especially vulnerable to such and responsibilities have been used even in context abuses – these sometimes also take the form of of trade and travels. For example, the posting of sexual harassment, including rape and cited cases of passengers’ rights at airports, videos on what to women providing “favors” to officials in exchange expect and what are appropriate procedures at for a smooth border crossing. In turn, this also security checks and prominent placement of major facilitates the spreading of HIV/AIDS and other customs rules at borders crossings have been used sexually-transmitted diseases. to reduce misunderstandings and complaints. The goal is to achieve faster processing times for travelers and traders, while allowing border officials to undertake their essential duties effectively. Plain language guidelines, publicly displayed, can serve as easy reference for all parties in case of disputes. 6| www.worldbank.org/afr/trade It must be noted that, in most cases, border CHARTER BASIC PRINCIPLES agencies already have in place their own Service Charter, Code of Conduct etc., each of which  No abuse or harassment usually applies only to the agency that has  Efficient processing and no discrimination developed it. The Charter for Cross-Border does  Transparent duties, fees and taxes not replace those internal codes - it rather builds on their experience, and yet is innovative in that it  No bribes applies indistinctly to all stakeholders at the border.  Clear documentary requirements In other words, it operates at horizontal level to promote standard behavior among border agencies. In comparison to the internal Codes of In order to ensure a fair balance between Conduct that exist within each border agency, the its two main categories of target beneficiaries, in Charter for Cross-Border Traders adds value in a addition, the Charter has been developed using a number of areas. In particular: mirror approach: each right of the traders has a corresponding obligation for the border officials,  It introduces a credible complaint and vice versa. mechanism, based on the use of toll-free lines (see Obligations are spelt out very clearly for both details below). categories. For instance, the Charter requires that,  It puts strong emphasis on the importance whenever a physical check is requested, the of maximum transparency at borders, both in trade- relevant official must provide a reason for that, related transactions as well as in the quality and and that female traders have the right to receive a quantity of information publicly displayed and physical check by female officials in a private but made available to traders. regulated and accountable environment. Similarly,  It has a clear focus on eliminating sexual officials are obliged to announce any change to duties, fees, taxes and documentary requirements harassment and other gender-related abuses, in publicly at the border and within reasonable time, order to reflect the prevalence of women among so that traders can plan their transactions cross-border traders in Africa. accordingly - they must provide a receipt for any  It is designed to be accompanied by an payment made, and all payments must be effective performance measurement system, where properly recorded. context-tailored indicators are used to assess On the other hand, the Charter states that traders progress made in the improvement of the overall must pay appropriate duties and present the border experience. required documentation when crossing the border. They are also required to treat the officials As a way to provide a tool for real-time with respect, and to avoid offering bribes and/or reporting of abuses, addressing emergencies arising other favours in exchange for any preferential from harassment and overall monitoring of the treatment. implementation of the Charter, the initiative also includes the setting up of toll-free phone numbers. These will allow cross-border traders to access information on required trading documentation e.g. duties, permits, certificates etc., file complaints and report abuses affecting themselves and their peers, particularly women, as they cross the border. The 7| www.worldbank.org/afr/trade numbers will be also linked to an ICT platform, Technical arrangements are also being made with which would work in the following two ways: the major mobile phone operators in those countries in relationship to the setting-up & testing 1. On the one hand, it would allow for of toll-free numbers. collecting information queries and reports of abuses Finally, the Africa Trade Team plans to conduct a submitted by traders; large-scale dissemination campaign for each of the 2. On the other hand, it would provide piloting countries. designated organizations e.g. Traders Associations and CSOs with a mechanism to a) provide the requested information to traders, b) collect further As the Charter for Cross-Border Traders is evidence e.g. pictures, GPS coordinates etc. on the rolled out in Malawi and Zambia, the Africa Trade reported cases, and c) refer them for immediate Team is also preparing the ground for its action to the responsible authorities (Revenue implementation at other borders. Indeed the Authorities, Police, Immigration etc.) and follow-up existing literature on informal cross-border trade, on their response. although limited, is consistent in showing that there is a significant degree of similarity across challenges faced by traders in the continent. Once tailored to 4. Progress in the Malawi/ Zambia pilot the specificities of the local contexts, the Charter and next steps could therefore impose itself as an innovative, effective tool to improve behavior at several African Reaction to the Charter was highly positive borders, and ultimately help promote gradual in Malawi and Zambia: all stakeholders were formalization of informal trade on a regional basis. supportive of the initiative, and expressed interest It is with this ambitious vision that the in being involved in its implementation. In Zambia, Team is currently preparing for Charter in particular, CSOs and Traders Associations led implementation at the Tanzania/Zambia and by CUTS (Consumer Unit & Trust Society) have Tanzania/Malawi borders. Early discussions with agreed to cooperate on the monitoring of Charter stakeholders there have indeed indicated that there enforcement and on the management of is real demand for a similar initiative, and that again information queries & complaints through the the use of ICT technology would add significant Taarifa/ComCol platform. In Malawi, on the other value in relationship to an effective enforcement of hand, key stakeholders have defined an official the Charter. division of roles & responsibilities in the Although similarities are observed implementation of the Charter, with the lead role regarding some general aspects of cross-border being played by Malawi Revenue Authority (MRA), trade (e.g. traders usually originate from poor rural and are also in the process of designating Charter areas/are often illiterate/tend to be mostly women focal points. etc.), other issues may vary across borders. In order Additionally, training courses were to reflect the peculiarity of each context, the Africa delivered on the Charter for Cross-Border Traders Trade Team therefore plans to tailor the Charter to with the participation of over 70 direct/indirect the specific challenges faced at the borders where beneficiaries, including traders (especially women), the document will be applied. senior border officials and representatives of CSOs and Traders Associations from both Malawi and Zambia. 8| www.worldbank.org/afr/trade 5. Conclusions exposed to financial and other challenges including physical violence, sexual harassment and Small-scale cross-border trade represents a HIV/AIDS infection. In this sense, the Charter unique, yet still largely untapped opportunity for with its clear focus on gender would offer a unique many Africans. Whether informal or not, it is still opportunity for empowerment of women cross- often viewed as a threat or a nuisance, rather than border traders, which ultimately could have a as a legitimate entrepreneurial activity contributing tremendous impact on households’ income levels to regional integration, livelihoods and food as well as economic and social advancement at security, as well as a basis for more formal activity community level. and employment in the future. If offered a The initiative also presents clear benefits favorable environment to grow, cross-border trade for the authorities operating at borders. Amongst has the potential to create stable jobs and make others, those include increased tax and custom duty trade more broad-based and inclusive. Yet, at collection; improved quantity and accuracy of key present the transaction costs imposed by official data on trade flows, which would be beneficial for trade procedures and taxes still result in informality policy analysis and policy-making purposes; being seen by a majority of small traders as the only enhanced respect of rules and of health/safety viable way of conducting business. On the other standards; improved governance at the borders. hand, the existing literature shows that excessively tight controls and high taxes are self-defeating as To quote an official: “Small traders pay our they are relatively easily avoided by traders, often salaries through taxes. The more they are, the more with the complicity of border officials. Trade revenue are collected. We must help them”. facilitation measures tailored to the needs and constraints of small traders are therefore required. In this scenario, the Charter for Cross- Border Trade imposes itself as a new initiative with potential to dramatically change behavior at borders, and therefore to gradually pave the way for formalization of informal cross-border traders. The ultimate outcome would clearly be a win-win situation. From the perspective of traders, indeed, operating in the formal sector (provided it does not impose excessive costs) could facilitate the transition from a survivalist activity to a more stable employment, and could make it easier for them to scale up their business, notably by enhancing their capacity to apply for credit at formal financial institutions. Indeed lack of start-up capital and limited access to finance are systematically indicated by small traders as the major threat to the creation and sustainability of their business. 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