Informal Trade in East Africa Will Face an “Efficiency Shock”

This article was originally drafted by the Society for International Development for the newsletter “GHEA Outlook” as part of the Rockefeller Foundation’s Searchlight Process. For more Searchlight content on futurechallenges.org, please click here.

Informal cross border trade accounts for a significant portion of overall regional trade in East Africa. Launching a new National Cross Border Trade Association in Kenya, the permanent secretary in the Ministry of Trade noted that, “informal cross border trade currently accounts for about 30% to 60% of all inter-regional trade. Evidence further shows that over 50% of intra regional trade is conducted through the informal cross border trade, particularly those trading in agricultural products.”

Improving the transport corridors is expected to reduce the costs of road transport by up to 25% in the northern corridor and 11% in the central corridor. The time to ship goods by road will reduce by up to a third in the north and half in the central corridors. These cost and time reductions represent a significant and positive ‘efficiency shock’ to GHEA’s economy. It will very likely have an impact on the informal trade in the region, although the nature and direction of that impact is hard to determine without deeper analysis.

Certainly, informal trade will benefit from the improved transport infrastructure and the costs savings that it represents. To the extent that informal trade crosses national boundaries at designated border posts, the seven new one-stop border posts (OSBPs) that are being built across the East African community partner states also ought to have a beneficial effect by combining two countries’ formalities in a single space and eliminating the duplication of procedures.

However, if informal trade has thrived in part because of logistical inefficiency – allowing it to serve markets and consumers that more formal distribution channels do not reach – the improved transport corridors will reduce this constraint and may lead to greater formalisation of cross border trade. Rwanda’s informal cross border trade and the government’s response offer some signals.

Rwanda is developing informal trade along its borders to tap into growing revenues from the sector as it seeks to cut back rising trade deficit. While the country’s trade deficit increased in the first half of 2011 to $587 million compared with $543.7 million in June 2010, informal trade balance recorded a surplus. Rwanda’s informal cross border trade hit $9.33 million between April and June 2011, dominated by DR Congo on the export side and Uganda on the import side. Informal cross border trade accounts for 20 per cent of Rwanda’s total exports.

According to the Minister of Trade and Industry, Francois Kanimba, the government was exploring ways of reducing barriers to trade, including setting up formal market structures to help the traders. It also intends to roll out a literacy campaign, educating traders about rules and regulations governing cross-border trade. Traders will be trained in managerial skills and export processes, and provided with simplified certificates of origin to ease the movement of goods across the borders. “The government does not have to invest heavily. Simply mobilising the local traders into co-operatives, will enable them to finance the development of the infrastructure needed,” Mr Kanimba said.

However, the net effect of formalisation could be ambiguous. For it to be beneficial at the individual level, any increase in the cost of formalisation to the trader (administration processes, fees, taxes) must be more than outweighed by an increase in business. But it is not clear that small traders will be able to capture the cost savings represented by improved transport infrastructure. Larger traders with deep pockets and distribution networks could edge out their weaker competitors by translating cost savings into lower retail prices for the final consumer. So, while systemic efficiency is good at the aggregate level, it may be painful at the level of the small and/or informal trader who for various reasons may find themselves unable to compete.