Defining informal trade

The definition of informal trade is often used interchangeably with a definition of informal activity. Yet the definition of the latter is itself far from perfect. Based on the National Accounts Systems, informal activity is characterized primarily by four elements:

It operates on a small scale, with weak levels of organization and with little 1. or no distinction between the factors of production (capital, labour).

Informal employment relationships are usually based on part-time employ-2. ment, kinship or personal and social relationships, rather than contractual

agreements or formal guarantees.

Individual enterprises are not distinct moral entities separate from the 3. households to which they belong. They do not keep accounts that

distin-guish their activities of production from the other activities of their owners.

Thus, assets used do not belong to the unit but to their owners.

From a legal perspective, “there is personal, unlimited liability on the part 4. of the proprietor for all commitments entered into during the production

process” (AFRISTAT, Methods Series no. 2, 1999).

However, according to the International Labor Organization (ILO), “the informal sector should be defined independently of the location of productive activity, the extent to which fixed capital is used, the effective life-span of the enterprise (per-manent or temporary), and the principal or secondary nature of the employment”

(AFRISTAT, 1999). Thus, for the ILO, the unit or formal enterprise must be defined by one of the following criteria:

The enterprise or paid workers are not registered; or 1.

The size of the unit is not commensurate with its levels of employment.

2.

Based on these two definitions, it follows that, “Informal activity is any activity that is unregistered and/or without formal written accounts, carried out as a principal or secondary employment, by a person as a boss or in his own individual capacity.

This person, actively employed, is thus considered the head of an informal unit”

(AFRISTAT, 1999).

These definitions, obviously, have as their basis the notion of ownership rights, par-ticularly as they include an involuntary bias by assimilating or confusing the infor-mal activity with the inforinfor-mal unit or enterprise. A substantial share of the activi-ties of many registered or formal enterprises may be unregistered or unrecorded on national accounts. They may be considered hybrid enterprises, carrying out both informal and formal activities. Their mixed nature makes it possible to envisage informal trade as all or part of trading activity recorded or unrecorded, with and without formal (official) written accounts.

This definition makes it possible to add, under the informal trade category, re-export activities and cross-border trade. Such products often are under-reported either because of the deliberate use of positive fiscal policy benefiting from opportuni-ties arising from differences in national political economies, because states do not apply community customs regulations, or even because of inappropriate methods of recording the flow of goods. As in informal enterprise, individual ownership (in the

strict sense of active workers and the absence of a distinction between the resources of commercial activity and those of the household) characterizes informal trade.

However, this does not necessarily legitimize it. In fact, because small traders have registration problems along borders, many informal traders go unregistered. This makes them illegal traders or classifies them with smugglers, with all the associ-ated risks and uncertainties. Such unregistered activities may be defined as illegal, unofficial, underground/parallel/black market activities, over-invoicing and under-invoicing, smuggling and contraband activities (Meagher, 1997).

Informal trade covers re-export activities, cross-border trade, domestic trade on the pavements and marketplaces, informal trade contracts based on trust and the given word, and the portion of official trade that goes unrecorded or under-recorded.

However, it is difficult to assess the true extent of unrecorded trade, since it merges with fraud in formal enterprises, only to be revealed under duress or when uncovered by effective control methods. When defined as a separate category, ICBT can be said to occur where business activities cross borders, mainly based on popular supply and demand or comparative advantages, registered or unregistered. Officially registered informal cross-border trade is sometimes determined bilaterally or unilaterally by neighbouring countries or by multilateral subregional agreements.

ICBT between the Sudan and Ethiopia, for instance, is defined by bilateral agree-ments, while Ethiopia has made unilateral decisions to liberalize ICBT with Dji-bouti, Kenya and Somalia. Such decisions and agreements determine their defini-tions of ICBT based on the following criteria:

The goods are not readily obtained from the central national

markets/domes-•

tic sources, but have acceptable qualities and standards and can be easily and cheaply obtained across the border in a timely and regular fashion. Such goods are listed in the agreements and official publications.

Exchange of such goods is permissible only within a certain radius of border

• trading points, depending on population density and certain conditions.

For example, the bilateral agreement between Ethiopia and the Sudan fixed a 90 kilometres distance along each of the border lines. Ethiopia made a unilateral decision authorizing a 200 kilometres distance from the Kenyan border; 100 kilometres from Djibouti borders, and from 15 specified Ethio-pian towns located along the border of Ethiopia and Somalia.

There is a capital limit or monetary value on goods for trade only within the

• defined radius/distance from the border trading points. For example, the value of goods traded along the border between Ethiopia and the Sudan is fixed at Birr 2,000 in one weekly crossing that can be repeated four times in a month and 48 times in a year. On the other hand, the value of goods (other than livestock) traded with Kenya is fixed at Birr 5,000 per week,

twice a month, or 24 times in a year, while the value of livestock is fixed at Birr 30,000. The value of goods traded with Djibouti is set at Birr 5,000 per week, twice a month, or 24 times in a given year. The value of goods traded with Somalia is fixed at Birr 10,000 a week, twice a month, 24 times a year.

Uganda also has taken a unilateral decision regarding the liberalization of ICBT for goods valued at less than US$ 1,000. Sub-regional organizations such as COMESA, SADC and ECOWAS also have defined certain goods that should be traded infor-mally across borders and even duty-free goods. For instance, maize is permitted to be freely traded across borders in Southern and Eastern Africa. However, implementing these agreements leaves much to be desired, as will be examined in greater detail with respect to ECOWAS and COMESA.

Once they have entered a country, goods informally traded across borders are openly sold in licensed shops by registered traders. Taxes and levies are paid to local admin-istration on these goods (Little, 2007; MoARD, April 2008).