Formalizing Informal Cross-Border Trade: Evidence From One-Stop-Border-Posts in Uganda

Abstract

Informal trade is pervasive between sub-Saharan African countries. This study examines the relationship between trade informality and trade costs. More specifically, using an augmented gravity model, I exploit time and custom point variation in the introduction of a border facility which is aimed at reducing border delays and corruption. I find a significant decrease in trade informality in the second quarter after the introduction of an OSBP, with indications that this change is mainly driven by a fall in large-scale informal trade. I examine whether this result can be explained by formalization of individual cross-border traders by using first-hand data set of traders operating at two border towns between Kenya and Uganda. I find that few traders formalize despite the reduced costs associated with the introduction of the border facility, and that trade costs and border crossing choices are not only associated with export restrictions, but are also gendered.