Trade Policies, Smuggling, and the Informal Job Market in Francophone Africa. The Case of Pharmaceuticals, Used Cars and Petroleum Products

Senegal - 1 June 2016

Internationalization has become an important feature of the informal sector in West Africa, in the last few decades. Yet, official trade and financial data provide a very misleading picture of the patterns and magnitudes of cross border trade in the sub-region. This chapter examines informal trade in West Africa, focusing on Senegal and Benin. Informal trade is flourishing in West Africa, reflecting both porous boundaries, strong ethnic ties transcending these borders, as well as lousy national trade policies, which deter formal trade flows and create incentives to engage in smuggling. This chapter illustrates the complex interplay between formal and informal aspects of international trade transactions in West Africa. The bulk of regional trade is controlled by the large informal actors and uses an important network involving mostly small informal businesses (Golub and Mbaye 2009, Golub 2012). Large informal enterprises are intimately involved throughout the distribution process, and interact in complex ways with formal importers and shipping companies. Some locally produced commodities such as petroleum in Nigeria, as well as imported goods such as used cars and pharmaceuticals are mainly distributed in West Africa through informal circuits. Connections between smuggling and the informal sector are quite large and have huge implications on employment and living standards.

The informal sector is overwhelming in West African economies, with a share of GDP ranging between 50 and 70% and share of employment peaking up to more than 95%. While a growing body of literature is covering many aspects of informal labor force and household enterprises, very little is known about the bigger actors of the large informal sector spectrum, or the deep interrelation between the various segments of this sector and the formal one, and how they affect jobs and living standards. When they exist such studies use either the 123 survey data base (Gonzalez and Lamanna 2007), or World Bank Investment Climate Assessment survey data bases (Bohme and Thiele 2014). Our view is that neither of the used datasets can allow a comprehensive explanation of this complex interplay in Africa. ICA surveys deal mostly with formal firms, and informal firms as well as their relationship to formal ones are only marginally covered both in their samples and in the survey instruments. Regarding 123 surveys, they mostly cover small family enterprises, with very few bigger firms included in their samples. In this paper we use qualitative and quantitative approaches to yield a better understanding on the types on interaction informal and formal firms are developing in Francophone Africa.
The relationship between formal and informal sectors are quite complex. The two sectors are sometimes highly complementary and interact to produce goods or services, and sometimes they can engage in a very strong competition with important implications on poverty, via low wage jobs. In this chapter, we analyze three cases of fairly stiff competition between formal and informal sectors: trade in pharmaceuticals, trade in used vehicles and trade in smuggled petroleum products. The reminder of the chapter is organized as follows: section 2 highlights the competing trade networks between the formal and the informal in the drugs industry; section 3 examines the case of smuggled gas distribution; section 4 studies the case of imported used cars. Section 5 presents some descriptive statistics from our survey data, as well as an econometric analysis of the determinants of such competition. Section 6 concludes.