DDP 764. Graham Glenday. "Trade Liberalization and Customs Revenues: Does trade liberalization lead to lower customs revenues? The case of Kenya." June 2000. 24 pp.

Kenya implemented a phased trade liberalization program starting in 1987. After an initial replacement of quotas with tariffs, tariff rates were systematically rationalized and reduced during the 1990s. Interestingly, between the early 1990s and the mid-1990s, the average import duty rate was approximately halved, but the revenue yield about doubled. The major shift in trade and customs collections occurred over 1993 and 1994 when import licensing and foreign exchange controls were removed, and a comprehensive pre-shipment inspection program was implemented along with other customs management reforms. This study uses detailed customs data from 1989 to 1999 to analyze the factors that contributed to the change in customs revenue yield. It investigates the impacts on revenue yields from year to year of: (i) trade volumes; (ii) import duty exemption policy and administration; (iii) the number of items classified as duty free; (iv) average import duty rates; (v) special duty rate regimes for oil and major agricultural products; and (vi) shifts in the composition of imports and exemptions between different import duty rate groups as the relative gross-of-duty prices of imports changed. To investigate the effects of changes in customs administration and importer compliance, the changes in revenue yield are predicted from base periods in terms of changes in trade, exemptions, and import duty rates. The residual unexplained increases in revenue yield are correlated with changes in trade and administrative policy, including the introduction of pre-shipment and secondary destination inspection programs and other customs control programs. This analysis show that improved administration and compliance raised import duties from at least one-third to over two-thirds higher than could be explained by changes in trade, exemptions and import duty rates.

Keywords: trade liberalization, import tariff rate reductions, customs revenues, customs reform, Kenya, pre-shipment inspection, customs administration

JEL Codes: E62, F13, H26, O23

Graham Glenday is a Fellow of the Institute and Director of the Public Finance Group at the Harvard Institute for International Development and is currently an Advisor to the Ministry of Finance, Kenya.

This paper was prepared under the Equity and Growth through Economic Research/Trade Regimes and Growth Cooperative Agreement No. AOT_0546_A_00_5073_00 of the Division of Strategic Analysis, Office of Sustainable Development, Bureau for Africa, U.S. Agency for International Development (USAID). Views and interpretations in this paper are those of the author and do not necessarily reflect the view of the U.S. Agency for International Development.