Trade liberalization and customs revenues : does trade liberalization lead to lower customs revenues? -- the case of Kenya

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: (1) trade volumes; (2) import duty exemption policy and administration; (3) the number of items classified as duty-free; (4) average import duty rates; (5) special duty rate regimes for oil and major agricultural products; and (6) 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 shows 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. (Author abstract)