78585 Trade Facilitation in the Caribbean: The case of customs performance June 2013 1 Authors: This material has been prepared by Jose Eduardo Gutierrez Ossio, Senior Public Sector Specialist, and by Martin Alessandro and Juan Jose Neyra, consultants, of the Public Sector Unit in the Latin America and the Caribbean Region of the World Bank. The Caribbean Knowledge Series is an occasional series that presents World Bank knowledge in an accessible format. It is meant to assist knowledge sharing across the region and trigger policy dialogue on topics relevant for the Caribbean This note was prepared to support the participatory policy dialogue in the context of the Caribbean Growth Forum (CGF). The CGF is an initiative facilitated by the Compete Caribbean Program, the Inter-American Development Bank, the World Bank and the Caribbean Development Bank, with the support of the Canadian International Development Agency, the United Kingdom’s Agency for International Development, CARICOM Secretariat, the University of the West Indies, the European Union and Caribbean Export. It aims to facilitate a multi-stakeholder dialogue to identify practical solutions for the growth challenge in the Caribbean. To learn more about the CGF methodology and progress in each Caribbean country visit: http://caribgrowth.competecaribbean.org/ Disclaimer: The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Executive Directors of the International Bank for Reconstruction and Development / The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Visit the entire “Caribbean Knowledge Series” collection at: http://worldbank.org/lac Design & Concept by Room Grupo Creativo | www.room.com.do Cover Photo: iStockPhoto 2 3 Trade Facilitation in the Caribbean: the case of customs performance 1. Overview Box 1: CATT’s methodology in detail. The Caribbean countries1 have highly open economies (World Bank & OAS, 2009). The trade Operationally, good practices are incorporated of goods and services and the inflows from into the CATT through the definition of 120 Foreign Direct Investments (FDI) represent large indicators that measure the gap between the proportions of their Gross Domestic Products current situation and good practices, scoring it (GDP), especially in English Speaking Caribbean from zero to 100%. Once indicators are measured, (ESC) countries2. Therefore, the proper functioning they affect seven intuitive dimensions (processes of the channels that connect them to the rest of the orientation, strategic thinking, control, efficiency, world, including Customs offices, is essential to the effectiveness, facilitation, and transparency) which performance of their economies. also are measured from zero to 100%. Finally, these seven dimensions are aggregated into two However, this note will show that, despite their high level dimensions: performance and practice. integration into the world economy, Customs This aggregation process enables the CATT team performance in the Caribbean countries is to present assessments outcomes through a bi- comparatively low. There is an inconsistency dimensional figure which, in ranks of 25 percent between the high openness of their economies points, classifies customs in four categories: world and the relative weakness of their customs class at the top, contender in the second quarter, operations. This note presents data from the progress in the third quarter, and underperforming Customs Assessment Trade Toolkit (CATT), which at the bottom. provides empirical evidence that processes do not meet adequate standards in terms of speed, predictability and transparency. This inconsistency These reforms are entirely feasible to implement, is partially explained by the lack of an effective and they would increase the competitiveness and complementarity between the use of Information growth of Caribbean economies. and Communication Technologies (ICT) systems and the actual operational practices. 2. Structure and methodology of this note There are at least two channels by which customs interventions impact the economy directly. First, This policy note is organized as follows. Section through the pass through of duties, taxes, and 3 presents evidence on the economic profile transaction costs to domestic prices, being this of the Caribbean countries to show their high effect particularly important in countries where integration to the world economy. Trade and most goods are imported. And second, through Foreign Direct Investments are they key aspects revenue collection, a key feature in countries with being considered in this regard. The World Bank’s a narrow fiscal base. Nevertheless, the impact World Development Indicators and the Caribbean of customs systems on the economy is broader Community’s (CARICOM) statistics are the main since they affect the capacity to attract investors, sources for this information. increase competitiveness and boost exports. This report will show that all these factors are critical for the Caribbean economies, and that their customs systems need improvements to meet those challenges. 1 In this report the Caribbean refers to the World Bank definition for this region, which includes these 15 countries: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname and Trinidad and Tobago. 2 In this report the English Speaking Caribbean (ESC) includes 12 countries: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines and Trinidad and Tobago. 4 Section 4 discusses the role of customs systems Tobago, trade represents over 100% of GDP, and for economic development. It analyzes the for The Bahamas, St. Vincent and the Grenadines performance of the Caribbean customs offices in a and Dominica, the values almost reach that figure. number of aspects (clearance times, predictability, (See Figure 1). and transparency) that the literature has identified as critical to promote competitiveness and In most Caribbean countries, this strong trade development. This analysis relies on data produced activity involves mainly exports of services (such as by the CATT. The CATT, used by the World Bank tourism)4 and imports of goods. The receipts from since 20113, is an integrated monitoring tool that tourism only represent 6% of the LAC exports, but considers the evidence provided by local teams for many ESC countries (Bahamas, Antigua and and compares it against good practices in the Barbuda, Grenada, Jamaica, St. Lucia, Barbados) field (See Box 1). These are defined in accordance this figure exceeds 50%. And while imported goods to international best practices recommended and only constitute 19% of LAC’s GDP, this proportion promoted by international organizations such is substantially higher for every Caribbean nation. as the World Customs Organization (WCO) and For several ESC countries, like Guyana, Antigua and the World Trade Organization (WTO). Thus, the Barbuda, Belize, St. Vincent and the Grenadines, CATT is a source of objective evidence about the St. Lucia and Barbados, the imports of goods even performance of the customs systems. exceed 50% of their GDP. This fact underscores the importance of customs performance for their Section 5 expands this analysis by focusing on how economies. the use of ICT can improve customs performance in those aspects. Proper use of ICT can reduce Intra-regional trade is low and concentrated on oil. clearance times, ensure process’ predictability and All countries buy at least 60% of their imports from decrease the risk of corrupt practices. However, outside the region, and some of them (like Trinidad CATT data shows that the Caribbean countries and Tobago and Belize) obtain almost all of their are not taking full advantage of the opportunities imports from outside the Caribbean. This lack of provided by ICT systems. As a result, the intra-regional trade is explained by the absence of effectiveness and the efficiency of their customs complementarity and by the low competitiveness offices scored poorly in the assessments. of their economies (CARICOM, 2010)5. The United States is by far the main trade partner of Section 6 summarizes the lessons learned by the the Caribbean, denoting the influence of the US analysis of these data. Finally, the conclusions economic cycle on these countries’ performance. section presents some policy recommendations to The Caribbean economies also rely heavily on deal with the inconsistency between high economic Foreign Direct Investments. Net inflows of FDI openness and low customs performance in the represent less than 3% of the LAC’s GDP, but Caribbean countries. this figure is higher for most Caribbean nations (Trinidad and Tobago, Haiti, Jamaica and Suriname 3. Profile of the Caribbean are the exceptions). For small economies, like the economies. ones of St. Kitts and Nevis and St. Vincent and the Grenadines, FDIs exceed 15% of GDP (Chart 5 in Trade represents 44% of the GDP of the entire the Appendix). Thus, we can observe how open Latin American & Caribbean (LAC) region, but for the Caribbean countries are by combining the two the Caribbean countries this value is substantially dimensions of trade and FDIs as proportions of higher. This is especially true in most ESC GDP (Figure 2). When compared to the LAC region economies: for Guyana, Antigua and Barbuda, as a whole, the Caribbean countries, and especially Belize, Barbados, St. Lucia and Trinidad and the ESC nations, depend substantially more on trade and on foreign investment. 3 For detailed information about the CATT, visit www.customscatt.org. 4 Unlike the exports of goods (which only represent, on average, 19% of the total exports in the Caribbean countries), the exports of services are not registered and controlled by customs systems. However, to provide these services companies (like hotels) usually need to import goods, which again highlight the relevance of the customs offices for their economies. 5 The low regional integration can also be influenced by the cumbersome customs procedures in these countries, which can act as an entry barrier for smaller, region-based companies. 5 Source: calculated using merchandise trade and trade in Source: calculated using data from the World Development services data from the World Development Indicators. For Indicators. For certain countries, 2010 data was used. certain countries, 2010 data was used. Their fiscal situation is also dependent on trade, and open economies that rely heavily on trade and due to their reliance on tariffs for the collection foreign investment, like those of the Caribbean of revenue. Although in the last few years several countries, these dimensions are especially relevant countries have reduced their dependence on taxes for their economic development6. on international trade, they still constitute a higher share of total revenue than in the LAC region The first factor, clearance times, requires as a whole. In Bahamas, taxes on trade exceed minimizing the burden associated with customs 50% of all government revenue, and this figure is procedures, by simplifying the operations involved approximately 25% in Belize and Grenada (Chart in the movement of goods across borders. The 6 in the Appendix). This is partly explained by the notion of “trade facilitation”, with its emphasis on fact that all Caribbean countries have higher mean the reduction of time-consuming and unnecessary tariff rates than the LAC region taken as a whole, operations (Grainger 2011), is similar. It has with particularly high rates in Bahamas, Barbados, been shown that elapsed times at the borders Antigua and Barbuda, Suriname, St. Kitts and Nevis significantly reduce international trade (de Jong and Trinidad and Tobago (Chart 7 in the Appendix). and Bogmans, 2011). Nowadays, when not only the This high reliance on trade taxes may reinforce a trade of goods but also their production is global perception of customs offices simply as revenue- (Maskin, 2010), ensuring ‘just in time” delivery of collection agencies, instead of seeing them as key inputs, capital goods, and goods is especially actors for the smooth functioning of trade. critical to ensure efficiency and competiveness7. Delays are costly to investors, so they prefer to 4. The role of Customs in economic locate in countries with short customs procedures. development Furthermore, a country’s exports can also be significantly increased by a reduction in clearance Over time, three factors have been identified as times (Djankov, Freund and Pham 2010). critical for customs administrations to promote economic competitiveness and development: clearance times, predictability and transparency (International Chamber of Commerce, 1999; OECD, 2009; Shujie and Shili, 2010). Economic losses companies suffer due to delays at borders and to the lack of transparency and predictability can even exceed the costs of tariffs (Engman, 2009). In small 6 In this policy note we are not considering the differential impact that trade can have on a country’s inequality levels (see Kremer and Maskin 2006). This is a broader topic, which exceeds the objectives of this note. But for countries with already open economies, poor customs performance (which increases transaction costs for imported merchandise) can disproportionately affect lower income individuals, who destine a larger share of their wages to the consumption of goods. 7 Logistics performance is critical in a context when Central Banks are limited to depreciating the local currency to strengthen a country’s competiveness. 8 During the CATT assessments it was evidenced as a common practice the rerouting of lanes by Customs officers when entries were selected for green lane (i.e. immediate release) to red lane without registering decisions and outcomes in the system. 9 The table presents a selection of the main CATT indicators related to clearance times. The same procedure was applied in Tables 2 and 3. Countries are not indicated due to the reserved nature of CATT data. 6 The CATT assessments in the Caribbean show that the indicators related to clearance times are underperforming in comparison with good practices, as well as with the average for Latin America. In addition, their negative effect over the economy is aggravated due to the fact that nearly 100 percent of entries are subject to physical examination8. The following table presents a summary of the measurements of clearance times in six Caribbean countries9. Table 1. Caribbean customs performance in clearance times10 CATT  indicators   Country   Country   Country   Country   Country   Country   LA   Good   1   2   3   4   5   6   Practice   %  of  imports   36%   29.43%   14.51%   75.92%   NA   0.47%   82.67%   70%   released  in  less  than   24hs   Average  number  of   5.55   NA   12.11   1.76   NA   3.19   2.55   Closest  to   days  to  import   0   %  of  imports   0%   3.43%   NA   1.24%   0%   NA   13.05%   50%   processed  in   advance  to  goods   arrival   Average  time  for   37.68   66   NA   128   NA   40.13   27.21   8  hours   imports’  physical   inspections  (hours)   %  of  imports  subject   75   84   100   100   35.21   41.15   14.87   Closest  to   to  physical  or   0   documentary   inspections     Source: CATT. NA indicates that the value was not available. The second factor, predictability, is also critical to about how the customs will decide, they may be improve a country’s competitiveness. In general, discouraged to even operate in a certain country. On institutional uncertainty has been found to the contrary, when formal processes are followed significantly reduce trade by increasing transaction and delivery is consistent and predictable, costs costs (Büge 2010). In the case of customs offices, are reduced and competitiveness is enhanced. erratic or unreliable procedures increase costs Caribbean customs offices are performing poorly by requiring the maintenance of large “safety in terms of predictability, as shown in Table 2. In stocks” on the part of businesses, who need to fact, almost none of the indicators associated to cover from unexpected decisions. These costs predictability (in the sense that they show how are eventually transferred to the consumer, and consistent and regular are the processes in the therefore can be regarded as a hidden tax (and eyes of the traders) present positive values in any without the government collecting any revenue of the countries. from it). Moreover, when businesses are uncertain 10 Name of countries is not disclosed because assessed countries did not provide their non-objection to disclose it. 7 Table 2. Caribbean customs performance in terms of predictability. CATT  Indicators   Country   Country   Country   Country   Country   Country   LA   Good   1   2   3   4   5   6   Practice   Existence  of  a   No   No   No   No   No   No   No   Yes   single  window   mechanism  for   clearing  import   goods   Implementation  of   No   No   No   No   No   No   No   Yes   the  Authorized   Economic   Operators  Program   (WCO)     Legal  processes  are   No   No   No   No   No   Yes   No   Yes   handled  by   specialized  courts   Existence  of  a   No   No   No   No   No   No   No   Yes   maximum   allowable  time  for   clearance   procedures     Source: CATT The third critical factor, transparency, is associated tax on the final value of the products. The presence with the two previous ones. Traditionally, longer of corruption also reduces the flow of foreign direct trade times are associated with higher levels investments (Wei, 1997). Providing traders with of trade-related corruption because traders clear and accessible information on the required have an incentive to make side-payments to documentation, for example, contributes to ensure speed up procedures (Shepherd, 2010). Lack of transparency in the process. Caribbean customs predictability is also tied to a higher risk of corrupt are also underperforming in terms of transparency, behavior, because it creates an uncertain context as shown in Table 3. Most countries do not publish under which those practices can occur.. Arbitrary adequate and accessible information, and do not decisions in the valuation or inspection of goods survey regularly about corruption perceptions. can disrupt logistical flows and increase transaction costs, leading again to the imposition of a hidden 8 Table 3. Caribbean customs performance in terms of transparency.   Country   Country   Country   Country   Country   Country   LA   Good   1   2   3   4   5   6   Practice   Publishes  changes   No   No   Yes   No   No   Yes   Yes   Yes   in  law,  new   regulations  and   programs   Measures  the   No   No   No   No   No   No   Yes   Yes   corruption   perception  by   using  surveys  or   equivalent   systems   Allows  users  to   Yes   Yes   No   No   No   Yes   Yes   Yes   view  the  status  of   imports/exports   declarations   online   Publishes  tariff   No   No   No   Yes   No   Yes   Yes   Yes   classification  and   valuation  rules     Source: CATT The economic literature argues that the three 5.1 Use of ICT for Customs factors covered in this section (clearance times, Management and Development predictability and transparency) can be improved by the adoption of technologies that make It is supposed that, with the support of ICT customs procedures shorter, more consistent systems, customs offices will enhance their and less arbitrary. The next section will analyze in management and development, and will also greater detail how these six countries have been impact positively their countries’ competitiveness implementing ICTs in their customs systems. through the improvement of the three critical factors of clearance times, predictability, and 5. Customs Performance in the transparency. The idea that the implementation Region of ICT systems should help customs offices to perform more effectively and efficiently is widely Beyond clearance times (i.e., facilitation), shared11. For instance, ICT systems are crucial to predictability (i.e., process orientation) and systematize customs operating procedures, and transparency, the CATT measures the dimensions also to provide to stakeholders more transparency of strategic thinking, control, efficiency, and of their enforcement by making customs decisions effectiveness. Since the CATT is evidence based, more predictable, avoiding in-person interactions. proper roll out of ICT systems is a core aspect to Information systems also support data analyses measure indicators and dimensions properly, as that allow customs to implement risk management information coming out from ICT systems will systems to strengthen control and facilitate trade. evidence the way Customs operations perform. Nevertheless, proper roll out is not only about the existence of information systems but rather about the effective complementarity between the use of ICT systems and operational practices. 9 The next section will show the results of the CATT submitted to the customs office electronically evaluations in six Caribbean countries. Since before the cargo arrives at the customs office even the results of the CATT evaluations on clearance though most of the systems are capable to accept times, predictability and transparency have been the cargo-manifest electronically. The lack of this reported in section 4 of this note, the next section good practice implies that it is hard to implement will highlight the results on the remaining four facilitation measures based on risk assessment. In CATT dimensions: control, efficiency, effectiveness addition, critical modules as transit and warehouse and strategic thinking in light of the ICT systems’ (including the control of abandoned goods) have implementation in the Caribbean. not been activated. This situation reinforces the weak position of the customs administrations to 5.2 ICT versus Practices in the provide facilitation measures based on effective Caribbean control mechanism. Implementing ICT systems has become one Why have the Customs offices not activated of the few modernization aspects that seem to such modules? A possible answer is the lack of a have a general consensus among practitioners. Standard Operating Procedures (SOP) Manual Nevertheless, as this note shows, modern customs formally approved and disseminated, as well go beyond ICT systems’ implementation. ICT as other important measures and practices to systems become a powerful tool only when they ensure a quality of services. SOPs constitute the are complemented effectively with good practices backbone of any Customs office. Without SOPs and a set of economic incentives (not necessarily there is the risk of improper ICT roll out due to monetary incentives)12. the fact that no “straitjacket” exists to make the activation of the overall modules mandatory. SOPs First, as it was indicated, we will look at the level also make Customs decisions more transparent of integration and sophistication of ICT systems and predictable. The CATT evaluations found that in Caribbean countries through the analysis of Caribbean customs offices follow international the results of selected CATT indicators. The standard regulations on issues such as tariff CATT evaluations found that, in the six countries classification, valuations, rapid release guidelines, assessed, only one of them does not have an etc.; however, none of them were applied integrated information system working. Most of properly. Therefore, in some cases, the issue is these countries are using some of the three versions not the procedure, which sometimes exists, but its of the ASYCUDA (Automated System for Customs implementation and enforcement. In order to tackle Data) developed by UNCTAD. Table 4 presents this issue, a set of economic and legal incentives the main features of the core Customs information have to be in place to make customs officers systems’ implementation in the selected Caribbean fully accountable. For example by strengthening countries. links between work-oriented training and career development; introducing monetary and non- As table 4 shows, critical aspects for customs monetary incentives; systematic and transparent control and performance have not been rotation policy; HR systems with complete implemented properly. The most illustrative case performance records, and the authority of customs is the low percentage of cargo manifests that are management to take disciplinary actions. 11 Many international organizations including the World Bank, the Organization for Economic Cooperation and Development (OECD), the World Customs Organization (WCO), the World Trade Organization (WTO), Regional Development Banks such as the Inter-American Development Bank (IDB) and Asian Development Bank (ADB) and the European Union (EU) have recommended the use of ICT systems to improve customs processes, facilitate trade and therefore enhance countries’ competitiveness. See Lewis (2009) in World Customs Journal. 10 On control mechanisms, the effect of the ICT Finally, a critical aspect is that Customs in the systems has been also limited. The CATT evaluations region cannot envision better scenarios in the show that only in three of the six countries there future to ensure continual improvements. The is a historical database containing information of CATT data evidenced that ICT systems have been all customs declarations for the purpose of risk implemented only for revenue purposes, being tax assessment. However, in none of them the risk and duties collection the only one strategic goal assessment analysis is done systematically. None that government authorities pursue. Most countries of these countries use modern customs control lack a strategic plan, a long term technology plan practices for selectivity control and risk assessment or a modernization plan, and only half of them based on risk profiling. Despite the tendency to identify quantifiable performance measures. inspect a high percentage of all declarations, the Optimizing performance, therefore, has not been rate of detection in the inspections is very low a central priority. Table 6 shows the main results (less than 1% for two countries and 12% for the regarding strategic thinking. outperformer country, which is still a low rate). The CATT allows us to graph the overall This is clearly a signal that the inspections are not performance of these six Caribbean countries well targeted being the most visible outcome the compared to a group of selected Latin American high discretionary power of Customs officers. On countries14. As Figure 3 shows, the Caribbean the side of the trading community high transitions countries are underperforming in the two costs come up in dealing with Customs. Tensions dimensions (performance and practice) in which between Customs and the trading community can all of the indicators are grouped. None of the arise because of the lack of an effective feedback Caribbean customs reaches the “contender” mechanism13. Table 5 summarizes the situation category (50% of good practices). of good practices that should complement ICT systems in these countries: Figure 3: CATT results comparisons between Caribbean and Latin-American countries Source: CATT. 12 There are some basic necessary conditions that have to be in place before, during and after implementation of any ICT system. First, it is crucial to have strong political will to implement ICT changes; second, it is necessary to identify a champion to lead the process, explain its benefits and deal with people opposed to the changes; third, it is crucial to address with customs staff the cultural change that implies going from a culture of physical records on paper to a culture of virtual records and electronic entries; fourth, it is very important to ensure the availability of financial resources to complete implementation of the ICT systems and to provide staff the necessary training to facilitate its use and maintenance; fifth, a legal reform has to accompany the implementation of ICT systems to provide support and sustainability to the changes; and sixth, the implementation of the ICT systems has to be part of a broader technology plan in which a clear vision is outlined for the different phases of its implementation and its role within the strategy plan of the institution is explained. The analysis of these conditions is beyond the scope of this technical note. 13 This is also extensive to the internal feedback mechanism 14 Countries were selected to be a representative sample for Latin America regarding the size of the country (i.e. big, middle, and small). 11 Table 4: CATT Results on ICT indicators CATT  indicators   Country   Country     Country     Country   Country   Country  6   LA   Good   1   2   3   4   5   Practice   %  Border  O ffices  w ith   0   92.3   100   92   42.86   100   90.11   100   Communication  services   24x7   Level  o f  integration  of   Total   Mostly   Total   Partial   None   Mostly   Mostly   Total   core  customs  IT     integrated   integrated   integrated   systems   Transmit  and  receive   None   None   Manifest  +   All   None   All   75%  All   All   data  electronically  u sing   declarations   EDI   Access  to  institutional   47.18   100   100   17   0   11.73   93.76   100   email,  intranet  and   internet  (%  staff)   %  A dministrative   25   NA   37.5   54.54   11   37.5   52.86   100   processes  controlled  by   any  software   %  of  cargo  m anifests   100   NA   100   100   0   3.14   86.39   100   presented  to  the   Customs  office  in   electronic  format   %  of  cargo  m anifests   NA   NA   NA   18.03   0   0.44   67.22   100   submitted  to  the   customs  o ffice   electronically  in   advance     Operates  a   No   No   No   Yes   No   No   25%  Yes   Yes   computerized  systems   for  transit  control   Customs  office  can   No   No   No   Yes   No   No   25%  Yes   Yes   generate    report  of  all   transport  documents   considered  abandoned   Average  days  goods   NA   NA   NA   1.27   NA   NA   229.3   1   considered  abandoned   remain  in  that  state   before  being  disposed   of   Uses  selectivity  based   No   No   No   No   No   No   50%  Yes   Yes   on  automated   compliance   measurement  and  risk-­‐ assessment  and   profiling  systems   %  of  economic   NA   3.4   NA   2.1   NA   NA   52.71   100   operators  w ith  risk   profiles  defined   %  of  economic   NA   3.4   NA   0.074   NA   NA   10.04   Closest   operators  w ith  H IGH   to  0   risk  profiles     Source: CATT. 12 Table 5: CATT results on Good Practices Indicators CATT  indicators   Country   Countr Countr Countr Countr Countr LA   Good   1   y  2   y  3   y  4   y  5   y  6   Practice   Procedures  Manual                   Applies  the  WCO  Harmonized  System   Yes   Yes   Yes   Yes   Yes   Yes   Yes   Yes   Convention   Applies  the  WTO  Valuation  Agreement   Yes   Yes   Yes   No   Yes   Yes   Yes   Yes   The  Customs  office  implements  a  Single   Yes   No   Yes   Yes   Yes   Yes   75%   Yes   Administrative  Document  (SAD)   Yes   Applies  the  WCO  Immediate  Release   No   No   No   Yes   No   No   50%   Yes   Guidelines   Yes   Defines  special  procedures  for  express  cargo   NA   No   Yes   No   Yes   No   Yes   Yes   (Courier)   Effective  Feedback  Mechanisms                   Exists  a  mechanism  to  capture  process   No   No   No   No   No   No   75%   Yes   feedback  from  internal  users   Yes   Exists  a  mechanism  to  capture  process   No   No   No   No   No   No   75%   Yes   feedback  from  external  users   Yes   Implements  customer  satisfaction  surveys   No   Yes   No   No   No   No   75%   Yes   for  external  trade  operators   Yes   Conducts  employee  satisfaction  surveys   No   No   No   No   No   No   Yes   Yes   regularly   Procedures  in  the  Customs  web  page                   %  of  core  customs  procedures  and   0   15   33.34   16   0   0   99   100   legislation  that  is  loaded  in  the  Web  page   Makes  tariffs  and  duties  available  on  the   No   Yes   No   Yes   No   No   Yes   Yes   web  page   Customs  has  an  on-­‐line  support  system  for   No   No   No   No   No   No   50%   Yes   external  trade  operators   Yes   Customs  has  an  on-­‐line  statistics  and   No   No   Yes   Yes   No   No   50%   Yes   reporting  system  for  external  users   Yes   Complaints  Office                   Existence  of  a  complaints  office  within  the   No   No   No   No   No   No   50%   Yes   Customs  office   Yes   Complaints  lodged  per  month  by  external   NA   NA   NA   0.8   NA   2.33   14.72   Closest   operators  per  thousand  employees   to  0   Appeal  Mechanisms                   %  of  judicial  processes  that  were  resolved  in   NA   84.36   NA   60   0   42.31   40.56   70   favor  of  Customs  (one  year)   Average  time  to  resolve  legal  process   NA   5   NA   24.6   1   1.08   51.80   6   (months)   %  of  administrative  processes  that  were   NA   11.03   NA   0   70.58   98.61   66.17 70   resolved  in  favor  of  the  Customs   1   Average  time  to  resolve  an  administrative   NA   NA   NA   NA   68.94   39   184.6   15   appeals(days)     Source: CATT. 13 Table 6: CATT results on Strategic Thinking Indicators CATT  indicators   Country   Country   Country   Country   Country   Country   LA   Good   1   2   3   4   5   6   Practice   Customs  office  applies  Balanced   NA   Yes   No   No   No   No   75%   Yes   Scorecard  or  equivalent  methodology   Yes   Customs  office  has  a  documented  and   Yes   Yes   No   No   No   No   25%   Yes   approved  strategic  plan  for  at  least  5   Yes   years   Strategic  plan  identifies  quantifiable   Yes   Yes   Yes   No   No   No   75%   Yes   performance  measure  for  targets   Yes   Customs  has  a  documented  long  term   No   No   No   No   No   No   25%   Yes   technology  plan   Yes   Customs  has  a  reform  and/or   Yes   No   No   No   No   No   75%   Yes   modernization  program   Yes   %  of  workforce  trained  in  their  areas  of   NA   38.5   82.1   31.96   0   56.8   53.7   100   responsibility     Source: CATT. 6. Lessons learned This report has presented evidence on a number all these factors increases transaction costs and of aspects related to the Caribbean countries’ greatly affects the performance of the economy, customs systems. This section systematizes the especially in countries (like those of the Caribbean) note’s key messages: where trade plays such a critical role. Due to the large proportion of goods that are imported The Caribbean economies are highly open, consumers’ purchasing power is also affected by but their customs systems are not up to the these extra costs. Higher prices disproportionally challenge. Almost all Caribbean countries, and affect lower income households that destine a especially the ESC countries, rely heavily on trade larger share of their income to the purchase of and foreign direct investments for the functioning goods. of their economies. However, one of the key channels through which these interactions occur, Customs offices may be performing additional the customs offices, performs poorly in terms of functions, which in a context of scarce resources clearance times, predictability and transparency. can also distract them from performing their core The CATT data shows that elapsed times are long, functions. In some of these countries, customs processes are not consistently followed and the are working to facilitate the inflow of foreign required information is not easily accessible to the investments by, for example, implementing tax traders. and duty exemptions for investors. In a globalized context in which not only trade but also production This inconsistency affects the competitiveness has been internationalized (Kremer and Maskin, and development of these countries. There is a 2006), this is an important role, especially because large body of evidence that indicates how these Caribbean countries rely on foreign investments factors impact a country’s competitiveness. for their tourism industry. However, resources used High clearance times impose costs on trade and for this task are diverted from the customs core discourage the attraction of foreign investment. function of controlling the flow of goods in a timely Inconsistent procedures require the maintenance and appropriate manner. This can partly explain of large “safety stocks”, something that may not their low performance in the dimensions previously be possible for new entrepreneurs or for smaller discussed. companies15. Lack of transparency, in addition to acting as a hidden tax, unfairly discriminates against those who play by the rules. The combination of 14 The main strategic function that could be Modernization efforts are should not be limited evidenced was the tax and duties collection, exclusively to ICT implementation. Most of the while important functions such as policy advisor, Caribbean countries have been implementing trade facilitator and security provide appear to ICT systems, or are in the process of upgrading be neglected. Although the role of Customs as previous versions or seeking new integrated revenue collectors contributes to fiscal stability, solutions. However, the CATT data show that, focusing only on revenue collection has distorted to become a world class customs, government other core Customs functions (Shujie and Shili, authorities need to pay attention to the adoption 2010). As policy advisors, Customs in the region of good practices in several key dimensions that cannot effectively support policy decisions by complement the use of ICT systems. ICT adoption is providing accurate and on-time trade statistics; as a requisite for a modern customs, but it needs to be policy implementers, they lack standard operating supplemented by improvements in other aspects procedures to make their decisions predictable; too. In particular, the absence of strategic thinking as trade facilitators, they lack effective facilitation (in the form of plans, modernization programs or measures; and as security providers, they lack even quantifiable indicators of performance) hurts risk management systems based on electronic the ability to make most of the technological tools submission of cargo information in advance and being adopted. risk profiling of authorized operators. 15 In this sense, poor customs performance can act as an entry barrier to new competitors, reinforcing the region’s lack of economic diversification and dependence on few industries. 15 Conclusions efficiency, reduce costs and decrease clearance times. Although this cannot be an immediate goal, advancing with regional agreements to consolidate Based on the lessons learned from this study, there and streamline trade processes would be a positive are a number of ways by which the Caribbean first step in this direction. countries can improve the performance of their customs systems in all their core roles (policy • Establish alliances with the private sector. The advisor, policy implementer, trade facilitator and private companies are key partners to ensure the security provider). Implementing these changes, smooth and predictable operation of customs which are all feasible and realistic, would boost procedures. Their collaboration is needed to the competitiveness of the Caribbean economies alert about problems that need to be solved, and and solve many of the problems detected in this they have a strong interest in the reduction of report. These recommendations can be divided in the high transaction costs associated with these (a) policy changes and (b) institutional reforms. customs systems. It would be important to build mutual trust and cooperation in these interactions. The following are the main policy changes that Working together, it is likely that clearance these countries could adopt: times, predictability, transparency and therefore competitiveness would be improved. • Reduce the dependence on tariffs for the government’s total revenue. The high reliance of In addition to these policy changes, we can identify Caribbean countries on trade taxes reinforces the a number of institutional reforms that would idea that customs offices are just revenue-collection contribute to enhance the performance of these agencies. Thus, their officials have incentives to customs systems in all their core roles: simply concentrate on raising revenue, instead of focusing on their key role in trade facilitation. A • Above all Customs offices in the Caribbean reduction in tariffs (compensated for example by region could prioritize the completion, roll out greater emphasis on internal consumption taxes) and dissemination of SOPs. Without SOPs it is hard would also reduce the incentives to smuggle to conceive these public offices either as modern goods or to bribe customs officials. This increase Customs or traditional ones. Within the public in transparency would lower the transaction sector no entity needs to operate through the costs involved in trade, benefiting the Caribbean definition and implementation of basic rules of the producers and consumers. game as a Customs office must do. Trade transitions are complex and in some cases they imply risks for • Clarify the role of the customs offices. Customs national security, sanitary status, revenue, health offices in the Caribbean usually deal with issues and other related aspects. This is why they need to that should be the responsibility of the tax be regulated. Nevertheless the regulatory system collecting agency. Customs, for example, have to should be simple and transparent to improve the implement the numerous tax exemptions designed flow of trade performance. for the attraction of foreign investment. But these added responsibilities divert resources from the • Promote continual improvements by customs core functions, hurting their performance. strengthening the strategic thinking. Performance Locating these tax enforcement responsibilities in cannot be improved in a sustainable way if customs the appropriate government agencies would allow authorities focus only on day-to-day operations. the customs to focus on their essential missions. CATT indicators show that the Caribbean customs are lagging behind in terms of defining strategic • Promote regional agreements to consolidate goals for their agencies. Setting objectives and customs processes. The Caribbean is composed defining the best ways to achieve them are critical of multiple islands, most of them with small actions to consolidate a culture of permanent populations. Establishing a common entry port (a improvement and reform. Moreover, establishing hub) and controlling the transits to the different measurable indicators for these goals would create islands would contribute to improve trade incentives to meet adequate standards of timely 16 and predictable processes. One critical aspect • Introduce productivity incentives to promote affecting the strategic thinking is the lack of training better performance. The CATT can serve as a on core technical themes such as classification, useful tool to collect objective evidence about valuation, procedures, and rules of origin. The how different sections within a customs office CATT evidenced that most of the Customs officers are performing. With these data, and with the were not trained on those themes in the last 10-15 establishment of clear goals, it would be possible years. to create incentives that foster the achievement of measurable results. For example, making • Ensure that ICT information is available to the training courses more relevant to work activities, decision-makers. To serve as a proper policy measuring the knowledge internalized by staff on advisor, customs need to be able to provide those courses and linking training with promotions timely and accurate data to the policymakers. could be a way to provide the right incentives to The current situation, in which only the IT staff promote the use of ICT systems. Sections that meet has the capacity to access these data, limits the the proper standards in terms of predictability or ability to effectively use the data produced by the clearance times could be rewarded accordingly. customs in the decision-making process, and also To provide the flexibility needed to achieve these as an instrument to achieve accountability and goals, granting greater autonomy tor the customs transparency. Moreover, ensuring a broader access offices could also be considered. to this information would foster a more evidence- based approach to policymaking and impact in the implementation of better and more accurate customs controls. • Establish the procedures and the incentives to fully seize the potential of ICT systems. To act as an adequate policy implementer, the adoption of ICTs can only have significant effects if complemented by other measures. Among them we can mention: (i) the importance of training to address the cultural change and to avoid natural reluctance to use the new systems; (ii) Link training on systems with staff promotions and salary increases; (iii) a legal reform to accompany and validate many processes and procedures introduced by the systems; (iv) name a champion with strong political support to implement and follow up on the dissemination of the system; (v) availability of resources to complete the implementation of the system, provide maintenance and monitor future developments, (vi) provide incentives for customs staff to make research with the information provided by the system, i.e. grant recognition to best research work and implement the recommendations of their findings and (vii) ensure that ICT systems are part of a bigger Strategy and modernization plan of the institution since that will force customs management to provide a vision and a general equilibrium view on its implementation. 17 References OECD, Organization for Economic Cooperation and Büge, Max (2010). “Institutions, Uncertainty & the Intensive Development (2009). 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