A Behavioral Perspective on Informal Cross-Border Trading

Informal cross-border trade (ICBT) involves trade that wholly or partly evades payment of duties and charges and is a highly prevalent business practice in developing countries. We focus on the persistence of ICBT despite government interventions to increase formalization, and explore how informal traders’ behaviors influence their appreciation or adoption of interventions for formalization. We argue that the potential for formalizing ICBT depends on how the informal traders evaluate the prospects of remaining informal versus changing to formality. Based on a qualitative case study of the introduction of a simplified trade regime (STR) at the Busia trading post between Uganda and Kenya, we find that informality persists due to a supportive, informal social network, skepticism of government/state programs, and perceived superiority of informal. We contribute by explicitly acknowledging the role of socio-economic behavior in explaining informality persistence even when simple formalization interventions are introduced.