The cost of smuggling
RECENTLY, I was invited by the National Defense College (NDC) to speak on smuggling. I was happy to accept the invitation because, when NDC started its journey, I was one of the members of the board of governors (as VC of JU) and also attended the inaugural function.
Our expectations at that time were that NDC would grow to be an internationally reputed institution of excellence. To be honest, I found our expectations coming true with more than half of about fifty participants (high level military and civil officials) coming from abroad and gradual improvements in the infrastructure.
Talking about smuggling is just like talking about the lost revenues of the government. The determinants of smuggling are many but few should be cited: price differentials, misaligned exchange rate, high transaction and logistic costs of trade, underdeveloped check posts and corrupt, and weak law enforcing agencies.
Most of our illegal trade is with India through the porous border. In fact, roughly 70 percent of the total imports from India come through land ports in western and eastern zones to convey the message that most of the smuggling between Bangladesh and India is through land ports.
"Bootleg smuggling" generally dominates the discourse on smuggling. Small quantities of commodities are carried across the border through head loads, bicycles, small boats, etc. Not only Bangladesh, but other countries are also scared of bootleg smuggling of alcohols, tobacco, drugs etc. If one could carry some cartons of cigarettes from US to Canada, the costs of travel could easily be recouped. Or a few bottles of wine from France to England might allow a comfortable stay in London. This is "bootleg smuggling" -- small in quantities per head but large number of heads. To contain such illegal trade, the best way is to lower import duties and domestic taxes so that the traders find no incentive to engage in such kind of trade.
Historically, Bangladesh's illegal imports from India have hovered around 30 times more that its illegal exports to India. The trend in legal trade is no different. Theoretically speaking, a liberalisation of trade through rationalisation of tariff structure and lowering of customs duties should reduce smuggling. In fact, it has done so over the years.
Now, illegal trade is reported to constitute roughly 60- 70 percent of the legal trade of more than $2 billion compared to 1.5 to 2 times in the 1980s or earlier times. But the most important thing to note is that trade liberalisation has prompted illegal trade through legal routes. That is, trade is now taking place through customs posts but by illegal means. The major means are: recording lower values of imports than actual, mis-classification and mis-declaration of commodities, under and over-invoicing etc. These are mostly done in connivance with customs officials in either side of the fence. My research a couple of years back on smuggling showed that, of the total illegal imports from India, 70 per cent is "technical smuggling" and only 30 percent is "bootleg smuggling."
How much revenue is lost by the government on account of "technical smuggling"? If illegal imports from India are 70 percent of legal trade, then total illegal trade can be approximated at $1.4 billion per year. Seventy percent of that comes to about one billion dollars of illegal imports taking place through regular check posts (technical smuggling).
Assuming an average customs duty rate of 25 percent, the lost revenue stands at Tk. 200 crore annually. Taking bootleg smuggling and other small check posts into account, the total revenue loss might hover around Tk. 300 crore!
The car that drove me to and from NDC is run by gas. My own car (until sold recently) also used to run on gas. The price difference between gas and other fuels (e.g. diesel, octane, petrol) is very wide to distort the use pattern. I reckon that I spent Tk.100 or so on gas for my visit to NDC and back. But alternative fuels would have cost at least 5-6 times more.
Why should our gas be under-priced? Why should we subsidise imported fuels for the transport of the rich? Price adjustments in this respect could yield substantial amount of revenue each year. To raise revenue, you need not have to increase taxes always. A rationalisation of tariff and tax structure along with a wider coverage of the net would be helping generate revenue for the government and reduce smuggling across the border.
By consuming smuggled goods of bootleg type, we are in fact paying taxes to the Indian government. Such smuggled goods carry central and state taxes of India at retail level. Had these been formalised through legal imports, there would be no such taxes from Indian side and Bangladesh government would get taxes through tariffs.
Reduce customs duties and domestic taxes, you end up with increased revenues for the government. Like poverty, smuggling cannot possibly be eliminated -- only reduced.
Abdul Bayes is a Professor of Economics at Jahangirnagar University.
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