What is the connection between international trade and democracy? Much research has been devoted to exploring this intricate relationship, examining how international trade and market openness can strengthen democratic institutions and promote liberal values. Prominent scholars such as Douglas A. Irwin, Jagdish Bhagwati, and Dani Rodrik have delved into the economic aspects of this relationship, analyzing how trade openness can contribute to political stability and democratic consolidation.
While it is hard to find a precise causal relationship between trade and democracies, it may be worth flipping the question, and ask instead what is the connection between trade and authoritarian regimes? How do autocrats strategically exploit trade, and more specifically customs administrations, to consolidate power, accumulate wealth, and safeguard the interests of their loyal supporters?
The key to understanding this relationship is to acknowledge a basic but sometimes overlooked fact: autocrats need cash to obtain and maintain power. Lots of it. In a nutshell, an autocrat needs money to keep his inner circle happy, pay off the soldiers, and of course stash away some extra cash in a foreign bank account for a rainy day.
This is where international trade and customs administrations become a favorite target of autocrats, in addition to other sources of cash that the public and the media are more familiar with such as natural resources, banks, and state-owned enterprises.
The important factor here is to realize the role that customs administrations play in revenue collection. Based on data from the World Customs Organization’s 2019-2020 Annual Report, we have calculated that nearly 30% of the 125 countries that provided customs revenue data have their customs administration collecting 40% or more of the national revenue (excluding debt, grants, and other sources of financing). For example, in 2018 almost 60% of government revenue in Cuba was collected by customs. The rule of thumb here is simple: the less developed a country is, the bigger the role of customs in revenue collection (it is much easier to collect money from traders who need their goods to do business, than to set up a tax administration to tax payroll, capital gains, and real estate).
But it is not just cash. Customs administrations can also be used to control and favor specific industries and allies by restricting licenses, permits, and quotas, and imposing additional taxes or penalties on specific goods or companies. And the fact that the general population and the media are largely unaware of how customs administrations operate makes it more appealing for autocrats, like moths to a flame, drawn to the cloak of secrecy that shields their exploitative actions.
Therefore, we have a perfect cocktail here of an administration that collects tremendous amounts of cash daily, operates largely in the dark, and has significant control over the trading community – which functions as a perfect source of corrosive capital that can be used to strengthen authoritarian regimes and their chronies.
As JW Shaver, former WCO Secretary General from 1994-1998, put it: “There are few public agencies in which the classic pre-conditions for institutional corruption are so conveniently presented as in a Customs administration. The potent mixture of administrative monopoly coupled with the exercise of wide discretion, particularly in a work environment that may lack proper systems of control and accountability, can easily lead to corruption.”
But let’s look at a few well-documented examples to illustrate these points:
- Putin gained significant power during his time as the Deputy Mayor of Saint Petersburg in the 1990s, where he was responsible for approving licenses for imports and exports. Putin’s former role in the KGB facilitated many of these arrangements – including access to hard currency which only criminals and the KGB had access to.
- Fuel exports: Putin was responsible for approving licenses for the export of fuel from Saint Petersburg to the rest of the world. He used this power to limit competition and ensure that only his allies were able to export fuel, which helped to enrich his supporters and consolidate his power.
- Raw material exports: Putin also had control over the export of raw materials from Saint Petersburg, such as metals and timber. He used this power to ensure that only his allies were able to export these goods, which helped to create a network of loyal supporters and consolidate his power base.
- Import restrictions: Putin also had the power to restrict imports into Saint Petersburg, which he used to protect domestic industries and limit the influence of foreign companies. By limiting imports and protecting domestic industries, he was able to maintain a high degree of control over the local economy.
- Mobutu Sese Seko, former President of Zaire (now the Democratic Republic of Congo) from 1965 to 1997 and Robert Mugabe, Prime Minister and President of Zimbabwe from 1980 to 2017, both used “customs control” to extract revenue from their respective economies and to limit the power of potential opponents. They established highly centralized customs systems that were controlled by supporters, who were able to extract bribes and other payments from importers and exporters. The revenue generated from customs was used to fund the regime’s patronage networks and maintain the loyalty of its supporters (Mesquita and Smith, 2011).
- More recently, in Guatemala, although not an authoritarian regime, former President, Otto Pérez Molina, was sentenced to 16 years because of corruption in customs. The scheme revolved around a customs fraud network operating within the Guatemalan Tax Authority. It involved bribes being paid to high government officials in exchange for lower import duties and customs taxes. The illicit funds were largely used to enrich the officials and benefit their elite supporters (businessmen, politicians, etc) in exchange for loyalty.
This intricate relationship between customs administrations and the ruling elites highlights the vulnerabilities within trade systems that can be easily exploited to gain and consolidate power while eroding democracy.
But what can the international community do? This is a very complex matter with no quick fix or easy solutions, but here are several approaches:
First, the international community should prioritize the demand for independent and transparent customs administrations and other border agencies as a condition to receive foreign aid.
Second, working with local organizations, such as chambers of commerce and customs brokers associations, could bring more transparency into the mechanics of customs. For example, local organizations could help shed light on:
- Requirements and approvals of import and export licenses and permits.
- Exemption regimes and who benefits from them.
- Modifications to tariffs, and quotas to favor allies and penalize the opposition.
- Monitor transshipments, which are typically used to evade trade sanctions (case in point Russia, which is using transshipments to evade Western sanctions)
- Appointment of high-level customs officials.
- Penalty regime (who gets fined, how much, and why). Customs administrations are notorious for imposing hefty fines even for trivial and honest mistakes in the paperwork.
Any major source of money will always be the target of autocrats, especially if they can do it under the radar. The significance of customs revenue and the control wielded by customs administrations make them a favorite target for autocrats. That’s why it is of paramount importance to acknowledge the role that customs administrations play in strengthening authoritarian regimes and how easily they can be exploited for the benefit of a few at the expense of the many.
By promoting accountability, exposing corruption, and advocating for fair trade practices, we can mitigate the power imbalances that enable autocrats to exploit customs administrations and international trade. Safeguarding the integrity of international trade systems is not only vital for economic development but also for preserving democratic values and fostering a more equitable global order. Through sustained efforts, we can strive towards a future where customs administrations serve as facilitators of trade, transparency, and prosperity for all.
At CIPE, we have a group of dedicated professionals who are committed to fighting corruption and modernizing trade institutions with a holistic approach that delivers solutions to public and private sector stakeholders alike. If you are interested in knowing more about our work, please check out our anti-corruption and trade practices. You can also drop us a line at firstname.lastname@example.org.
Published Date: September 01, 2023