I Introduction

A large number of studies show that patron–client relationships between politicians and voters deter democratisation and development (Bardhan and Mookherjee, Reference Bardhan and Mookherjee2017; Gallego et al., Reference Gallego, Li and Wantchekon2018; Robinson and Verdier, Reference Robinson and Verdier2013; Stokes, Reference Stokes2005; Stokes et al., Reference Stokes, Dunning, Nazareno and Brusco2013; Wantchekon, Reference Wantchekon2003). However, while most studies focus on the interaction between politicians and voters, and more recently on the role of political brokers,Footnote ¹ they often fail to characterise the influence of interest groups, particularly firms, on political distortions.

The consequences of leaving aside the role of firms in studies of patron–client relationships between politicians and voters are twofold. First, by assuming that sponsoring interests and political parties are unified actors that hold the same incentive structure, studies fail to recognise the independent effect of the political connections firms and politicians on governance, particularly on corruption.

Second, the clientelism literature has understudied firms’ strategic decision-making when facing political uncertainty: firms might undermine democratic consolidation – which thrives with electoral uncertainty – through increasing levels of intervention, corruption, and capture. In other words, democracy thrives with electoral uncertainty through political turnover. However, electoral uncertainty also leads to higher financial risk by sponsoring firms.

We show that as electoral uncertainty increases so does the incentive for firms to mitigate financial risk through the appointment of cronies to key government positions, making politicians irrelevant to policy implementation. In other words, increasing risk leads firms to arrange contracts with candidates that replace political intermediaries with direct patrons. Patrons then act as electoral risk-mitigating tools for special interests.

From the latter, demand-side viewpoint, as electoral uncertainty, politicians’ electoral power diminishes vis-à-vis other political contenders, decreasing their bargaining power at the politician–firm contractual arrangement phase, allowing stronger forms of capture.

In that regard, this chapter uses a novel database on contractual arrangements between politicians, political brokers, and businesspeople in Benin to investigate the way the nature of these arrangements depends on the level of political competition. To do so, the chapter pursues four objectives.

First, we propose a reconfiguration of the clientelism and political distortion literature by bringing it together with the ‘political connection’ and clientelism literatures. The cronyism and special interests and lobbying literatures have moved separately from the clientelism literature and have focused on showing, among other things, that political distortions from clientelism are ‘fundamentally different in nature from elite capture’ (Bardhan and Mookherjee, Reference Bardhan and Mookherjee2012, p. 2). With regard to distributional politics, for instance, clientelism is typically progressive, as poor voters are willing to sell their votes at a lower ‘price’. Capture is regressive, as richer interest groups are willing/able to pay more. Moreover, clientelism decreases public goods allocation by favouring private use of public resources, while the implications of capture for public goods remains ambiguous and highly dependent on interest groups’ preference and type. In other words, the special interest literature has stressed that while clientelism and capture represent important forms of political distortion and institutional weakness, especially in developing countries, they are qualitatively different. However, by doing so they have overlooked what politicians do with the financial and non-financial resources provided by firms, and thus they have theoretically misspecified their utility function, and the effect of electoral constraints on firms’ investment maximisation problem. Consider, for instance, that politicians’ strategies of voter mobilisation have to be financed. Thus, campaign finance affects the decision to choose one mobilisation strategy over another.Footnote ²

Second, we characterise empirically the existent firm–politician–broker–voter contractual arrangement, focusing mainly on the relationship between the gifts/resources given to politicians and the different payback demands established by corporations. The chapter uses a novel database on contractual arrangements between politicians, political brokers, and (local and foreign) businesspeople in Benin to investigate the nature of these arrangements and their dependence on the degree of electoral competition. Obtaining information on the underlying ‘sponsoring system’ is difficult, and to our knowledge no study has tried to depict the bilateral relation in terms of resources and pay cheques between firms and national and local politicians. To do this, we carried out structured interviews with key political actors to build a contractual-level dataset covering Benin’s twelve departments and twenty-four electoral districts from 1991 to 2018, for legislative and municipal-level elections. The results allow us to construct national- and local-level contractual arrangements between politicians, political brokers, and firms, including both the financial amounts given to politicians as well as specific concessions granted to interest groups.

Third, we look at determinants of the form of firm–politician contracts. To do so, we consider two alternatives. First, we estimate the effect of political competition as proxied by municipal-level winning margins on firms’ strategic decision-making at the local level, controlling for various cross-municipal socio-demographic differences, surveyor, and municipal fixed effects. To push forward causal identification we provide placebo tests on legislative-level elections. Elections for Members of Parliament (MPs) in Benin provides an ideal placebo, since they do not hold control over national- or regional-level procurement and budgeting, and they have no say in national or regional bureaucratic positions. Contrary to other settings, MPs are not allocated to relevant committees in parliament in charge of budgeting, but rely on party and executive lines for general voting patterns in the assembly. Thus, electoral shocks that modify the overall electoral uncertainty faced by MPs should not lead to firms’ stronger preference for more direct forms of state capture or the appointment of cronies to key government positions. Second, we exploit a quasi-exogenous shock introduced by the 2018 electoral reform that – among other features – collapsed the existent multiparty system into a two-party block competition.Footnote ³ The reform allows us to compare those communes and electoral districts with multiple parties competing for office and suddenly collapsed to one of the two proposed party blocks, decreasing electoral competition (our treatment group), to those districts that were already under a de facto two-party system (our control). Our expectation, later confirmed empirically, is that those districts that experience a decrease in electoral uncertainty experience a decrease in firms’ preference for direct forms of state capture. Both empirical strategies then allow us to observe the existent simultaneity of democratic consolidation – which thrives with electoral uncertainty through political turnover – and special interests’ state capture.

Finally, the fourth objective of the chapter is to contribute to the study of institutional reforms that aim to reduce the influence of interest groups and the negative effects of clientelism in developing countries. In particular, we pinpoint the need for multilevel reforms to prevent business interference, limit bureaucratic capture by brokers, promote transparent appointment processes, and strengthen accountability through the promotion of voter civic engagement in Benin.

In fact, since the democratic renewal of Benin in 1991, political actors have initiated reforms aiming to reduce the cost of campaigning. However, the reforms yield mixed results. The attempts include the following. The first was the imposition of campaign spending caps according to election type (presidential, parliamentary, and local). However, the caps have not been respected or enforced. Furthermore, by 1998, a provision in the electoral code removed the verification capacity of the Supreme Court – the institution in charge of the control of campaign spending of candidates and parties. By 1999 a new electoral restriction was introduced forbidding the distribution of campaign gadgets (T-shirts, caps, pens, etc.) with parties’ and candidates’ logos within six months of national elections (presidential and parliamentarian). The electoral change had mixed results, with parties and candidates utilising specific colours for branding instead of logos. Lastly, a limitation of the campaign period to two weeks was established (contrary to countries where there is no limitation at all like Ghana or where the campaign period is long such as Nigeria’s three months). This restriction is supposed to contribute to the reduction of campaign costs. Except for the incumbent, this measure has seemed to be by and large successful.

It is important to note that Benin has three traits that make it an ideal setting in which to study the relationship between economic and electoral risk and firms’ state capture strategies. First, the dynamics of electoral competition and economic power vary substantially across the country’s seventy-seven communes and twelve departments. The winning margins by political party for the commune-level 2015 elections are substantially low (less than 1 per cent). Moreover, Benin can be characterised as a low concentrated party system in terms of vote share. Moreover, between communes and within communes across time we notice large variability in the actions taken by influence groups to achieve their desired outcomes. Second, Benin provides a case of thriving democratisation mixed with poor governance and various degrees of local state capacity, an important mediator to consider when studying politician–private-sector contracts. Lastly, a pseudo-decentralised political system allows for local politicians to have substantial freedom to shape local campaigns and agree to different contractual arrangements with their financial sponsors.

Our results show three main findings. First, around 34 per cent of mayors and city councils competing for municipal-level positions, and deputies competing for legislative seats, face budget constraints in regard to developing their political campaigns. This creates a need to negotiate their budget deficit with businesspeople in order to run for elections, allowing for contracts through narrow commitment over policies. Second, the most recurrent policy concessions made by businessmen are public procurement arrangements (71 per cent of contracts include such concessions), followed by policy commitments related to firms’ interests (46 per cent of cases), and the direct appointment of businessmen’s relatives to public positions (39 per cent of cases). In part, this rank ordering is due to the fact that public procurement allows for firms to cash in and for politicians to keep a share of the procurement (a minimum of 10 per cent in Benin’s case). Note that policy concessions add more than 100 per cent, which implies that contracts contain more than one concession petition.

Most interesting are firms’ strategic decisions when faced with political uncertainty. If incumbents do not comply with the contract with firms, the latter may finance riots against the former to increase economic concessions and payment. Moreover, firms seek to support challengers with contracts that are characterised by higher concessions, increasing the overall control of firms over local governments and national politics. Regarding the estimation of the effect of winning margins on firms’ capture preferences, we find that a 1 standard deviation increase in winning margin decreases the reliance on more direct forms of state capture by –0.1684 standard deviation for municipal-level elections, a result that is significant to the 1 per cent level and robust to surveyor and municipal fixed effects and socio-demographic controls. However, interestingly, positive and non-significant results are found for MPs’ elections, showing that electoral shocks only have an effect on firms’ capture preferences when political actors are relevant for electoral risk management.

Relative to the status quo concession benchmark, when elections become more uncertain due to the introduction of more challengers, firms modify their demands in relation to incumbents. In particular, they rely more heavily on demanding that incumbents’ platform commitments are similar to firms’ interests during the electoral campaign (a prevalence of 68 per cent), while decreasing the proportion of public procurement petitions to 67 per cent, holding second place, followed by an increase in pushing forward the political careers of businessmen’s acquaintances, which reaches an occurrence of 64 per cent. Moreover, in this case of higher electoral uncertainty the influence and control over the recruitment in all public sectors increases from 17 to 51 per cent. Lastly, in the absence of what firms consider a ‘good’ candidate to fund, firms increase their participation in elections by running for election themselves.

These results are tied to those on the effect of Benin’s 2018 electoral reform on party collapse in that electoral uncertainty drives firms’ capture preference. In particular, multiparty districts affected by the reform show a decrease of –0.259 standard deviation on firms’ capture preferences in the 2019 commune-level elections. In other words, as the number of candidates decreases – and thus the cost of bribes – firms rely less heavily on more direct forms of state capture, such as the appointment of firms’ agents or cronies to key government positions. Specifically, firms decrease their use of patronage to move forward the political careers of friends and family members (decrease of –0.437 standard deviation), they decrease their use of patronage of members from the company (–0.436), and they reduce the demands on bureaucratic recruitment control (–0.606). The results are robust to including controls on politician-level characteristics, as well as commune fixed effects. Moreover, we demonstrate that the sample of politicians used show a balance on multiple covariates between districts that hold multiparty competition in the 2015 elections (the treatment) to those with de facto two-party competition (the control). While this balance does not rule out commune- and firm-level differences between treatment and control, they show that the results are not driven by sample selection bias. As with the effect of winning margins on firms’ capture preferences, we also find positive and non-significant effects for legislative-level elections, which provides an important placebo to take into consideration.

We believe that differentiating sponsoring interest groups, politicians, and voters will lead to interesting developments in the clientelism literature. First, this chapter provides an explanation of the coordination between politicians and private interests in order to marginalise poor voters, especially in the face of increasing demands for redistribution. Second, it makes it possible to explain the paradoxical result of stronger degrees of direct involvement of interest groups through personal nominations in highly democratised (i.e. highly uncertain) settings. Third, the chapter helps increase our understanding of the variation in strategic decision-making of interest groups between different levels of uncertainty across time and space, either caused by variation in electoral risk or interest groups’ risk. In the spirit of Kitschelt and Wilkinson (Reference Kitschelt and Wilkinson2007), where politicians prefer to use clientelism when they can predict voters’ electoral conduct and elasticity, interest groups prefer to rely on direct capture strategies when uncertainty is high, and they rely on sponsoring political campaigns only when politicians can predict voters’ behaviour well. This point is closely related to the literature on the link between economic and political structural conditions and strategic choices made by firms to mobilise citizens (Diaz-Cayeros et al., Reference Diaz-Cayeros, Estevez and Magaloni2016; Magaloni et al., Reference Magaloni, Diaz-Cayeros, Estevez, Kitschelt and Wilkinson2007).

This chapter is closely related to work on mapping de facto institutions. Starting with Dahl’s (Reference Dahl1961) description of the power structure in New Haven and moving to more recent literature on family networks and politicians (for example, Cruz et al., Reference Cruz, Labonne and Querubin2017; Querubin, Reference Querubin2016), there has been a need to characterise the full power dynamics affecting electoral politics. Moreover, this chapter speaks directly to the large literature on interest groups and cronyism. The crony governance literature focuses on systems in which economic policies are chosen with the goal of benefiting connected actors (Klor et al., Reference Klor, Saiegh and Satyanath2017). Our study, in contrast, focuses on showing how interest groups develop crony networks in local institutions as the degree of uncertainty increases. Most importantly, this chapter connects the seemingly distant but actually highly related literatures of clientelism and cronyism, showing that electoral risk encountered in clientelism settings affects firms’ (sponsors’) strategic decisions to create and fund networks in high-level bureaucratic and political positions.

This chapter is more closely related to the literature on elite capture of local institutions in developing countries. Ch et al. (Reference Ch, Shapiro, Steele and Vargas2018), for example, show that illegal armed interest groups in Colombia – both left-wing guerrilla forces and right-wing paramilitary groups – shaped policy outcomes by influencing local officials who implemented the groups’ policy preferences. Likewise, Sanchez-Talanquer (Reference Sanchez-Talanquer2018) and Pardelli (Reference Pardelli2018) find that landowners transform local institutions in their favour by appointments to key local bureaucracy and political positions, which result in pushing forward beneficial policies in terms of taxes, property rights, and property land values, and increase the relative power of local governments vis-à-vis higher levels of government. This chapter shows how firms use various strategies to control local institutions, and not only promote policy change through violence (as in the case of Colombia), policy change, political campaign sponsoring, or direct appointments to bureaucratic positions.

II Theory and Testable Hypotheses

Consider Anderson et al.’s (2015) clientelistic relationship analysis in India, where elite minorities can undermine policies that push forward redistribution in favour of the poor majority. In this case, the capture mechanism runs through land ownership dominance and the use of cultural hierarchies to achieve political control. However, while empirical evidence shows that elites undermine democracy even in a non-coerced setting, the existent strategic relationship between firms and politicians is not clearly described and is actually not considered. There could be at least two possible types of relationships between firms and politicians, depending on the source of uncertainty. First, politicians could renege on delivering investments to sponsors. Under this setting firms face uncertainty due to politicians’ type, which allows a cheap-talk strategic setting: politicians act as agents who hold a private information advantage in respect to their sponsors or the principal, and ‘bad’ politician types renege on their contractual arrangement or benefit from their advantageous information standpoint. Second, firms might face uncertainty coming not from politicians’ type but from the political environment and institutional design. From a supply-side standpoint – that is, from the perspective of political sponsors like firms – high electoral competition leads to high risk on campaign financial investments. As a response to higher financial risk, firms increase their demand for more direct forms of capture, moving from procurement demands to requesting political appointments and recruitment bureaucratic control. Cronies are then selected for such positions, bypassing politicians entirely.

From a demand-side standpoint, high electoral competition implies politicians’ bargaining power is weaker at the time of negotiating the terms and conditions of the contractual arrangements with firms. Not only is there at least one other candidate with similar electoral strength that could compete for funding, but electoral competition increases both the marginal cost of a vote as well as total campaign costs. The result is needy politicians facing risk-averse firms who move to stronger preferences for direct forms of state capture through the appointment of key government positions.

What does the contract look like? Sponsors fund politicians in order to receive a payback. The payback takes a wide range of forms, running from more indirect to more direct forms of state hijacking: refunds on financial investment, policies and platform changes, public procurement, control of budget lines, patronage, and bureaucratic recruitment control.

III Data and Methodology

To test how political competition affects firms’ uncertainty and modifies their preference for more direct forms of state capture, we study the relationship between international and domestic companies and electoral politics at various levels of aggregation – national and local – in Benin, covering all elections from 1991 to 2019. Benin exemplifies a thriving nascent democracy, with poor governance and economic performance. While being what has been labelled a successful democracy, Benin has been characterised by a high level of corporate capture of local and national politics. As noted by Fujiwara and Wantchekon (Reference Fujiwara and Wantchekon2013), the country’s institutional development has allowed for clientelistic promises to narrow groups of citizens and has favoured private use of local government resources. Benin contains over 3,000 villages (called quartiers) in seventy-seven communes, and they vary widely in the type of productive activities carried out, as well as in the political competition in a multiparty system.

Our methodology exploits two sources of variation. First, variation in firms’ political investment or contractual choice. To measure this, we rely on a novel database on contractual arrangements between politicians, political brokers, and firms in Benin. In particular, we carried out structured interviews with key players, including campaign managers, CEOs of politically connected firms, local brokers, and politicians and candidates, among others.Footnote ⁴ The result is a dataset with a sample of more than 300 Beninese politicians (deputies, ministries, mayors, etc.), as well as political brokers, covering Benin’s twelve departments and seventy-seven communes.

The data collection took place in Beninese constituencies with targeted populations from 6 February to 21 February 2019. Given the difficulty in identifying potential subjects to survey, a snowball sampling technique (or chain-referral sampling) was used. This is a non-probability sampling technique where existing politicians surveyed recruited future subjects from among their acquaintances. Prior to the interviews, the controller – in charge of coordinating interviews – arranged an appointment with the politician via a phone call to establish contact between the latter and the enumerators to prepare the interview. Then, enumerators met the politician alone, or in a team of two or three, depending on the category (national or local) and/or the agenda of the politician to conduct the interviews. Overall, 311 political actors and brokers were surveyed: 256 politicians, including 191 local politicians (mayors, councillors, etc.), and 83 national politicians (deputies, ministries, cabinets staff, etc.), with 18 who have run for both local and national positions, and 55 brokers (18 per cent of the full sample). Given that elections were scheduled for March and April 2019, we were able to acquire information on contemporary campaigns as well as past ones since 1991. Of the full sample, 76 per cent were running as candidates for the next elections. This dataset allowed us to depict existent politician–firm contracts (such as funding amounts and sources, for instance) and contract types, ranging from those that demand policy and procurement concessions from politicians, to those that seek to influence political platforms during campaign periods, and those that seek to influence direct appointments of firms’ acquaintances, or direct intervention through control of budget lines or key bureaucratic positions.

It is important to note some overall characteristics of the politicians in the database. First, 54 per cent of the 215 surveyed individuals who were running for the next election were running for municipal-level elections, while the rest were competing for legislative ones. On average, individuals are 47 years of age and hold a high variety of education degrees, especially high-level ones, with the majority having either undergraduate or graduate degrees. Moreover, only 27 per cent are first-time runners and those who have recurrently participated in elections in the past have participated in a large number of different types of elections, from commune- to presidential-level ones. It is important to note that Benin is characterised as a highly dynamic electoral setting: more than half of the surveyed politicians have switched political parties. A wide majority have switched not due to opposition to their former political parties, but in opposition to party platform changes. In other words, the highly dynamic party system hides a seemingly conservative underlying ideology spectrum. Noteworthy, additionally, is the fact that almost all politicians and political brokers (87 per cent) are members of a political party. Lastly, it is important to see that of the full sample, 36 per cent say they have held private positions in the past.

The second source of variation we exploit is national and local variation in electoral uncertainty. We rely on two measures of electoral uncertainty: first, the use of winning margins; second, the number of political candidates contending for office. We believe the former constitutes a benchmark measure of electoral competition, given that winning margins are positively related to a candidate’s likelihood of winning office or the risk associated with a candidate losing. Related to the latter, as the number of political candidates increases, so does the total amount of bribes that firms need to allocate in order to achieve their desired policy preference. In other words, the number of candidates represents a cost of contractual arrangements. Both the costs and electoral competition form part of what we define as electoral uncertainty in this particular setting. As an example, the highest level of electoral uncertainty will be that where low winning margins coincide with a plethora of political candidates running for office with relatively equal electoral strength.

For identification we rely on two empirical tests, given these two sources of variation, firms’ preferences for direct capture and electoral uncertainty. First, we analyse the relationship between winning margins and firms’ state capture preferences as stated in contractual arrangements. In particular, we estimate the following ordinary least squares (OLS) specification:

$y\text{}=d\alpha +{\gamma }_d+\beta {\text{WinningMargin}}_d+\Phi X_d+\Theta W_i+s_d$(1)

where y_d is either a dummy of any of the preferences for state capture or intervention pushed by firms on politicians, including demanding a refund of resources, and demanding policy and programme modification during a campaign; demanding support for future candidates close to firms; demanding a local budget line; demanding public procurement; patronage both for close family members and for friends or members of the firm; and taking control of bureaucratic recruitment control in a district d; Winning Margind is a continuous variable on the winning margin of the incumbent relative to the second contender for the 2015 commune-level elections; X_d is a vector of commune-level control variables;Footnote ⁵ and W_i is a vector of politician-level characteristics, listed in Table 4.1, including age, education, title, former occupation, political experience, a dummy to account for party switch and reasons for such a switch, and electoral political experience as candidates in different types of elections. We also include a district fixed effect, γ_d, to account for any district-level time-invariant heterogeneity. Thus, our estimates account for the change in firms’ preferences for direct forms of state capture in districts that have experienced high electoral uncertainty, as proxied by smaller winning margins. We report robust standard errors (SEs) throughout, clustered at the electoral district level.Footnote ⁶

Note, however, that this specification does not allow us to rule out time-variant and other sources of potential endogeneity. To push forward the identification we estimate equation (1) for municipal-level elections and run a placebo test on legislative-level elections. Elections for MPs in Benin provide an ideal placebo, since MPs do not exercise control over national- or regional-level procurement and budgeting, and they have no say in national or regional bureaucratic positions. In contrast to other settings, MPs are not allocated to relevant committees in parliament in charge of budgeting, but rather they rely on party and executive lines for general voting patterns in the assembly. Thus, electoral shocks that modify the overall electoral uncertainty faced by MPs should not lead to firms’ stronger preference for more direct forms of state capture or the appointment of cronies to key government positions.

As a second identification strategy, we use quasi-exogenous variation introduced by the electoral reform in Benin in 2018, which collapsed the multiparty system to an effective two-party block competition.

The reform allows for the existence of multiple parties, but forces parties to join a block to compete, and no more than two blocks can contend for any political position in the country. The reform allows us to compare those communes (or seats) that had multiple parties competing for office and higher degrees of electoral competition and suddenly were affected by the reform (our treatment group) to those communes that already had an effective two-party system (our control). The expectation is that communes affected by the electoral reform reduce the number of effective political parties and thus candidates, decreasing the overall financial costs of bribery faced by sponsoring firms, making them less desirous of more direct forms of state intervention. Interestingly, the number of candidates is highly negatively correlated with the winning margin, and positively correlated with voter turnout for the commune-level 2015 elections (see Figures 4.A.1a–4.A.1d in the Appendix). Thus, while we believe that the effective number of parties (and candidates) acts as a proxy for the capture costs of firms, it also represents an indirect measure of electoral competition, and thus electoral uncertainty. In short, for the identification of the effect of contract type we will rely on cross-municipal competition variation triggered by quasi-exogenous shocks in electoral competition. Specifically, we estimate an OLS specification at the electoral district level for commune-level elections on the effect of the electoral reform as a quasi-exogenous shock to electoral uncertainty on firms’ strategic capture of government in the current 2019 elections:

$y_d=\alpha +{\gamma }_d+\beta \text{Electoral}{\text{Reform}}_d+\Phi X_d+\Theta W_i+s_d$(2)

where _yd is a dummy for any of the demands pushed by firms on politicians, including demanding a refund of resources, demanding policy and programme modification during the campaign, demanding support for future candidates close to firms, demanding control over the local budget line, demanding control over public procurement, demanding patronage both for close family members and for friends or members of the firm, and taking control of bureaucratic recruitment control in a district d; Electoral Reform_d is a dummy that takes a value of 1 if a commune-level electoral district had more than 2.5 effective parties, as measured by a Molinar Index for the 2015 commune-level elections, and 0 otherwise;Footnote ⁷ X_d is a vector of commune-level control variables;Footnote ⁸ and W_i is a vector of politician-level characteristics, listed in Table 4.1, including age, education, title, former occupation, political experience, a dummy to account for party switch and reasons for such a switch, and electoral political experience as candidates in different types of elections. We also include the district fixed effect, γ_d, to account for any district-level time-invariant heterogeneity. We are thus working with between-electoral district variation in firms’ government capture, controlling for a range of district- and politician-level characteristics. Hence, our estimates account for the change in firms’ strategies in districts that experienced less electoral uncertainty than the electoral districts mean. We report robust standard errors throughout, clustered at the electoral district level, as done with equation (1).Footnote ⁹

For both equations (1) and (2) we construct a firm capture index with all available demands made by firms in their contractual arrangements with politicians. The index ranges from 0 to 6, with 6 being the highest degree of capture. In particular, capture demands are categorised in the following way: financial refunds get a value of 0; policies and programme changes a value of 1; support for future candidates close to firms’ interests a value of 2; control of a budget line a value of 3; public procurement a value of 4; patronage 5; and, lastly, bureaucratic recruitment control a value of 6. We believe this ordering fits well the notion of increasing capture in firms’ actions as depicted in the Beninese study case.

Our identifying assumption with this approach is that electoral uncertainty variation occurs due to a quasi-exogenous shock conditionally independent from future firms’ capture demands. Our controls tease out district-level dynamics, especially pre-treatment competition levels. One concern, however, is that this approach could simply pick enduring cross-sectional within-electoral district differences, correlated with both electoral uncertainty and firms’ demands. To rule this out we include a set of regressions controlling for firms’ demands in the 2015 election and identify whether pre-treatment demand differences between control and treatment districts are non-existent.Footnote ¹⁰ Furthermore, we show that sampled politicians in treatment and control districts do not have statistically different characteristics.Footnote ¹¹ This gives high confidence regarding avoiding sample selection bias, as well as treatment and control similarity. Lastly, as done with the estimation of equation (1), we use MPs’ elections as a placebo test.

A Descriptive Statistics on Campaign Funding

In this section, we provide a short description of the data, based on the preliminary descriptive statistics related to the central tendency of key variables of the study. This is followed by a short discussion. At a first glance at the data we notice that businessmen invested, on aggregate, a total of CFA Franc 7,567,560,000 (US$13,080,443) in the recent electoral campaigns as financial support to politicians, according to the 189 who responded to this question. On average, the former invested, all elections combined, an amount of CFA Franc 40,040,000 (US$69,252) in the campaigns of a candidate. Considering the type of elections and the location, the financial package is about CFA Franc 10,900,000 (US$18,838) and CFA Franc 47,600,000 (US$82,288) for municipal elections, respectively, in rural and urban areas. These figures are higher according to the importance of elections. For instance, CFA Franc 37,300,000 (US$64,470) and CFA Franc 67,600,000 (US$116,842) are invested in legislative campaigns of a candidate in rural and urban locations, respectively.

While political parties’ charters predict CFA Franc 1,500,000 (US$2,592) and CFA Franc 30,000,000 (US$51,853) for municipal and legislative campaigns, out of the 27 per cent of those who really know these amounts, 34 per cent find it insufficient for the corresponding elections, including those who ran or will run for commune and legislative elections. Note, however, in Figure 4.1a that those who believe politicians have a ‘reasonable amount of funding’ or ‘more than needed’ greatly surpass the campaign costs of those that believe funds are insufficient.

Figure 4.1a Campaign cost by type of election and evaluation of funds

Source: Authors’ calculations.

Actually, as noted in Figure 4.1b, we see that those who believe that ‘campaign funds are reasonable or more than needed’ believe that campaign costs should be decreased substantially, especially in commune-level elections. Subsequently, on average, they reported CFA Franc 115,000,000 (US$198,772) and CFA Franc 163,000,000 (US$281,691) as the amount necessary for legislative elections in rural and urban constituencies, respectively.

Figure 4.1b Ideal vs real campaign costs, by election type and evaluation of funds

Source: Authors’ calculations.

Furthermore, business monetary involvement in electoral campaigns is substantial. Figures 4.2a–4.2b show a striking result: for commune-level elections, firms account for 54.3 per cent of the total campaign costs on average. More impressive is the fact that 15.7 per cent get funding from businesses that surpass the total campaign costs, sometimes holding budgets up to three to four times more than needed. These results are even greater for legislative-level elections, with firms accounting for 76.3 per cent of total campaign costs.Footnote ¹² In other words, as we move up the federalist ladder in Benin we notice more business intervention in monetary terms.

Figure 4.2a Ratio of firms’ funding to campaign costs by type of election: Community level

Source: Authors’ calculations.

Figure 4.2b Ratio of firms’ funding to campaign costs by type of election: Legislative level

Source: Authors’ calculation.

IV Results

The former evidence points to the high intervention of businessmen in elections at different levels. However, the actual proportion of politicians affiliated with firms suffers from social desirability bias and thus politicians might not truthfully answer sensitive questions, creating a measurement challenge. Moreover, given the complexity of businessmen’s interests, it is difficult to capture such dynamics either observationally or through surveys.

One way to address such challenges is the use of a list experiment. As noted by Blair and Imai (Reference Blair and Imai2012) and a large range of studies (Biemer et al., Reference Biemer, Jordan, Hubbard, Wright, Kennet and Gfroerer2005; Gonzalez-Ocanto et al., 2010; Jamison et al., Reference Jamison, Karlan and Raffler2013; Kane et al., Reference Kane, Craig and Wald2004; Kuklinski et al., Reference Kuklinski, Sniderman and Knight1997), this methodology protects respondents’ confidentiality, allowing them to reveal sensitive information. The underlying mechanism in a list experiment is to compare two groups: a treatment and a control group. The control group is asked to report the number of non-sensitive items called a short list, while the treatment group is asked to report the number on that same short list plus an additional sensitive item. The average response for each group is estimated and differenced out. The difference in means represents the proportion of the population for whom the sensitive item applies. Design effects are tested, as well as ceiling and floor effects, to validate the list experiment estimate (for details, see Ch et al., Reference Ch, Hounkpe, Wantchekon, Bourguignon, Houssa, Platteau and Reding2019).

Specifically, the list experiment question tested to measure politicians’ affiliation to business interests was the following:

The list of answers that the control groups received included:

• the mayor of this commune;

• a member of the communal council;

• the prefect of this department;

• the MP; and

• the president/president’s political party.

The list that the treatment group received included the following sensitive item (in the sixth position on the list):

• national or local businessman/firm/business group.

In order to separate respondents into the treatment and control groups, we used their birthday months. Those born in January, March, May, July, September, and November were assigned to the control group, while those born in February, April, June, August, October, and December made up the treatment group.

Table 4.1 shows the balance between the treatment and control groups of the list experiment across a wide range of covariates on politician characteristics. Out of thirty-eight covariates we notice a significant difference in four, giving us confidence regarding the balance to the 10 per cent level.

Table 4.2 shows the results of the list experiment by running a t-test comparing the treatment and control means on politicians’ affiliation with firms’ interests. The difference shows a prevalence of firms’ interests of 48.1 per cent, a difference significant to the 1 per cent level. In other words, almost half of politicians and political brokers in Benin are affiliated with either local or national business interests.

If we distinguish by election type, we notice that business affiliation is higher in commune municipal elections, with a proportion of 83 per cent, significant to the 1 per cent level. Legislative elections show a lower proportion, of 45.6 per cent, with a significance barely reaching 10 per cent. In other words, as we move up the administrative ladder, we notice a decrease in business intervention. A plausible explanation to explore in the future is that business interference might be higher at lower administrative levels due to national government lack of monitoring and state capacity.

It is important to compare these results with those shown in Table 4.3. This table presents a list of different sources of funding provided to politicians for commune and legislative elections. Numbers represent the percentage of funds coming from a particular source. Related to business interests we note that firms, local and national, account for 16 per cent of total funding at the commune level and 17 per cent for legislative elections. Both estimates contrast significantly with the results of the list experiment, showing the effect of social desirability bias.Footnote ¹³

V Discussion and Conclusion

A wide literature has shown the pernicious effects of business interests in institutional and democratic development. However, there has been little study of the underlying mechanisms by which firms deter democracy, especially in the context of weak states. This chapter provides evidence on the relationship between business interests and clientelistic contracts, and by doing so brings together two seemingly unrelated literatures: interest groups and state capture and clientelism. By doing so it provides, for the case of Benin, concrete evidence on the demand set applied by firms to politicians in exchange for firms’ support for electoral campaigns. More importantly, we show that more than half of Benin’s politicians are politically affiliated with firms, and that such affiliation affects the underlying base structure within which clientelist contracts with citizens take place.

We provide evidence that firms’ strategic interactions with politicians change as electoral uncertainty changes. In particular, in the most striking result of this chapter, we show that as electoral uncertainty decreases firms rely less heavily on more direct forms of government capture, including patronage or the control of local bureaucratic recruitment processes. In positive terms, paradoxically, this implies that democratic consolidation, which thrives with electoral uncertainty, is undermined by business interests.

‘Campaign finance and state capture’ provides a new perspective on topics that are at the heart of the literature on the political economy of development. In particular, the study of democracies in the developing world tends to focus on issues of clientelism or political exchange – directly or indirectly providing private benefits for constituencies in exchange for electoral support. However, as this chapter points out convincingly, not only are different forms of political exchange targeted at voters, different forms of political exchange are also practised by firms, each with potentially different implications for economic development and democratic consolidation. One problem with the literature on clientelism is that it tends to focus on political exchange between voters and politicians, without regard for the strategies of firms. Arguably, not only does this miss an important part of the dynamic for understanding political exchange more broadly, it also understates the developmental impact of clientelism. In focusing on small-scale ‘retail’ strategies, such as vote buying or patronage, we may be missing the more important forms of ‘wholesale’ strategies, such as capture or cooptation – strategies that arguably have more distortionary effects on both economic development and democratic consolidation.

As a result, in addition to highlighting important dynamics in Benin with implications for political institutions and economic development, this chapter addresses a first-order question in the literature on clientelism. This work is exemplary in leveraging results from a specific country context in order to make broader theoretical arguments. It does so by contributing both a novel framework – bringing together the two literatures on clientelism at the voter and firm levels – and bringing new data from Benin to test it.

I Networks

One potentially helpful area for exploring extensions to this work is to think more about firm and politician networks. Theories of networks underlie both the literature on clientelism and the literature on firm capture and cronyism, making it a natural fit given that this project is bringing new data to create a unifying framework for the two literatures. Furthermore, networks are implicit in the chapter’s analysis (even if not sufficiently explicit) and, in fact, networks were a key part of the data collection because of the snowball sampling techniques.

Networks matter not only because of the direct connections, but also for understanding the broader structure of how business interests interact with clientelism. This short note addresses two types of networks, firm networks and politician networks, in order to suggest potential extensions to the analysis. Firm networks matter because they determine access to political ‘goods’, but also because the types of networks that firms invest in may provide evidence of their priorities and strategies for lobbying. As a result, firm networks would be expected to matter for the range of demands that firms might pursue, and their techniques for doing so. It is also possible that networks operate as a constraint on firm strategies – to the extent that firms invest in developing ties and cultivating relationships with a broad range of industry and government actors, it may be difficult for them to switch strategies even when political circumstances change (Fisman, Reference Fisman2001).

Similarly, politician networks matter not only for electoral competition, but also for the types of strategies they may pursue once they are in office. For example, a large literature links politician networks to different types of electoral strategies. In particular, clientelistic political exchange requires dense, hierarchical networks for the identification of clients and the delivery of benefits and monitoring of voter behaviour. Compared to the internal organisational problems inherent in programmatic parties, for clientelist politics the problem is monitoring and controlling the political brokers at each level in the process (Kitschelt and Wilkinson, Reference Kitschelt and Wilkinson2007). Such mechanisms require elaborate networks to monitor actors and manage exchange relations (Stokes, Reference Stokes2005). Kitschelt and Wilkinson (Reference Kitschelt and Wilkinson2007) describe these networks as necessary because of the need to monitor political actors at each level in the process. Research by Calvo and Murillo (Reference Calvo and Murillo2009) has argued that clientelist politics requires different types of political network structures to programmatic politics: clientelist countries have large, heterogeneous, vertically integrated parties, while programmatic countries have smaller, homogeneous, horizontally integrated parties. The ability to monitor is a fundamental aspect of successful politician networks (Kitschelt and Wilkinson, Reference Kitschelt and Wilkinson2007; Larreguy, Reference Larreguy2013).

II Firm Networks

It is widely accepted that better-connected firms exercise more political influence. However, it remains little understood how different types of ties affect different types of political action. The notion that the type of ties matters underlies much of the work on politician networks and political parties. With this type of analysis, it becomes possible to explore whether firm connections affect the strategies firms pursue, or the ways in which they engage with politicians.

For example, Cruz and Graham (Reference Cruz and Graham2021) contrast the effect of ties to other firms in the same industry (peer ties) with direct ties to elected officials and bureaucrats (government ties). Their framework proposes that peer ties facilitate collective action, most often with respect to broad policy issues that affect many firms, while government ties are primarily used to address narrow, particularistic issues. Cruz and Graham use a new survey of foreign-owned firms operating in the Philippines to demonstrate that different ties are associated with different approaches to lobbying. Consistent with theories of collective action among firms, ties to other firms are associated with efforts to influence policy at the national level, where issues are broader based and affect larger numbers of firms. By contrast, ties to government actors (bureaucrats or politicians) are associated with seeking policy influence at the local level, where actors have narrower scope but can direct specific benefits and concessions to firms.

For example, Figure 4.3a is a visual illustration of firms’ ties with politicians, bureaucrats, and other firms.Footnote ¹⁴ Each of the black circles (nodes) represents an actual firm in the sample and the grey circles represent political actors: congress, local government, and the bureaucracy (labelled). For each firm, the figure presents (1) ties to congress, bureaucracies, or local government, depicted by connecting lines between the firm node and the government actor node; and (2) ties to peer firms, represented by the size of the circle, where large circles are those firms that report a larger number of peer firms. A substantial number of firms, including many with a large number of peer ties, have no direct government ties.

Figure 4.3a Peer and government ties

Source: Author’s calculations.

III Politician Networks

Another important aspect of networks that could extend the important findings in this chapter are differences in the networks and strategies of politicians. Figure 4.3b is a visual illustration of ties among mayors in Isabela province, in the Philippines. Some mayors are well connected horizontally, while others have vertical connections: instead of ties to other mayors, they have ties down to the village-level officials and up to the congressman (or congresswoman) and governor of the province. The structure of these ties affects the incentives of politicians to pursue different types of political exchange.

Figure 4.3b Effective mayor network in Isabela (1st district–white; 2nd–light grey; 3rd–dark grey; 4th–black)

Source: Author’s calculations.

Vertical ties are associated with individually targeted political exchange, because in a political context where there are overlapping constituencies, politicians can reduce the costs associated with individually targeted political exchange by pooling their efforts. Politicians at higher levels collude with lower-level politicians and political brokers. The higher-level politicians provide funding and the lower-level politicians provide the personnel and oversight for the implementation. A big part of the costs of vote buying involves logistics: identifying targets, sending personnel to conduct the transaction, as well as monitoring and enforcing the transaction. Once a system for monitoring or verification has been set up and the political broker has already been hired to hand out the envelope of money, the marginal cost of asking the voter to also vote for another politician on the same ballot is relatively small. The overlapping constituencies create incentives for such collusion among politicians organised through vertical networks.

Horizontal ties, by contrast, facilitate group-targeted strategies like pork-barrel politics. When pork-barrel funds take the form of spending allocated to more than one municipality, mayors who are able to cooperate with each other can act collectively to demand pork-barrel projects that benefit their municipalities. In these cases, the funding is typically controlled by politicians at the national level (such as governors or congressmen) or national government agencies. Very few local-level politicians are influential enough to lobby successfully for these types of funds on their own. However, groups of mayors acting collectively can successfully bid for large-scale projects affecting their areas. Examples of such projects include fisheries and shoreline support for coastal municipalities, irrigation systems for municipalities along a river, or construction and road projects that go through more than one locality. Horizontal ties are important not only for the process of bidding for national- or provincial-level projects, but also for ensuring that mayors cooperate throughout the project implementation process.

Extended to firms, we might also expect that the form of political alliances and political networks might also condition how politicians engage with firms. For example, politicians with ties to the bureaucracy might offer to negotiate with firms by offering regulatory deals. Politicians with more discretionary funding may prefer to offer concessions and kick-backs. As a result, in addition to considering the preferences of firms for direct or indirect forms of capture, it is equally important to consider that politicians may be differentially positioned to offer these different types of ‘policy goods’.

I Introduction

Cotton has a long history in Benin’s development strategies and it continues to play a majorFootnote ¹ economic role today, accounting for about 50 per cent of export revenue (excluding re-exports) and 45 per cent of tax revenue (excluding customs revenue).Footnote ² It contributes to the livelihoods of about one-third of the populationFootnote ³ and it constitutes 60 per cent of physical capital in Benin’s industrial sector (nineteen ginning factories, four textile factories, and two agro-food factories for vegetable oil extraction) where it generates about 3,500 paid jobs (Ministère de l’Agriculture de l’Elevage et de la Pêche, 2008). In addition, cotton contributes to activities in the services sector (e.g. transport and construction), and also plays a socio-politicalFootnote ⁴ role in rural development in Benin (see, e.g. Kpadé, Reference Kpadé2011).

Several indicators have been proposed to assess the economic performance of the cotton sectors in African countries (e.g. Tschirley et al., Reference Tschirley, Poulton and Labaste2009), but data limitation forces us to focus this analysis on three main indicators: production, yield, and acreage. In some cases, we discuss performance related to two additional indicators: the producer price of seed cotton; and Benin’s market share of cotton lint in the international market. We derive data on the first key three indicators from the Food and Agriculture Organization (FAO) Corporate Statistical Database (FAOSTAT), allowing us to make a consistent comparative analysis with other countries over a long time period (1961–2017).Footnote ⁵ Data from three other sources (Institut National de la Statistique et de l’Analyse Economique, INSAE; Association Interprofessionnelle de Coton au Bénin, AIC; and Programme Regional de Production Intégrée du Coton en Afrique, PR/PICA) are used to discuss the performance of the sector over the recent period (2016–2018).

Figures 5.1a and 5.1b report the performance of the cotton sector in Benin and in Burkina Faso, a neighbouring francophone country; they give the production of seed cotton, yields, and cultivated area over the 1961–2017 period.Footnote ⁶ Figure 5.1a presents the performance in Benin and Burkina Faso in levels, whereas Figure 5.1b displays the performance of Benin relative to Burkina Faso (1961=100). The data in Figure 5.1b show a relatively poor performance in Benin’s production in 1962–1969, 1974–1992, and since the early 2000s. In 1961–1969, this was primarily caused by a more rapid expansion of acreage in Burkina Faso, since Benin was doing relatively well in terms of productivity per land unit. In the period 1974–1992, Benin lagged behind both in terms of yields and acreage.

Figure 5.1a Performance of the cotton sector in Benin and Burkina Faso

Sources: Authors’ calculations based on FAOSTAT. Data over the period 2016–2017 are obtained from INSAE and AIC and are being updated in the FAOSTAT database. Note that the data presented here are sometimes different from the values presented in studies (e.g. Gergely, Reference Gergely2009; Kpadé, Reference Kpadé2011; Saizonou, Reference Saizonou2008; Yérima, Reference Yérima2005) citing AIC. LHS, left-hand side; RHS, right-hand side

Figure 5.1b Performance of the cotton sector in Benin relative to Burkina Faso (1960=100)

Sources: Author’s calculation based on FAOSTAT. Data over the period 2016–2017 are obtained from INSAE and AIC and are being updated in the FAOSTAT database. Note that the data presented here are sometimes different from the values presented in studies (e.g. Gergely, Reference Gergely2009; Kpadé, Reference Kpadé2011; Saizonou, Reference Saizonou2008; Yérima, Reference Yérima2005) citing AIC.

In contrast, Benin outperformed Burkina Faso in 1970–1973 and 1993–1997. In the first subperiod, Benin’s performance was due to a spectacular improvement in yields, whereas in the second subperiod the result mostly stemmed from a more rapid extension in the area allocated to cotton. Figure 5.1a shows that, up until 1993 and except for the subperiod 1970–1973, the output of cotton in Benin moved roughly hand in hand with the cultivated land area, suggesting that improvement in yields did not play a significant role. In Benin, yields thus appear to be volatile and, more worryingly, in recent years they have come down to the level where they were in the early 1970s.

What are the causes of the performance in the cotton sector in Benin? This chapter aims to provide a diagnostic of the cotton sector in Benin. In particular, it reviews the underlying factors of the sector’s performance, with an emphasis on the role played by institutional factors. Over the years the sector has operated under different modes of organisation, between public and private types, each of which has been reversed over time. We aim to elaborate on the underlying causes of these changes and their implications for the performance of the sector. For this purpose, we make use of academic and grey literature. Moreover, we obtained information from key informants within the sector.

Section II introduces the framework of the analysis. Section III summarises the historical background. Section IV reviews the performance of the cotton sector in the period 1961–2016. It seems too early to provide an analysis of the sector after 2016, particularly because we lack crucial information on the current functioning of the AIC. We therefore do not provide an in-depth analysis on the performance of the recent period, but we leave such an analysis for future research. Section V presents the synthesis of the diagnostic.

II Analytical Framework

B External Factors

External factors include international forces that cause fluctuations in the global cotton price. Figure 5.2 displays monthly data on world cotton prices in US$ and CFA Francs (CFA), together with the CFA Franc/US$ nominal exchange rate over the period 1980–2017. The figure also displays the real producer price, which we obtain by dividing the nominal price by the consumer price index (CPI). The co-movement between the nominal and real price series is strong (0.65). Therefore, the rest of the discussion will be focused on the nominal series.

Figure 5.2 World cotton price and the CFA Franc/US$ exchange rate (1996=100)

Source: Authors’ calculations based on International Monetary Fund (IMF) commodity database and IMF internal financial statistics. Real price in CFA Francs is obtained by normalising the nominal price by CPI. Due to missing data we were not able to construct the real price before 1991M12. After the CFA/kg were constructed all series were transformed in indices worth 100 in base year 1996. The real series starts from 1991M12 because of missing information on CPI prior to that date.

The data show that variations in both the nominal exchange rateFootnote ⁷ and the US$ value of world cotton prices have caused great fluctuations in the CFA Franc value of the cotton price. In the second half of the 1980s, in 2001–2002, and in 2004–2009, for instance, the US$ value of cotton prices exhibits a declining trend, amplified by a persistent appreciation of the CFA Franc. We briefly discuss the causes of these fluctuations in the world US$ cotton prices. Thereafter, we elaborate on their impact on domestic cotton supply and the welfare of producers.

1 Understanding the Fluctuations in World Cotton Prices

Fluctuations in the world US$ price of cotton are caused by both demand and supply forces (see, e.g. Janzen et al., Reference Janzen, Smith and Carter2018). The impact of world supply operates through the action of subsidies in some leading cotton-producing countries, the USA in particular. For instance, FAO (2004) argues that world cotton prices would have been 10–15 percentage points higher in the absence of the subsidies to cotton producers in big producing countries. In value terms, the effect of subsidies amounts to a loss of about US$150 million in the export earnings of West African cotton-producing countries (Tschirley et al., Reference Tschirley, Poulton and Labaste2009). In 2003, a number of these African countries (Benin, Burkina Faso, Chad, and Mali) submitted a case to the World Trade Organization (WTO) to request the elimination of such subsidies by the Organisation for Economic Co-operation and Development (OECD) and financial compensation. Following discussions at the WTO, the USA removed around 15 per cent of its subsidies to the cotton sector, but did not provide any direct compensation.

On the demand side, fluctuations in world cotton prices are explained by variations in global demand and by the development of substitutes in the form of synthetic fibres. The role of synthetic fibres in the global market has grown considerably over the past decades (see Baffes, Reference Baffes2004; Krifa and Stevens, Reference Krifa and Stevens2016). In particular, the share of cotton fibres in the world market of textile fibres shrank considerably from 70 per cent to below 30 per cent between 1960 and 2014, due to the marked decrease in the relative price of synthetic fibres (see Figure 5.3b below). For Benin and other West African countries, this new factor calls into question the sustainability of any long-term development strategy grounded primarily in the cotton sector. However, in absolute terms there is no decline in cotton fibre. We come back to this issue in Section V.

2 Welfare Impact of Cotton Price Fluctuation

Farmers are sensitive to the price of cotton, especially because cotton requires more labour effort and other inputs than other crops.Footnote ⁸ A number of studies find a positive response of the supply of seed cotton to production price and a positive effect of higher prices on producers’ welfare in Benin (e.g. Alia et al., Reference Alia, Floquet and Adjovi2017; Gergely, Reference Gergely2009; Hugon and Mayeyenda, Reference Hugon and Mayeyenda2003; Minot and Daniels, Reference Minot and Daniels2005; World Bank, 2004). For instance, Alia et al. (Reference Alia, Floquet and Adjovi2017) report price elasticities of the cotton supply ranging from 1.3 to 2.6.Footnote ⁹ In a related study, Minot and Daniels (2002) find that a 40 per cent reduction in the producer price of cotton results in a 6–8 per cent increase in rural poverty.Footnote ¹⁰ Moreover, they estimate the multiplier effect of cotton: national income would be reduced by US$2.96 for each US$1 decrease in the income of cotton farmers.

These micro-economic findings are in line with the aggregate data reported in Figures 5.3a and 5.3b. First, Figure 5.3a shows a strong co-movement between the world price and the producer price, although the strength of the correlation is less pronounced before 1992 when the statistics are based on the cyclical component of the two prices. We elaborate later, in Section III, the producer price-setting rules. Second, following the drop in cotton prices observed during the years 2001–2009, both the output and the surface of land planted in cotton have declined significantly in Benin and Burkina Faso. However, Benin displayed a much larger negative response, suggesting that country-specific factors may also explain the behaviour of cotton supply.Footnote ¹¹ Conversely, cotton supply increased sharply in the same countries following a strong increase in the US$ price and the devaluation of the CFA Franc in 1994.

Figure 5.3a World and Benin producer prices of cotton (CFA/kg) and rolling correlation coefficients of the prices

Sources: Authors’ calculations based on data derived from several sources. The original world price of cotton comes from the World Bank and has been converted into CFA Francs with the exchange rate series obtained from World Development Indicators. The producer price series comes from Baffes (Reference Baffes2007) prior to 1980, Kpadé (Reference Kpadé2011) from 1980 to 2009, and INSAE for the remaining period.

Figure 5.3b World and producer prices of cotton (CFA/kg) and rolling correlation coefficients of the prices

Sources: Authors’ calculations based on data derived from several sources. The original world price of cotton comes from the World Bank and has been converted into CFA Francs with the exchange rate series obtained from World Development Indicators. The producer price series comes from Baffes (Reference Baffes2007) prior to 1980, Kpadé (Reference Kpadé2011) from 1980 to 2009, and INSAE for the remaining period. The correlation coefficient value for 1980 is obtained using information from 1970 to 1979. The correlation coefficients for the cyclical components are based on de-trended series using the HP filter where the value of the smoothing parameter is set to 100.

III Historical Background of Cotton in Benin: 1641–1960

A Pre-colonial Period to 1949: Private Mode of Organisation

The origin of cotton in Benin dates back to the pre-colonial period. Cotton was produced in the northern (Atacora–Donga and Alibori–Borgou departments) and central (Zou–Collines departments) regions of the country, and the raw cotton was entirely processed by the local artisanal textile sector (D’Almeida-Topor, Reference D’Almeida-Topor1995; Manning, Reference Manning1980, Reference Manning1982).Footnote ¹⁵ Map 5.1 shows that the Alibori–Borgou departments easily dominated cotton production. Moreover, the data reported in Figure 5.4 show that the central region, which was the second most important contributor to cotton production in the 1970s and 1980s, has declined considerably over time. In fact, the level of cotton production (not reported) has increased in the northern region, while it has decreased in the central region.

Map 5.1 Share of the main cotton-producing areas, 2016 (per cent)

Sources: Authors’ calculations based on DSA.

Figure 5.4 Share of the main cotton-producing areas, 1979–2016 (per cent)

Sources: Authors’ calculations based on data from Kpadé (Reference Kpadé2011), Benin (1994), and Direction de la Statistique Sociale (DSA).

The northern region has a dry climate whereas the central region has a humid climate. A humid climate is less favourable to cotton production and this partly explains the decline in cotton production in the central region (e.g. Ton, Reference Ton2004). In particular, the producer cost of cotton is relatively high in that region, for example because farmers would need to consume relatively more pesticide to protect cotton from diseases. As a result, farmers switch more frequently to alternative crops when the relative producer price of cotton decreases (and/or the relative cost of cotton increases, or when the quality of input deteriorates). On the other hand, the support of development aid projects is one possible explanation for the increase in the production in the northern region.Footnote ¹⁶ We will elaborate on these points later (Figure 5.4).

During the colonial period (1894–1959), French entrepreneurs encouraged the production of cotton with the purpose of supplying cotton to their textile industries in France.Footnote ¹⁷ They developed two main strategies, which seem to be still relevant today (Kpadé and Boinon, Reference Kpadé and Boinon2011 and Manning, Reference Manning1982): (1) introduction of new varieties of the Barbadense family of cotton to improve productivity; and (2) promotion of small-sized farming (in order to limit labour movement).Footnote ¹⁸ In this context, ginneries were built in the central area (in Savalou and Bohicon) in order to process raw cotton.Footnote ¹⁹

The market structure of the cotton industry in this period was thus decentralised and potentially competitive, with the private sector in charge of the main activities, including marketing and processing. Following these efforts cotton production improved and exports to France began around 1904Footnote ²⁰ (Manning, Reference Manning1982). The two ginneries were upgraded in 1924 (Savalou) and 1924 (Bohicon). However, the sector’s development was still marginal around 1926Footnote ²¹ (Figure 5.5). One problem was the low producer price compared to other crops (coffee, cacao) that were subsidised by the colonial authorities. Moreover, due to several market imperfections that characterise Africa’s rural areas, the market-based mode of coordination did not ensure efficient provision of inputs and agri-services to farmers (Kpadé and Boinon, Reference Kpadé and Boinon2011).

Figure 5.5 Cotton exports, 1903–1960 (tonnes)

Source: Authors’ calculations based on data from Manning (Reference Manning1982) and Kpadé (Reference Kpadé2011). The original data obtained from the two sources did not coincide in several periods. The data reported here are a simple average of figures from both sources. Data are missing in 1942–1944 due to World War II.

IV Understanding the Performance of the Cotton Sector in Benin: 1961–2016

V Concluding Remarks

The cotton sector presents a unique opportunity to understand the causes and consequences of institutional changes in Benin over a long historical period. The sector has operated under different modes of organisation, oscillating between public and private monopolies over time, as summarised in Table 5.1. Initially, the cotton sector was managed by French entrepreneurs. From the end of the 1940s the sector came under the control of a French parastatal monopoly, the CFDT, which helped to modernise the sector with the support of development aid. In 1972, the Marxist–Leninist regime of Kérékou nationalised the CFDT, which was replaced by a number of government agencies. The system thus disintegrated, which increased coordination costs and resulted in poor performance. Thereafter, the sector entered a first restructuring period in the early 1980s and the government agencies were re-integrated into a single state agency, SONAPRA. Poor management problems and adverse world price shocks undermined the sector’s performance in 1986. After another restructuring plan the sector started a liberalisation period in 1992, after the country achieved a successful democratic transition in 1990. In particular, a liberalisation plan was implemented in 1992–1998 and private Beninese entrepreneurs started operating in the inputs and ginnery components of the sector. Thereafter, the sector experienced a crisis from the late 1990s and an inter-professional association of private entrepreneurs, AIC, became responsible for the management of the sector in 2000–2006, but the government continued to play an important role. In 2007 a new government suspended AIC. Thereafter, SONAPRA was privatised in 2008 and a dominant private group emerged. AIC became responsible again for the sector in 2009, but new problems in the sector led the government to suspend AIC from 2012 until 2016, when AIC was again given the management of the sector.

What are the common causes of these institutional changes? What are the common institutional weaknesses in the cotton sector in Benin? What are their consequences for economic development in Benin? Can Benin develop a long-term development strategy based on cotton?

Along with starchy staple crops, cotton dominates the farming landscape in West Africa. Cotton is primarily cultivated under rainfed conditions in rotation with maize, sorghum, and/or millet on small family farms that average fewer than ten hectares. Being the primary source of income for millions of smallholder farmers, cotton can help reduce poverty and improve food and nutrition security. As a main source of export revenue, cotton has wide-reaching implications for poor developing economies in West Africa.

The extent that cotton contributes to the socio-economic development of West African countries depends heavily on the economic performance of their cotton sectors. In turn, the incentive structure embodied in institutions influences the cotton sector’s economic performance. Supportive institutions positively affect the ability of individuals and organisations to respond to new opportunities and challenges. Well-designed institutions provide incentives for individuals and organisations to invest, can limit the economic and political power of the elites, and create more economic equal opportunities for a greater share of the population (Acemoglu, Reference Acemoglu2003).

Over the last several decades, major institutional changes have been experimented with in West African cotton sectors, with the goal of increasing economic performance. These have included changes in social, political, and economic institutions, coming especially from market liberalisation and privatisation. With institutional changes come shifts in incentives and distributional power. These shifts have affected the economic performance of multiple West African cotton sectors, including those of Benin, Burkina Faso, and Mali.

West African cotton sectors compete in a highly competitive and global environment. Although cotton production and exports are key to their economies, West African countries play a relatively small role in the international cotton market compared to larger cotton producers and exporters, such as China, India, and the USA. As smaller players on the global stage, they need the ability to adapt to external forces (e.g. price fluctuations, tariffs, subsidies). In addition, West African cotton sectors face internal constraints that can impede economic development, such as missing or imperfect access to inputs, financing, and insurance. Well-designed and implemented cotton-based institutions can help mitigate both external and internal challenges and support the socio-economic development of their countries.

Many institutional changes have occurred in the West African cotton sectors since achieving independence and a common goal has been improving economic performance. These changes can be grouped into four general periods: (1) contract with the French parastatal; (2) nationalisation of cotton gins; (3) implementation of market-oriented reforms; and (4) post-market reforms. Several indicators have been used to assess the economic performance of West African cotton sectors. These include production and yield; price; access to inputs, credit, and extension services; cotton quality; farm technical efficiency; research and development; export revenues; and profitability (Thériault and Serra, Reference Thériault and Serra2014; Thériault and Tschirley, Reference Thériault and Tschirley2014; Tschirley et al., Reference Tschirley, Poulton and Labaste2009).

John R. Commons’ institutional economic framework is well adapted to understanding the evolution in institutions and their related effects on economic performance (Thériault and Sterns, Reference Thériault and Sterns2012; Commons, Reference Commons1934). According to Commons’ framework, actions to address limiting factors are the drivers of institutional changes. These actions have both intended and unintended consequences that affect economic performance, which in turn can lead to the advent of a new set of limiting factors. New sets of limiting factors resume the cycle of institutional change. Each institutional change generates a new incentive structure and affects power dynamics within the sector. Stakeholders are more likely to resist changes that would decrease their power.

I Contract with the French Parastatal (1960 to MID-1970s)

Before the country’s independence, the French parastatal, CFDT, had significant control over the cotton sectors in which it operated, managing farm input delivery and the grading and weighing of seed cotton, as well as exports. In return for its monopoly status, the French parastatal agreed to purchase all cotton production at guaranteed fixed prices announced before the planting season. During this period, production went up and the CFDT was profitable. However, much of the profits were retained by the French parastatal and little was reinvested in West Africa, and this impeded economic development.

II Nationalisation Of Cotton Gins (Mid-1970s to Mid-1990s)

One of the major institutional changes corresponds to the end of the monopoly contract with the CFDT. To encourage economic development after independence, several West African governments nationalised their cotton sectors, which gave them control over the allocation of cotton export revenue. During this nationalisation period, cotton became a primary vehicle for boosting agricultural productivity and helped to promote integrated rural development (Thériault and Tschirley, Reference Thériault and Tschirley2014). Both cotton and cereal yields benefited from greater public investments. State-owned enterprises played an important role in developing and maintaining rural roads infrastructure, providing access to drinkable water, and reducing illiteracy. Yet, in the absence of strong institutions, greater power created incentives for rent-seeking behaviours and political interference. Farmers were still lacking a voice in decisions related to cotton activities. The combination of low farm-gate prices, mismanagement, and inefficiencies in ginning operations led to significant debts and discontent among farmers.

III Market-Oriented Reforms (Mid-1990s to Late 2000s)

In response to poor financial performance, donors started to push for market privatisation and liberalisation. The market-oriented reform process gave farmers the opportunity to better organise themselves to increase their voice within the cotton sector. Village-wide, multipurpose farmer associations were transformed into formal groups focused on cotton farmers. More responsibilities, such as the management of farm input credit, were transferred to them. Even though farmers, through their organisations, became more involved in management activities, their limited negotiation power in the determination of the price they received from the gins remained a limiting factor (Thériault and Sterns, Reference Thériault and Sterns2012).

Market reforms were unevenly and partially implemented (Thériault and Serra, Reference Thériault and Serra2014). Benin made stronger attempts to privatise and liberalise its cotton sector than Burkina Faso and Mali. However, the establishment of several new cotton ginneries in Benin did not lead to increased competition, since the vast majority of them fell under the same, private rather than public, ownership. Despite the creation of new gins in Burkina Faso, the former state-owned enterprise continues to be the dominant player. After years of privatisation discussions, the Malian cotton sector remains managed by the state-owned enterprise, although it did undergo a change in management. Several factors can explain the uneven and partial implementation of the reforms, including resistance to change due to a loss of governmental power, as well as scepticism about the need for change and expected outcomes.

IV Post-Market Reforms (Late 2000s to Date)

In the post-market reform era, most efforts have been channelled towards increasing production. When world prices are high, increased production translates into greater export revenues. With greater export revenues, poor financial performance is less apparent, and therefore there is less push for market reforms. Cotton has been and continues to be produced under contract farming conditions, with guaranteed purchase of seed cotton at fixed pre-planting pan-territorial prices, and provision of inputs on credit. Both farm-gate and input prices have been key limiting factors to increased production. Price incentives, in particular through governmental fertiliser subsidies, have been used to encourage farmers to increase cotton production and productivity. But this has not always been enough to keep farmers content, as evidenced by the repeated farmer boycotts in Burkina Faso recently. After years of decline, Benin cotton production has been rising again over the last few years. This increase coincides with the arrival of the new president, who has a vested interest in the Beninese cotton sector (Honfoga et al., Reference Honfoga, Houssa, Dedehounaou, Bourguignon, Houssa, Platteau and Reding2019).

The current economic performance of West African cotton sectors remains highly affected by institutional structure. There is a trade-off between competition and effective coordination (Tschirley et al., Reference Tschirley, Poulton and Labaste2009). Effective coordination tends to facilitate the provision of services and improve the quality of cotton. Market competition tends to provide incentives for higher farm-gate prices and greater cost efficiency at the gin level. In more regulated cotton sectors, such as in West Africa, farmers are provided with extension services and inputs on credit, but receive lower farm-gate prices due to limited competition. The fact that no institutional structure performs unambiguously better across all performance dimensions can, in part, explain the abandonment of market reforms.

The institutional structure also affects the ability of cotton to spur food crop productivity (Thériault and Tschirley, Reference Thériault and Tschirley2014). This indicator has been the strongest in the regulated cotton sectors of West Africa. Direct and indirect pathways, through which state-owned enterprises have contributed to food crop intensification, include input provision and extension advice for food crops and agronomic spill-overs. Moving from a regulated to a more competitive market structure could have affected the food–cotton crop interdependence in West Africa, which may have threatened food security in the region.

Other limiting factors to the economic performance of West African cotton sectors include climate change, invasive species, low technology adoption, and lack of market influence. The increasingly erratic rainfall as a result of climate change has a detrimental impact on cotton production and productivity. The proliferation of counterfactual pesticides makes it more challenging to control for pests, while posing human, environmental, and financial risks to cotton farmers. With limited investment in agricultural research and development, West African cotton sectors are facing low and stagnant yields. Low adoption of technologies by farmers and gins results in low yields, limited traceability, and quality issues from contamination. With low processing capacity and domestic consumption, they are vulnerable to global development.

Moving forward, it is essential that any proposals to reform the West African cotton sectors take into account the institutional setting, such as the strong intertwined relationship between food and cotton crops, in order to avoid major discrepancies between expected and realised economic performance. Increasing farm productivity, while strengthening farmer resilience as well as ginning efficiency, is key to improving the economic performance of the West African cotton sectors. The promotion of regional integration is a viable approach for West African cotton sectors to increase their influence in the international market. Building strong institutions take times, but once built, they help to ensure that economic development occurs in an effective, accountable, and inclusive way.

I Introduction

The 2015 Addis Ababa Conference highlighted the central role of domestic revenue mobilisation for financing development in the context of the Sustainable Development Goals. Improving tax revenue contributes not only to the financing of public spending, but also to reinforcing the accountability of the government (see Brautigam et al., Reference Brautigam, Fjeldstad and Moore2009).

With a tax revenue to gross domestic product (GDP) ratio equal to 13.5 per cent in 2017 (IMF, 2018),Footnote ¹ Benin remains below the West African Economic and Monetary Union (WAEMU) criterion of 20 per cent. Meanwhile, at the same date, Togo, a neighbouring country, managed to raise 18.3 per cent of its GDP in terms of tax revenue. Such a gap (between Benin and Togo) is not temporary, but seems to be lasting and has even increased in 2010–2015 (see Figures 6.1a and 6.1b).

Figure 6.1a Share tax over GDP

Source: Authors’ calculations.

Figure 6.1b Non-resource tax over GDP

Source: Authors’ calculations.

Both countries inherited the same tax law, the French Tax Code, when they gained their independence – on 1 August 1960 for Benin and on 27 April 1960 for Togo. Both countries belong to the same customs and monetary union, WAEMU. The WAEMU Commission has produced several tax Directives, covering the main taxes (corporate income tax, value-added tax, excises, etc.), which aims to bring about tax harmonisation or coordination among the eight member statesFootnote ² (see Mansour and Rota-Graziosi, Reference Mansour and Rota-Graziosi2013). These Directives strictly limit any potential divergence of Beninese and Togolese tax laws after 1960. However, some discrepancy may still emerge not only in the enforcement of these tax laws by the tax and customs administrations, but also as a result of the scope of derogatory regimes (for instance, the Investment Code) that generate tax expenditures.Footnote ³

An important difference between Togo and Benin relates to the administrative side. In 2014, Togo transformed its tax and customs administrations into a single revenue authority (the Office Togolais des Recettes), while Benin has a more ‘classic’ organisation for French-speaking countries, with two separate administrations: tax and customs administrations.Footnote ⁴

First, using a database providing information on tax revenue over the period 1980–2015, covering forty-two sub-Saharan African (SSA) countries,Footnote ⁵ we analyse the efforts by Benin to raise tax revenue, as relates to its structural characteristics. The analysis aims to compare the non-resource tax-to-GDP ratio in Benin with its peers, to identify whether Benin is near to, or far away from, its tax frontier, before exploring possible scope for greater tax revenue raising and for tax policy and administration reforms.

We conclude that the tax effort in Benin has remained relatively stable during the period, with an average of 63.5 per cent of its total potential tax revenue over the period, ranked fourteenth out of forty-two countries. A tax effort of 63.5 per cent means that the level of non-resource tax revenue is at 36.5 per cent of the country’s maximum capacity. Knowing that, on average, Benin collects 11.45 per cent of its GDP in non-resource tax revenue and is at 63.5 per cent of its capacity, it would have raised 18.03 per cent of its GDP as non-resource tax revenue if it had used all its potential, given its characteristics. The estimated gap is higher than that estimated by Cui et al. (Reference Cui, Sola and Dieterich2016), which was 1.5–2 per cent of GDP based on a sample of SSA countries for the period 1995–2011.

The analysis identifies a higher tax effort in Togo, which exhibits a tax effort of 69.9 per cent on average and is ranked fifth out of forty-two countries. Togo would have mobilised 21.61 per cent of non-resource tax revenue as a percentage of GDP if it had made the maximum tax effort. This result appears intuitive. Indeed, Togo has a lower GDP per capita than Benin (US$6,280 for the former and US$6,480 for the latter) and its agricultural share is more important (35.73 per cent of GDP in Togo; 35.11 per cent in Benin). These characteristics penalise the mobilisation of non-resource tax. At the same time, Togo mobilises more non-resource tax revenues (15.11 per cent of GDP in Togo; 11.45 per cent in Benin). Hence, unfavourable characteristics of Togo, combined with its relative success in mobilising revenues, translate into a higher tax effort of Togo with respect to Benin.

Second, we study the effect of some economic and institutional variables on tax effort. While the calculation of the tax effort includes only structural supply factors of the tax pressure as inputs to the stochastic frontier analysis, we then study the effect of demand factors on the estimated level of tax effort.Footnote ⁶ Using a logistic regression, we study in particular the effect of the presence of natural resources, aid, transparency, corruption, and accountability, and the political regime and stability. We find that aid is associated with a lower probability of belonging to a quartile of high tax effort, while institutional quality – measured by the Country Policy and Institutional Assessment (CPIA) index – increases the probability of belonging to an efficient quartile in terms of tax effort. If the effect of the political system is not clear, political stability is strongly and positively associated with a greater likelihood of having a high tax effort.

Third, we analyse the potential policy and administrative sources of the tax gaps. We shed light in particular on the human resource policy of the tax administrationFootnote ⁷ and the remuneration mechanisms, which may be obsolete.

The chapter is structured as follows: Section II presents the tax effort estimation; Section III proposes an empirical study of the effect of some institutional and economic factors on the estimated tax effort scores; Section IV reviews some tax policy and tax administrative issues and proposes reforms, with a view to improving tax mobilisation; and Section V concludes.

II Empirical Estimation of Tax Effort in Benin: A Stochastic Frontier Analysis

We define tax effort as the extent to which the actual tax revenue collected is near the maximum level of tax resource that could be collected. In other words, tax effort in Benin is the extent to which Benin makes use of its potential for tax revenue regarding its tax base and its structural supply characteristics.

The empirical analysis is based on a sophisticated stochastic frontier analysis in which commonly used supply factors driving government tax revenue are considered as the inputs and the total non-resource tax revenue as the output (see Box 6.1). The rationale behind these methods is that an economic agent cannot exceed an ‘ideal frontier’, which is the optimal level of output, given the limited endowment of inputs. The tax frontier refers to the tax capacity, which represents the maximum tax revenue that a country could raise given its structural characteristics. The model used in the study by Kumbhakar et al. (Reference Kumbhakar, Lien and Hardaker2014) makes it possible to distinguish country effects, persistent inefficiency, and time-varying inefficiency. Hence, we control for country effects – which capture the effect of time-constant variables for each country – and obtain a total level of inefficiency that is the result of an identified persistent inefficiency and of a time-varying inefficiency for each country.

In the first stage of the estimation, countries’ tax ratio is regressed on a vector of structural explanatory variables. The calculation of the tax effort includes only structural supply factors of the tax pressure as inputs to the stochastic frontier analysis. Demand factors are excluded from the estimation of the tax effort: the impact of these factors on the level of tax effort is studied in the second part of the analysis. Based on the relevant literature on the determinants of government tax revenue, we introduce the following set of inputs in the stochastic frontier analysis:

1. i. The level of development: Countries’ tax capacity is positively associated with the level of economic development (proxied by real GDP per capita), which is linked to the efficiency of tax administration, the degree of economic and institutional sophistication, and the demand for public goods and services (see Lotz and Morss, Reference Lotz and Morss1967; Tanzi, Reference Tanzi, Newbery and Stern1987; Pessino and Fenochietto, Reference Pessino and Fenochietto2010; Crivelli and Gupta, Reference Crivelli and Gupta2014).

2. ii. Agriculture value-added (percentage of GDP): In addition to the numerous sectoral tax exemptions and tax holidays typically provided in developing countries, agriculture is often considered hard to tax in developing countries. Focusing on SSA countries, Stotsky and WoldeMariam (Reference Stotsky and WoldeMariam1997) emphasise that the share of value-added of this sector in GDP is negatively associated with tax revenue.

3. iii. Trade openness: Trade liberalisation policies implemented in most developing countries in the early 1970s have substantially increased trade volume in these countries. Therefore, trade openness expressed as total trade (imports and exports) as a share of GDP is expected to influence tax revenue, in particular through household consumption and domestic corporate profits (Stotsky and WoldeMariam, Reference Stotsky and WoldeMariam1997; Pessino and Fenochietto, Reference Pessino and Fenochietto2010; Keen and Perry, Reference Keen and Perry2013, among others).

4. iv. Financial development: High financial development combined with high access to credit allows individuals and firms to finance profitable projects, which favour tax collection (Gordon and Li, Reference Gordon and Li2009). On the other hand, in the presence of an ineffective financial system, firms can successfully evade tax payment by conducting business in cash, which is harder for tax administrations to monitor.

Table 6.1 displays the pairwise correlation between interest variables. As expected, all variables are positively associated with non-resource tax revenues, except the agriculture sector, which is significantly and negatively correlated with non-resource tax revenues. The detailed sources and definitions of variables are provided in the Appendix to this chapter (Table 6.A1).

Box 6.1 Estimation Strategy: Stochastic Frontier Analysis

An approach that is increasingly being used to capture countries’ tax effort is the stochastic frontier method, which was introduced in the seminal work of Aigner et al. (Reference Aigner, Lovell and Schmidt1977) to model firms’ production behaviour (see Pessino and Fenochietto, Reference Pessino and Fenochietto2010; Langford and Ohlenburg, 2015). The literature proposes several parametric and non-parametric models for stochastic frontier estimation. Data envelopment analysis (Charnes et al., Reference Charnes, Cooper, Lewin and Seiford2013) and the free disposal hull (Deprins et al., Reference Deprins, Simar, Tulkens, Marchand, Pestieau, Tulkens, Marchand, Pestieau and Tulkens1984) are the two main – and increasingly popular – methods used for non-parametric stochastic frontier models. The main disadvantage of such methods lies in the fact that the production function is more heavily influenced by outliers, and thus more vulnerable to measurement errors (Clements, Reference Clements2002).

We draw on a parametric model to estimate the tax effort as we are dealing with a single output (the total non-resource tax-to-GDP ratio). In panel data analysis, parametric models can be categorised into five groups: (1) time-invariant technical inefficiency models; (2) time-varying technical inefficiency models; (3) models that separate firm heterogeneity from inefficiency; (4) models distinguishing persistent and time-varying inefficiency; and (5) models separating firm effects, persistent inefficiency, and time-varying inefficiency. We use the model by Kumbhakar et al. (Reference Kumbhakar, Lien and Hardaker2014) that makes it possible to distinguish country effects, persistent inefficiency, and time-varying inefficiency. We estimate the following equation:

$NRTA{X}_{i,t}=\alpha +X_{i,t-1}\beta +{\psi }_i+{\varphi }_{it}$(1)

$where\left(\begin{array}{c}{\varphi }_{it}= {ϵ}_{it}- {\eta }_i- {\mu }_{it}\\ {\mu }_{it}>0 \text{}; {\eta }_i>0\end{array}\right)$(2)

The dependent variable $NRTA{X}_{i,t}$ (Equation 1) represents the natural logarithm of total non-resource tax revenue. The subscripts i and t and denote country and time dimensions, respectively. $X_{i,t-1}$ is a vector of structural and institutional factors explaining countries’ tax ratios, which are one period lagged to mitigate endogeneity issues and to account for delays in their effect on non-resource tax revenue. Time-invariant country-level characteristics that could potentially affect government non-resource tax revenue are captured by ψ_i. The last term, ${\varphi }_{it}$, is a three-component error term (Equation 2) including time-invariant tax inefficiencies ${\eta }_i$ (i.e. persistent tax inefficiencies owing, for instance, to sociological, cultural, religious, or geographical factors) and time-varying tax inefficiency ${\mu }_{it}$ (e.g. tax losses due to tax policy, tax administration, or tax officials’ qualifications, which can change over time). Thus, the model makes it possible to identify persistent and time-varying factors determining SSA countries’ tax effort.

The combination of Equation 1 and Equation 2 can be rewritten as follows:

$NRTA{X}_{i,t}={\alpha }_0^{*}+X_{i,t-1}\beta +{\alpha }_i+{\vartheta }_{it}$(3)

with:

${\alpha }_0^{*}=\alpha -E\left({\eta }_i\right)-E\left({\mu }_{it}\right)$(4)

${\alpha }_i= {\psi }_i- {\eta }_i+ E\left({\eta }_i\right)$(5)

${\vartheta }_{it}= {ϵ}_{it}- {\mu }_{it}+E\left({\mu }_{it}\right)$(6)

Equation 3 is then estimated following a three-stage procedure: (1) In stage 1, the $\hat{\beta }$ is estimated by performing a random-effect-based regression (Equation 3). This stage gives the predicted values ${\hat{\alpha }}_i$ and ${\hat{\vartheta }}_{it}$ of ${\alpha }_i$and ${\vartheta }_{it}$, respectively. (2) In stage 2, the time-varying tax inefficiency, ${\mu }_{it}$, is estimated using the predicted values ${\hat{\alpha }}_i$ and ${\hat{\vartheta }}_{it}$ from the first stage. To do this, Equation 6 is estimated by performing a standard stochastic frontier technique. Using Battese and Coelli’s (Reference Battese and Coelli1988) model, this procedure gives the prediction of the time-varying tax effort, $exp\left(-{\mu }_{it}|{\vartheta }_{it}\right)$; (3) Finally, in stage 3, the persistent tax inefficiency component ${\eta }_i$, is estimated by performing a stochastic frontier model on Equation 5 as in the previous stage. The persistent tax effort is then predicted and given by $exp\left(-{\eta }_i\right)$. Hence, the overall tax effort is obtained by the product of the time-varying tax effort and the persistent tax effort.

Table 6.2 presents the summary statistics for the full sample and for Benin and Togo. Benin is generally below the mean for the full sample (except for the agriculture share). It is slightly above the average of its income group, the low-income countries. Benin and Togo have very similar characteristics. As we noted, however, the ratios of tax and non-resource tax over GDP are higher on average in Togo than in Benin (Figure 6.1), while Benin has a higher GDP per capita and a lower agriculture share, which should facilitate tax revenue mobilisation. Although Togo has a higher trade openness and a better financial development index, this is not sufficient to explain the far higher tax over GDP ratio for Togo relative to Benin. While Benin’s performance is growing relatively steadily, Togo’s performance is more unstable. Except over the period 1992–2002, the ratios of tax and non-resource tax over GDP have been lower in Benin than in Togo (for more details see Caldeira and Rota-Graziosi, Reference Caldeira, Rota-Graziosi, Bourguignon, Houssa, Platteau and Reding2019).

Table 6.3 presents the three-stage estimation results. The first-stage estimation involves regressing countries’ tax ratio on a vector of explanatory variables. All variables have the expected sign and are strongly significant at the 1 per cent level: per capita real GDP, trade openness, and financial development are positively associated, while the share of the agriculture sector is negatively and significantly correlated with non-resource tax revenues (Table 6.3 A). The level of development measured by the per capita real GDP has a significant effect on countries’ non-resource tax ratio: a 1 per cent increase in real GDP per capita is associated with a 0.243 percentage point increase in non-resource tax revenue.

From that first stage, the Kumbhakar et al. (Reference Kumbhakar, Lien and Hardaker2014) model determines the maximum tax potential for each country, given its structural characteristics, estimates the persistent and time-varying inefficiencies, and computes the total inefficiency. On average in the period, SSA countries are at 53.96 per cent of their potential, so that they have room for about 46.04 per cent additional non-resource tax revenue (see Table 6.3 D). Knowing that, on average, countries collect 12.46 per cent of their GDP in non-resource tax revenue, they would have raised 23.09 per cent of their GDP as non-resource tax revenue if they achieved their maximal capacity, given their characteristics. The differences in total tax effort across SSA countries are mainly driven by persistent factors: the full sample average stands at 0.8005, 0.6724, and 0.5396 for the time-varying, the persistent, and the total tax effort, respectively. That room includes both tax administration (e.g. corrupt tax officers, tax evasion, inadequacy of tax administrations, tax exemptions, etc.) and tax policy. It is hard to determine whether persistent and variant inefficiencies are attributable to a tax gap or an administrative gap. If there is a tendency to associate the persistent inefficiencies with an administrative gap, and time-varying inefficiencies with a tax policy gap, significant administrative reforms may be implemented over time while tax policy may experience some persistence over time. In any case, the persistent factors – whether they come from administrative or tax policy inefficiencies – explain the major part of the inefficiencies.

Table 6.4 provides a country ranking over the period studied based on their total tax effort scores.Footnote ⁸ Lesotho, Burundi, and Malawi appear to be the most efficient countries, while Equatorial Guinea, Angola, and Nigeria record the lowest tax efforts. The tax revenue ratio as a percentage of GDP is high in efficient and low in non-efficient countries. At the same time, Angola and Equatorial Guinea have GDP per capita levels well above the average. Thus, Angola and Equatorial Guinea’s poor performance are the result of the combination of low output and advantageous inputs. These two countries are rich in natural resources and the effort made to raise non-resource tax revenues appears to be very low. By contrast, Burundi manages to raise more revenues than the average while its characteristics are very unfavourable. Over the 2001–2015 subperiod, Togo emerges as the top performer, with a tax effort score of 0.78 in 2015 (rank 1).

The average tax effort score for the full sample – which amounts to around 54 per cent – remained on average relatively stable (Figure 6.2) during the period. Starting in the late 1980s for Benin and early 1990s for Togo, the performance in terms of tax effort for both countries has improved. The trend for Togo is more one of boom and bust, but the gap in performance between the two countries stands around 6 percentage points. Togo has 9 percentage points more than Benin at the end of the period and ranks first among all countries. However, with a total tax effort level of 0.78 and 0.69 in 2015, Togo and Benin have not recovered their level of tax effort of the beginning of the period. Nigeria, Côte d’Ivoire, Cameroon, and Malawi also experienced an overall decline in performance during the period. Togo has experienced an increase in the last fifteen years (Figure 6.3). By contrast, Benin’s tax effort has declined over the same period.

Figure 6.2 Tax performance over time

Source: Authors’ calculations.

Figure 6.3 Growth rate of tax effort over the period 2000–2015

Source: Authors’ calculations.

We extend the analysis by estimating the tax effort by type of tax: value-added tax (VAT), corporate income tax, personal income tax, trade tax, and excise (Table 6.5). These results should be interpreted with caution. Indeed, tax revenue determinants of the different taxes (inputs) may differ. At the same time, comparison would be complex if a different model were determined for estimating the tax effort for each type of tax. We therefore chose to maintain the same model.

The tax effort is heterogeneous according to the type of tax. In particular, Benin appears relatively better ranked in terms of VAT (rank 4) and corporate income tax (rank 13) than in terms of trade tax (rank 28), excise (rank 15), and personal income tax (rank 14). The tax effort for VAT is 0.686 and on trade tax 0.666, and only 0.344 and 0.396 on average for corporate income tax and personal income tax. The ranking in terms of Togo’s performance is more homogeneous, but the values of the tax effort vary according to the type of tax: from 0.676 for trade tax to 0.504 for corporate income tax and only 0.452 for personal income tax. These results tend to corroborate those of Cui et al. (Reference Cui, Sola and Dieterich2016), which show an under-performance in terms of income tax relative to the performance in terms of trade tax in Benin.

III The Determinants of Tax Effort: A Logistic Regression Analysis

Using a logistic regression, we now study the effect of some variables – natural resources, aid, institutional quality, political regime, and political stability – on tax effort.

As a first step of the analysis we present some general descriptive statistics. We can observe that non-resource-rich countries and non-fuel exporters have higher tax effort scores than their resource-rich peers. This may support the view that governments in resource-rich countries have less incentive to mobilise tax revenues when they have resource rent. Similarly, landlocked countries make a more intense tax effort and countries that are considered as offshore financial centres have low performance in terms of tax effort. East African Community (EAC) and WAEMU member countries appear to have better performance than Communauté Economique et Monétaire d’Afrique Centrale (CEMAC) and South African Community (SAC) countries. If we look at the evolution of tax effort in the WAEMU and CEMAC countries, it appears that WAEMU countries are on average better performing, which lends some support to the arguments in favour of regional harmonisation (of both customs and domestic tax policies).

Benin has little room to increase tax revenues unless it addresses the reasons why it is below weak taxable capacity by conducting institutional reforms to expand its tax revenue potential. Using the International Country Risk Guide (ICRG) database and following Frankel et al. (Reference Frankel, Vegh and Vuletin2013), we compute an index of institutional quality based on an average of four normalised variables: investment profile, corruption, law and order, and bureaucratic quality. Higher values of the index are associated with better economic and political institutions that should favour tax revenue collection.

In order to study rigorously the determinants of tax effort, we carry out an econometric analysis to complement the previous statistical analysis. Based on an international comparison, we examine the effect of some variables on tax effort scores. Our focus here is on the effect of natural resources, official development assistance (ODA), transparency, corruption and accountability (CPIA indicator), and the political regime and stability.

The analysis of the factors explaining the level of tax effort is based on a logistic regression. Tax effort scores range from 0 to 1, the most efficient countries having the highest scores. The ranking is grouped in quartiles according to the score obtained: we have four classes, from Q₁ to Q₄. Thus, the observations with the lowest scores belong to the first quartile, while the observations with the highest scores are in the fourth quartile. These quartiles are considered as the dependent variable. Using quartiles allows us to estimate the effects associated with each group of countries.

As the dependent variable is thus an ordinal variable, we use a mixed-effects ordered logistic model (see Liu and Hedeker, Reference Liu and Hedeker2006; Rabe-Hesketh and Skrondal, Reference Rabe-Hesketh and Skrondal2012). This model is an ordered logistic regression containing both fixed and random effects. The identification strategy makes it possible to control for the characteristics of countries that can affect the evolution of efficiency over time. We use a two-tier model. For M countries, the cumulative probability that a Y_it observation belongs to an efficiency quartile greater than q is given by:

$Pr\left(Y_{it}>q|X_{it},{\phi }_q,u_i\right)=H\left(X_{it}\beta +Z_{it}{u}_i-{\phi }_q\right)$

with X_it a set of covariates, ${\phi }_q$ a set of cut points,Footnote ⁹ and u_i a set of random effects (i=1,…,M country, each i has a given number of occurrences in time t=1,…,n occurrences). H() is the cumulative logistic distribution function that represents the cumulative probability. The X_it vector of dimension 1*p represents covariates for fixed effects with β coefficients. The 1*q vectors of Z_it are covariates corresponding to random effects and can be used to represent intercepts and random coefficients.

While the estimation of tax effort scores requires focusing on structural supply variables, we now consider the potential effect of demand factors on the estimated level of tax effort: natural resource rent, aid, institutional quality (transparency, corruption, and accountability), political regime, and political stability.

The effect of natural resource rent on tax revenue ratio is widely evidenced in the literature. Natural resource endowment is associated with lower non-resource tax revenue, suggesting a natural resource curse (Sachs and Warner, Reference Sachs and Warner2001; Eltony, Reference Eltony2002; Melou et al., Reference Melou, Belinga, Paul and Nganou2017). In particular, during commodity price upswings, governments in resource-rich countries have less incentive to mobilise tax revenues so that resource rent crowds out tax revenue. We consider in our model total natural resource rents (percentage of GDP) as the sum of oil rents, natural gas rents, coal rents (hard and soft), mineral rents, and forest rents.Footnote ¹⁰

ODA can also modify government behaviour (Bahl, Reference Bahl2000; Bird and Smart, Reference Bird and Smart2002). The literature highlights several effects. Among the most documented, the flypaper effect is an empirical regularity: any increase in transfers/aid leads to greater public spending than an equivalent rise in the private revenue of the population (Hines and Thaler, Reference Hines and Thaler1995). In a context of informational asymmetries, aid challenges the fiscal discipline of recipient governments by raising a moral hazard problem (Pisauro, Reference Pisauro2001; Kornai et al., Reference Kornai, Maskin and Roland2003): it can be perceived as a kind of windfall resource, which crowds out own-source revenue by reducing the willingness of governments to improve their tax effort. More broadly, aid dependency seems to erode governments’ accountability, a prerequisite for the quality of public expenditure and taxpayers’ voluntary compliance. Hence, we consider in our model ‘Net ODA’ (from the World Bank). This consists of ‘disbursements of loans made on concessional terms (net of repayments of principal) and grants by official agencies of the members of the Development Assistance Committee (DAC), by multilateral institutions, and by non-DAC countries to promote economic development and welfare in countries and territories in the DAC list of ODA recipients’.Footnote ¹¹

Institutional quality may also play a key role in mobilising resources. Indeed, it can improve tax policies and administrations’ ability to collect revenues, as well as taxpayers’ voluntary compliance. In particular, the degree of transparency, accountability, and corruption in the public sector determines the extent to which citizens can hold the executive accountable for its use of funds, and for the results of its decisions and actions. It also determines the extent to which public employees within the executive are required to account for administrative decisions, use of resources, and the final results obtained. Using the ‘CPIA transparency, accountability, and corruption in the public sector rating’ variable makes it possible to account for these potential effects. The three main dimensions assessed in that indicator are ‘the accountability of the executive to oversight institutions and of public employees for their performance, access of civil society to information on public affairs, and state capture by narrow vested interests’ (World Bank, 2009, p. 301).

Beyond the institutional aspects, the political regime in place may explain the level of tax effort. A growing body of literature suggests that political regime type matters in determining taxation. Garcia and Von Haldenwang (Reference Garcia and Von Haldenwang2016) identify three different causal mechanisms that affect the relation between regime type and taxation: economic growth, redistribution, and legitimacy. First, based on a positive link between democratic rule and economic growth, democracy should lead to higher tax collection because of growing taxable income. Second, based on the median voter theorem (Milanovic, Reference Milanovic2000; Acemoglu and Robinson, Reference Acemoglu and Robinson2006), the expansion of suffrage induced by democracy should lead to higher levels of redistribution and more public services, which may impact the level of taxation. Third, tax contractualism emphasises the importance of legitimacy and credibility in bargaining processes and tax compliance (Moore, Reference Moore, Brautigam, Fjeldstad and Moore2008; Timmons, Reference Timmons2005; Levi and Sacks, Reference Levi and Sacks2007; Bates and Lien, Reference Bates and Lien1985; Mahdavi, Reference Mahdavi2008). In this context, democracy should lead to higher tax collection, as taxpayers can be more confident that fiscal resources are spent for the common good and that the distribution of the tax burden is fair. Empirical research on the relationship of political regimes to taxation yields mixed results and it appears that there is no linear trend in favour of democracy. To test for these potential effects, we use a modified version of the ‘Polity’ variable proposed by the Center for Systemic Peace that allows the use of a regime measure in time-series analyses. This variable captures the political regime authority spectrum on a 21-point scale ranging from −10 (hereditary monarchy) to +10 (consolidated democracy).Footnote ¹²

Tax effort may also be influenced by political instability. An important literature shows that political stability determines the level of taxation (Cukierman et al., Reference Cukierman, Edwards and Tabellini1992; Aizenmana and Jinjarak, Reference Aizenmana and Jinjarak2008; Melo, Reference Melo2011). A rise in the level of political instability generates a decrease in the resources available and public expenditure in the next period. Moreover, the risk of radical policy changes in the future can have a detrimental effect on the tax behaviour of governments and on tax compliance. We include in the empirical analysis a variable from the World Bank that measures ‘perceptions of the likelihood of political instability and/or politically-motivated violence, including terrorism. The estimate gives the country’s score on the aggregate indicator, in units of a standard normal distribution, i.e. ranging from −2.5 to 2.5’.Footnote ¹³

Table 6.6 presents the results of the regression of the logistic model. We regress successively each of the interest variables (columns 1 to 5) and then all these variables at the same time (column 6). Aid is associated with a lower probability of belonging to a quartile of high tax effort, while institutional quality (measured by the CPIA index) increases the probability of belonging to an efficient quartile in terms of tax effort. If the effect of the political system is not clear, political stability is strongly and positively associated with a greater likelihood of having a high tax burden. When the model is regressed across all variables, the effects of aid, institutional quality, and the political system appear to be significant.

IV Tax Policy or Revenue Administration Reforms

In this section, we review some tax policy and tax administrative issues in Benin, and suggest some reforms to improve tax mobilisation.

V Conclusion

Based on a large database covering forty-one SSA countries and the period 1980–2015, we analysed the effort by Benin to raise non-resource tax revenue in light of its structural characteristics. The stochastic frontier analysis, by comparing the non-resource tax-to-GDP ratio in Benin with its peers, identified whether Benin was away from the tax frontier: the tax effort in Benin remained relatively stable during the period, with an average of 65.1 per cent over the period and a rank of thirteen out of forty-two countries. A tax effort of 65.1 per cent means that the level of non-resource tax revenue is at 34.9 per cent of the country’s maximum capacity. Knowing that, on average, Benin collects 11.14 per cent of its GDP in non-resource tax revenue and is at 65.1 per cent of its capacity, it would have raised 17.11 per cent of its GDP as non-resource tax revenue if it had used all its potential, given its characteristics. Hence, Benin has little room – insufficient to reach the WAEMU criterion of 20 per cent of tax revenue to GDP – to increase tax revenues, unless it addresses the reasons for the weak taxable capacity and conducts institutional reforms to expand its tax revenue potential.

In order to study rigorously the determinants of tax effort, an econometric analysis then complemented the previous statistical analysis. Based on an international comparison, we examined the effect of natural resources, ODA, transparency, corruption and accountability (CPIA indicator), and the political regime and stability on tax effort scores. We found that aid is associated with a lower probability of belonging to a quartile of high tax effort, while institutional quality (measured by the CPIA index) seems to increase the probability of belonging to an efficient quartile in terms of tax effort. Political stability appears to be strongly and positively associated with a greater likelihood of having a high tax burden.

Analysing potential policy and administrative sources of these tax gaps, we shed light on the human resource policy of the tax administration and the remuneration mechanisms, which may be obsolete. The payment and incentive mechanisms in place in Beninese tax and customs administrations should be reviewed and associated with extensive and effective monitoring to improve tax effort and limit the risks of corruption. The 2017 tax administration reform may improve tax revenue through a more efficient organisation of departments and divisions. However, it also raises a critical issue of providing the decision-making power in tax policy to the tax administration through the creation of a tax policy unit.

The chapter by Emilie Caldeira and Grégoire Rota-Graziosi presents the tax collection situation in Benin in comparison with the performance of tax collection in Togo. The text is clear and easy to read. However, there are some observations to make:

• The theoretical question is whether the increase in the tax burden is an end in itself. Is a lower tax burden not an incentive to invest? The question needs to be asked. The USA has a lower tax burden than Denmark, but it has a per capita income and higher productivity. The tax burden should not be viewed as an absolute goal.

• In practical terms, the study would be more useful for both Benin and Togo if it indicated the causal relationship between the various indicators cited and the difference in tax collection rates between the two countries. The study cites as possible causes corruption, motivation of staff, the merger of the tax and customs administrations, the status of the staff (contract or civil servant), and so on. If the Government of Benin seeks to use this document to correct its tax policy, it will not know what lever to act on to improve the tax return.

• The bibliography contains no items by authors from the countries concerned and more generally from French-speaking West African countries. The only bibliographical references are to authors from/writing about English-speaking countries in Africa.

I Overall Point of View

The study chooses the institutional perspective as an angle of analysis regarding the issue of brakes on and adjuvants to growth for development in Benin. In this regard, we can advance ideas that complete the comparison between Benin and Togo, especially on the tax issue. Togo has created a revenue office and this has improved tax revenues. The Togolese scheme, which is similar to those in place in Rwanda and Burundi, addresses a major obstacle in Benin: the power of the trade unions in the finance sector (customs and taxes). The government has reduced by law number 2017–05 of 29 August 2017 the rights of workers by limiting to ten days per year the annual statutory period of walkout. The unions are therefore reduced to grumbling without a real threat capacity as regards the continuity of public services. However, there is reason to fear a similar manoeuvre to that adopted by Burkina Faso trade unionists in the finance sector, which led to the departure of their minister of guardianship and a ministerial reshuffle after a work-to-rule strike (presence at the office but not actually working through the entire period), in February 2019. For its part, the Government of Benin has shown no intention of going in the direction of a revenue agency. On the other hand, it has strongly oriented its administrative policy towards the creation of agencies in all sectors. In general, the agency as a management institution appeared in the course of the reforms undertaken with the advent of new public management in the 1980s. The goal is to apply the managerial methods of the private sector to allow public administrations to become more competitive while guaranteeing a quality public service. Countries like Sweden, the UK, New Zealand, Japan, Canada, and many others have followed this path. An agency makes it possible to combine the advantages of a public administration (regulatory power, power of constraint, general interest) with the managerial flexibility enjoyed by private individuals: a merit pay system, recruitment according to need, simplified dismissal, ease of appreciating individual and collective performance.

In the space of three years of government, the new President of the Republic, elected in 2016, has created about fifty agencies. In the particular field of taxes, the National Agency of Domain and Land was created (by decree no. 2015–10 of 29 January 2015). This agency deals with cadaster issues and facilitates upstream collection of property tax.

The question of the modernisation of public administration goes back a very long time (as mentioned by Pisani, Reference Pisani1956). Today we speak more often of development administration, in the logic of what we could call the ‘government by corporations’. The dynamics of differentiation present the attraction of the flexibility of management rules, the ease with which managers are recruited, and the rules of public accounting. Development administration resembles a management administration in the durability of its existence and its power of constraint. On the other hand, it is closer to mission administration in the resulting requirements and its management flexibility. Development administration is more concerned with performance. The question of the performance of administrations is evident in the massive ‘agencification’ underway in Benin, which is the beginning of a solution to the problem of administrative institutions and their impediment to growth in Benin. By multiplying agencies in Benin, the government provides solutions to two types of problems:

• First of all, the large numbers in general administration with profiles that often do not correspond to job positions. Public administration is often a refuge for incompetent people who cannot find jobs in the private sector. Very often, offices are cluttered with staff who work little because there are five or ten in a position that only one person can occupy with adequate working means. This overpopulation of the public administration goes hand in hand with insufficient staffing for certain managerial or high-tech positions. We are thus witnessing a contradictory phenomenon where on the one hand some people get bored at work, and on the other hand other agents are on the verge of burnout.

• The question of motivation of the staff could also be regulated by the ‘agencification’. Indeed, public officials receive premiums and are subject to a promotion system that is usually based on seniority and not on the quality of work. This is the standard contained in the General Code of the Civil Service (Law No. 2015–18 of 2 April 2015 on the General Statute of the Civil Service). In an agency, staff should be periodically evaluated on their professional performance, results achieved, innovations made, and quality of work done (attendance, relations with colleagues, etc.). This evaluation of the agent could be sanctioned by bonuses, promotions, and many other things. Poor performance should lead to punishments, downgrades, and even dismissal if necessary. The agent in an agency knows that he or she is recruited because of his or her skills and abilities, and not because of his or her relationships.

• Then comes the question of recruitment and dismissal: officials are guaranteed employment and can only be dismissed from their job in extreme circumstances. They are safe from economic redundancy and even if a nurse receives only two patients in the day for his or her village infirmary, this work is enough to guarantee the salary at the end of the month. The notion of return has no place in public administration. Officials obey the rules of the public service of the state. Labour productivity is not evaluated, and neither is yield. The agency offers the possibility to its leaders to leave the administrative framework of the civil service. Recruitment is carried out on the basis of a need for staff. The employment contract that binds the agent to his or her agency will be able to continue on two conditions: first, whether the agent fulfils his or her professional obligations correctly. He or she does what he or she must do on time and perfectly, under the appreciation of his or her managers. Then, the overall performance of the agency will justify the maintenance of the agency or not. An agency that is not performing can be dissolved, merged with another, or its team renewed entirely to give it a new lease of life. The fate of an agency is not very different to that of a private company, and nor is its management.

• Finally, there is the question of remuneration: civil servants are considered to be poorly paid and are not motivated at all to do quality work. It is popularly believed that the state pretends to pay officials and officials in turn pretend to work. The management of an agency makes it possible to combine an optimum workforce, satisfactory remuneration, and good motivation of the agents. It is total quality management.

II Agencification of the Revenue Services in Question

In the African countries that have adopted this approach (Togo, Rwanda, Kenya, etc.), the agencification of the services responsible for collecting taxes (domestic taxation and door taxation) has had consequences for:

• The motivation of staff.

• A synergy effect that favours revenue optimisation.

• The system of corruption.

Benin has not chosen this solution of agencification. The option is to be able to push on other levers to achieve the same results regarding staff motivation and the system of corruption.

• The promotion of results-based management: The African Center for Training and Administrative Research for Development pleaded in 2010 for accountability and transparency in tax administrations. These are values promoted by governments in general government. The African Union has adopted the Public Service Charter (2001) to highlight the concepts of productivity, objectives, and evaluation. For its part, the General Tax Directorate of Benin has started to apply a results-based management system: defining objectives, issuing mission letters, evaluating performance, and implementing positive and negative sanctions. The record of this policy is mixed, but the method may have a more convincing impact with the development of other managerial techniques, notably the dematerialisation of procedures.

• The dematerialisation of procedures: This means that information technology is used to reduce contact between tax and customs agents and users. At the customs port of Cotonou, the importer does all of his or her own operations, without ever encountering a customs officer. Import documents are entered into the electronic platform and the amount of customs duty is generated automatically. Payment of tax and customs is made in a commercial bank. The number of the payment receipt is entered into the computer system, which immediately issues the notice with the right to remove the goods. However, customs posts at land borders are not yet equipped with this computer system. As for the Directorate General of Taxes, it has also started a system of dematerialisation of these procedures of calculation and payment of tax. The immediate consequence is the reduction of opportunities for contact between users and the tax administration. This should reduce the risk of corruption involving tax officials.

• Saving time: Dematerialisation must also enable time savings in the execution of formalities with the tax authorities. According to the 2017 Paying Tax Report, it takes 908 hours (37 days) to fulfil tax obligations in Nigeria, 630 hours (26 days) in Cameroon, 124 hours (5 days) in Rwanda, and 82 hours (3.5 days) in Djibouti. Time management is related to the management of paperwork. It has a cost for the tax administration and generates additional costs for taxpayers. In South Africa, the use of electronic platforms has improved tax revenue mobilisation and reduced the cost of corporate tax compliance by 22.4 per cent.

III Conclusion

The Government of Benin is using the technique of agencification to modernise the public administration and to make it more efficient.Footnote ²⁰

Curiously, the same government seems not to be moving towards agencification with respect to tax management. We understand that the decision is to achieve the same results that allows agencification using other managerial techniques: the promotion of results-based management, the dematerialisation of procedures, and the reduction of the time that taxpayers dedicate to their tax obligations.

I Introduction

This chapter analyses the recent land reform that was enacted by the 2013 Code Foncier et Domanial (Land and Domain Code) and its results at end 2018, five years after.Footnote ¹ Its orientation is significantly different from the other chapters, both in its purpose and approach. It is not so much a question of highlighting desirable areas for reform as it is of analysing an ongoing reform. In particular, it deals with the political economy of the reform. It provides a detailed history of a complex and contradictory process, discussing the reform’s political and economic stakes, the groups of actors and interests that pushed it, those who are opposed to it, and those who seek to shape it for their own benefit.Footnote ²

A matter of ‘power, wealth, and meaning’ (Shipton and Goheen, Reference Shipton and Goheen1992), land is at the heart of societies and of the formation of the state: (1) the way of thinking and organising access and control of land and its resources reflects the conception of the society, its forms of authority, and the differentiations that structure it; (2) the distribution of rights over land and resources determines, in part, statutory and socio-economic inequalities; and (3) the capacity to define rules governing land rights, and to grant or validate them, is at the heart of political power and construction of the state (Boone, Reference Boone2014). Any land policy necessarily has power-related stakes (politics) and societal stakes (polity) (Léonard and Lavigne Delville, Reference Léonard, Lavigne Delville, Colin, Lavigne Delville and Léonard2022). Land reform processes are also linked to the interests of the different groups of economic and political actors, the weight of professional corporatism, the conflicts of societal projects, and the question related to the plurality of norms that run through the society (Lund, Reference Lund and Winter2001).

Since the middle of the 1980s the land issue in Africa has come back again onto the agenda of development policies, in a context of state crises, economic liberalisation, and increased conflicts in rural areas. Two major visions clash, both challenging the colonial and post-colonial state’s monopoly on land. The first one promotes the replacement of informal customary rights, considered as obstacles to productivity, by private ownership rights, supposed to be a condition for economic development. The other one, described as ‘adaptative’ (Bruce, Reference Bruce1992) or ‘pro-poor’ (Borras and Franco, Reference Borras and Franco2010; Zevenbergen et al., Reference Zevenbergen, Augustinus, Antonio and Bennett2013), acknowledges the dynamics of local/customary land rights and considers that they are not, as such, a constraint on productivity. Thus, the issue of land reforms is to build a favourable institutional environment that secures people’s rights and allows these rights to evolve peacefully.

Both paradigms emphasise the issue of the security of land rights, but with different assumptions regarding what ‘tenure security’ means. For the privatisation paradigm, it means private ownership rights recognised by the state and full capacity of transfer and sale. It is however a biased definition. Land tenure security means that one’s rights (of whatsoever kind) cannot be challenged without good reason, and that legitimate authorities (customary, state, or hybrid) are able to settle conflicts (Lavigne Delville, Reference Lavigne Delville2006).Footnote ³ Tenure security is above all an institutional issue: it requires rules and authorities able to design and enforce them; one can be in security with informal rights, which is the case in most customary contexts. While emphasising tenure security, the ‘adaptation’ paradigm also largely supports the formalisation of customary informal land rights in rural areas. However, according to this paradigm, formalisation has to adapt to the diversity of rights and to be implemented through progressive frameworks, and the development of innovative, adapted, inexpensive, and accessible approaches.

In French-speaking Africa, the debate on the legal recognition of property rights is strongly structured around land titles,Footnote ⁴ issued after ‘immatriculation’. Immatriculation is a land registration procedure that had been specifically designed for colonial areas (decrees of 1906 and 1932). In contrast to France, where the proof of ownership is the sale contract prepared by notaries, it is based on the granting by the state of a quasi-absolute private ownership, incontestable and guaranteed by the state, based on the purging of all pre-existing rights. Every plot that does not have a land title is subject to informal rights or ‘presumed ownership’ and is considered to be part of the state’s private domain. Immatriculation (hereafter referred to as standard titling or registration) allows for ‘the entry into legal life’ of land that previously had ‘informal’ status. However, it is a complex and costly procedure and colonial powers never tried to generalise it (Chauveau, Reference Chauveau, Lafay, Le Guennec-Coppens and Coulibaly2016). Historically, it has been at the service of colonial power and its allies, and not of the recognition of the rights of inhabitants, who were considered as subjects and not citizens (Mamdani, Reference Mamdani1996). It has been retained after independence and remains accessible only to a minority.

For the majority of West African land professionals and policy makers, the land title is the only conceivable form of legal property right and the aim of a reform is to unify land rights and to generalise private ownership and land titles. For some of them, and for most sociologists or anthropologists, standard titling is an obstacle to large-scale access to land rights formalisation, since its very logic – not to mention its cost – is contradictory to the aim of recognising the various existing land rights. In this conception, it is the law that has to adapt to society in order to overcome the colonial legacy.

The debate on agricultural productivity and on the relations between society and law is not only a technical one. It encompasses diverse conceptions of society, of relations between individuals, social collectives, and the state, of the place of market relations, of the role of law, and so on. It challenges people’s historical exclusion from access to the law. These various and intricate issues explain why, even though almost every West African country has launched attempts at land reform, the processes and outcomes, as well as the degree of implementation of adopted reforms, have been very different from one country to another (Seck et al., Reference Seck, Lavigne Delville, Richebourg, Vaumourin and Mansion2018).

The case of Benin is particularly interesting from this point of view because, within the space of a few years (from 2007 to 2013), Benin adopted two different contradictory land reforms. The first was led by the Ministry of Agriculture and supported by European donors. It focused on rural areas and promoted an alternative to standard registration and land titles, which the promoters considered fundamentally unsuitable for rural areas. It resulted in the 2007 Rural Land Law.Footnote ⁵ The second has a national focus. It was led by the Ministry of Urban PlanningFootnote ⁶ and the Millennium Challenge Account Benin (MCA-Benin).Footnote ⁷ It aims to standardise land law and develop access to private land titles by reforming the national land administration. It was embodied by adoption of the Land and Domain Code in 2013 (which abolished the 2007 law and was slightly revised in 2017), and the establishment in 2016 of the Agence Nationale du Domaine et du Foncier (ANDF, National Agency of Land and Domains).

The succession, within a few years, of two reforms based on different paradigms, carried out by different networks of actors, supported by different donors, and having experienced varying degrees of implementation, represents a textbook case for highlighting the intricate issues of land reform, and questioning the stakes and the actors’ interests around the reform’s framing and implementation. It also offers an opportunity to question the diverse conceptions of land tenure security and of land governance and the conditions for institutionalising a land reform.

In this chapter, I study the history of these two intricate land reforms, with a focus on the second one, which – at the end of 2018 – won the battle. I begin with a brief institutional analysis of the land sector in the early 2000s. Section II discusses the different, concurrent reform projects that took place during the 2000s. Section III details the vision and process of the second reform, with its dual focus on field registration projects and land law formulation. I then analyse the 2013 Land Code, its orientations and the controversies around it, and finally discuss the strengths and limitations of this reform, particularly in terms of citizens’ inclusion.

My analysis relies on a perspective of ‘socio-anthropology of public action in countries under aid regime’ (Lavigne Delville, Reference Lavigne Delville2016), which aims at studying through qualitative enquiries the way public policies are framed, negotiated, contested, and implemented in aid-dependent countries. In an ethnographic and constructivist approach, it studies the interplay of actors and conflicts of representation and interests throughout the policy process, taking into account the multiple disjunctions between its different stages. By empirically following networks of actors, ideas, and instruments, from the global to the local, this approach shows the intertwining of ideas, interests, and institutions (Hall, Reference Hall, Lichbach and Zuckerman1997), and the intricate issues of policy, politics, and polity. This analysis focuses on a reform that is still being implemented and ends with the National Workshop on Land organised in October 2018. The chapter therefore concerns an incompletely stabilised process, and in no way claims to evaluate it. Focusing on retracing the reform’s history, it offers primarily a retrospective look, and does not intend to take note of recent developments. However, some of them are presented in the Afterword.

II Competing Projects for Reforming Land Law and Administration (1990–2005)

B Adaptation versus Replacement: Competing Attempts at ReformFootnote ¹⁷

1 The Emergence of the Debate on Land Security in the 1990s

In Benin, the first seminar on housing and land tenure security, in 1984, is regularly quoted as the starting point for further reflection. But it was only around 1990 that the spoliations linked to a collapsing revolutionary regime, the land grabbing by the elite on the private domain of the state, and the abuses by state agents against the population led to the state’s land monopoly being called into question (Gbaguidi, Reference Gbaguidi1997). The context was one of economic liberalisation and democratic transition. Land rights’ informality and tenure insecurity started to be raised as a problem, in both urban (Comby, Reference Comby1998b) and rural areas (Hounkpodoté, Reference Hounkpodoté, Toulmin, Lavigne Delville and Traoré2002). In both contexts, the issue was to favour wide access to legal recognition and to prevent land conflicts. Several reform projects were raised in different ministries.

2 In Urban Areas, Tool for Commune-Level Land Taxation and Unsuccessful Discussions on Legal Reform

In the early 1990s, the French cooperation set up local land taxation tools, called Registres Fonciers Urbains (RFUs – urban land registers), in Cotonou and Parakou (Charles-Dominé, Reference Charles-Dominé2012). An RFU consists in a map of land occupations – regardless of their legal status – built from field surveys, allowing the issue of tax notices. The RFU allows a significant increase in tax resources, but remains incompletely mobilised by the municipalities, both because elected officials are reluctant to increase the pressure to pay taxes, and because of weak institutional anchoring in the municipalities’ administrative system (Simonneau, Reference Simonneau2015). RFUs have then been disseminated to other municipalities, by various donors, in various forms and with limited success (Simonneau, Reference Simonneau2015). While RFUs are primarily a fiscal tool, their designers thought they could help to register ownership: the presence on a plot for a sufficient period, as evidenced by the regular payment of property tax, could be considered after a given number of years as a proof of ownership, avoiding the complexity of immatriculation.

As part of the Urban Rehabilitation and Management Project (Projet de Gestion et de Réhabilitation Urbaine [PGRU], with World Bank financing), a series of studies conducted in the 1990s laid the groundwork for possible land reform. Comby (Reference Comby1998b) identified four possible strategies. The first was ‘an improvement of practices and reorganization of administrative means in compliance with existing law’. The second was ‘a policy of occasional improvements leading to a significant improvement’. The third built on the development of group registrations. The last strategy was based on deep modification of the conception of ownership and land rights legalisation: ‘in a more radical break with current legal and administrative practices, making ownership a matter to be settled between private persons. The State and its administrations no longer deal with the recognition and allocation of property. The peaceful owner of a piece of land is presumed to be the owner, with the burden of proof to any interested person to the contrary by taking legal action’ (Comby (Reference Comby1998b, p. 17). This would mean abandoning the colonial conception of state-guaranteed land ownership in favour of a contractual approach, like in the French Civil Code.

‘For many people’, according to Comby (Reference Comby1998b, p. 17), ‘all the current difficulties stem simply from a lack of respect for existing texts. They think that it is not the law that needs to be changed, but that it is the practices that must be brought into conformity with the law, all the evil coming from the fact that the law was no longer respected’. However, this expert supported the ‘bottom-up ownership’ perspective and thus an exit from the standard registration model. He explained that the scenario for implementing existing law was doubly unworkable: first, it would imply being able to prohibit sales of unregistered land, and then the cost and pace of issuing land titles are incompatible with a desire to address the problem on a significant scale.

Prepared by Beninese experts, the collection of legal texts compiled for the PGRU (SERHAU, 1999) timidly opens the question of alternatives to land titles, or in any case significant changes in procedures: ‘It may be necessary to study at the State level how to make it accessible to as many people as possible and if it must always be maintained as the mother of evidence of land ownership […]. There is a need to simplify the procedure along the lines of the procedure for establishing customary land rights […] and to restore the contract as an essential role in the acquisition of property’ (SERHAU, 1999, p. 350, emphasis added).

In practice, however, it is the first scenario that the Beninese authorities adopted, with the establishment in 2001 of a ‘Commission for the transformation of housing permits into land titles’, which was supposed to accelerate the issuance of land titles. The ‘Land and residential security’ programme driven by the Ministry for Urban Planning planned to issue 45,000 land titles between 2005 and 2007 (Le Meur, Reference Le Meur2008, p. 10). Blocked by complex procedures and by the entry of land professionals raising bids on procedures, this has been quite ineffective (see later). At the same time, the Ministry of Urban Planning launched a reflection on a possible reform of land and urban planning.

3 In Rural Areas, the PFRs and the Draft Rural Land Law: The Search for an Alternative to Land Title

In rural areas, two successive development projects, under the supervision of the Ministry of Agriculture and with French and German funding,Footnote ¹⁸ have integrated the issue of land tenure security, first as a tool for encouraging farmers to invest in anti-erosion techniques. The project began in 1992 and experimented in different regions in the country with the Plan Foncier Rural (PFR) approach, imported from Côte d’Ivoire, where it had been invented a few years earlier (Chauveau et al., Reference Chauveau, Bosc, Pescay and Lavigne Delville1998; Gastaldi, Reference Gastaldi and Lavigne Delville1998).

In the PFR approach, land rights are identified through cross-checked field surveys, conducted on a plot-by-plot basis. Each plot holder explains the rights he or she has and how – and from whom – he or she has obtained them. The boundaries of the plots are measured with a decametre and then drawn on an aerial photo.Footnote ¹⁹ Two types of situations are considered: those of individual owners (‘presumed owners’ in legal language) and those of family communities, represented by their ‘manager’, in other words the representative of the group of rights holders, who has authority to make decisions on the plot in question. The plot holder and the holders of the neighbouring plots sign the survey report. After a publicity phase, which is supposed to allow everyone to verify or correct the collected information, the final plot map and rights-holders’ register are given to the village committee, which is supposed to register future changes in rights (inheritances, sales, leases, etc.) and to keep the land documentation up to date. PFR is thus a kind of village land cadastre, without legal value. However, in the idea of its promoters, the demonstration that it is possible to map ‘informal’ customary rights, which are often considered difficult to understand from the outside, should contribute to promoting a legal reform. This reform could create a new and more appropriate legal status for rural land and thus enable rural actors to obtain legal recognition of their rights.Footnote ²⁰ Some forty pilot PFRs have been carried out in two successive projects in different regions of the country, which allowed the methodology to be put to the test and to be improved. However, the idea of a coherent village territory constituted of juxtaposed farmers’ plots is a simplification. It does not really consider the diversity of customary land rights (CIRAD-TERA, 1998); pastoral rights, commons, and agricultural areas where land rights are not stabilised (Edja et al., Reference Edja, Le Meur and Lavigne Delville2003) are not taken into account.

Present from the outset, the legal reform was put on the agenda in 1998 when a second project was negotiated between the Ministry for Agriculture and donors. Working under the supervision of several ministries (agriculture, justice, economy), a group of Beninese experts (lawyers, anthropologists, economists) drafted a law that was a potential legal revolution: it renounces the presumption of state ownership of unregistered land and provides that every plot subject to ‘rights established or acquired according to custom and, more generally, local practices and standards’ (art. 7) is part of private land. The draft law institutionalises PFRs and gives them, as an outcome, a new legal document, the CFR (certificate foncier rural, rural land certificate). A CFR is a ‘document of recognition and confirmation of land rights established or acquired according to custom or local practices and norms’ (art. 111). It can be individual or collective, it is transferable, assignable, and usable as collateral for credit (arts. 9 and 112). ‘A presumption of acquired rights is attached to it as proof until proven otherwise, established before the judge’ (art. 111).

In line with the recent administrative reforms creating elected local governments (1999), the draft law sets up a local land management framework, anchored in the communes and integrating village-level bodies. Communes deliver land certificates for plots registered in the PFR and maintain land information. Villages benefit from PFRs at their request and can define their own rules for managing natural resources on their territories. All transfers of land rights must be formalised at the village level, and permanent transfers (sales, heritage) have to be recorded at commune level, so that new certificates can be issued.

This reform clearly relies on an ‘adaptation’ paradigm. It rests on a legal innovation, thought to be more fitted to rural areas and much cheaper. The objective is to expand PFRs and thus land certificates with a progressive approach, relying on villages’ demand. Meanwhile, the institutional framework at commune and village level has to be put in place everywhere, to allow for local registration of land transfers even without PFR. The land certificate can be transformed into a land title but, for its promoters, most farmers will stay with a land certificate, which answers to their needs and is supposed to become dominant. With that draft law, new land legal and management frameworks are proposed for rural areas, alongside the land title and the state land administration.

The paradox is that this ambitious reform is made of a policy tool, the PFR, and a law, without a policy statement stating its objectives. It benefits from a relative consensus in MAEP (the Ministry of Agriculture, Herding and Fishing, where some actors support agribusiness and land titling) and more generally among the actors involved in the rural zones and decentralisation policies. Nevertheless, it faces opposition from actors in the Ministry of Urban Planning: for them, specifically rural legislation makes no sense and raises insoluble problems at the boundaries between rural and peri-urban areas; CFR can only be an intermediate document, of much lower status than the land title, and is contradictory to the provisions of the Organisation pour l’Harmonisation en Afrique du Droit des Affaires (OHADA, Organisation for Harmonising Business Law in Africa), which provides (art. 119) that only the land title (or failing that, an ongoing application) is recognised as the basis for a mortgage.

Partly because no policy statement defines the vision, different conceptions of the reform coexist. For its promoters, it creates a long-term alternative to land titles, allowing rural dwellers to have access to legal recognition of their rights. Among them, some want to quickly generalise PFRs over the country, while others prefer a more progressive strategy for expansion, depending on means and needs, starting from areas where PFRs are most useful (Lavigne Delville, Reference Lavigne Delville, Colin, Le Meur and Léonard2009). For those who support classic land titling, PFR is only a temporary framework, and land certificates must quickly be transformed into titles. The diversity of policy options that PFR can serve helps to build adhesion around it.

Ready since 2002, the ‘law on rural land tenure’ was initially blocked by the MCA team. It was finally passed in 2007 with MCA support. In the meantime, an action plan for implementation had been designed, which proposed a progressive strategy under the aegis of an Agency for Rural Land Tenure Management, to be created to take charge of coordination, technical support to communes, and management of a multidonor fund.

4 In the Mid-2000s: The MCA-Benin and the Emergence of a Global Reform Project

In the mid-2000s two separate policies were thus ongoing (Figure 7.1): in urban areas, the Committee for Transforming Housing Permits, which was practically ineffective (see Section II.B.2), and in rural areas, the PFRs, a draft law on which was ready (see Section II.B.3). A new initiative emerged at that time, carried out by the MCA-Benin, with a view to harmonising land law at the national level. Following the 2004 Monterrey Conference on aid funding, the US government created the MCC to support economic development projects proposed by beneficiary countries, officially selected based on good governance criteria. Benin was among the first countries selected. Its government set up a series of workshops to identify the themes around which to build a proposal. Land issues emerged from discussions between the government and the MCC. The Compact was signed in 2006 and implementation took place between 2007 and 2011. The Compact’s ‘Access to Land’ project aimed at overcoming the divide between rural and urban and promoting a global land reform, making access to land title easier and cheaper (Figure 7.1). It had two components: at institutional level, a legal reform that aims to standardise land law, overcome legal dualism, and provide the country with updated legislation; at operational level, field projects were supposed to scale up previous initiatives, in both rural and urban areas. Positioned under the aegis of the Presidency of the Republic, the MCA was the central actor, and the centre for the design and preparation of the land reform. In 2007, shortly after the launch of the Compact, the new President of the Republic, Boni Yayi, officially placed responsibility for land reform under the aegis of the Ministry of Urban Planning. These two bodies have steered the reform.

Figure 7.1 Chronology of land reforms in Benin.

The MCA project has been clearly oriented towards the promotion of land titling. During its formulation, the fight has been fierce between the Ministry for Agriculture, defending the PFR and the draft Rural Land Law, and MCA and the Ministry of Urban Planning, claiming leadership of the global reform and wanting to use PFRs as a tool for issuing land titles. Having high-level political support and a strong budget, the MCA reform took the lead after 2006 and signature of the Compact.

Several initiatives towards land reform emerged in Benin in the 1990s–2000s, from several ministries and with the support of different donors (Figure 7.1). All of them tried to answer the issues of informality and insecurity in a context of economic liberalisation and democratic transitions. All relate to what Muller (Reference Muller1990) calls a global/sectoral adjustment: a situation where a given policy sector, built and organised in coherence with a former global policy paradigm, has to adapt to a change in this paradigm, because its vision, tools, and institutions are now outdated. These competing reform projects were all attempts to adjust the land policy and administration to the liberalisation of the economy and to the democratic turn. However, the answers were different, illustrating the contrast between replacement and adaptation paradigms.

In rural areas, titling is almost non-existent, individual ownership is not the rule and most land is held by family groups, and the value of land does not justify supporting the high costs of titling. Specialists in rural areas promoted adaptative strategies, based on a new land administration and new legal documents, to allow for cheaper, affordable access to legal recognition of individual or collective land rights. While the centrality of the land title has been timidly questioned in urban areas, and the shortcomings of classic strategies for developing access to law have been explained by World Bank experts, state bodies clearly chose to push to titling.

III Expanding Access To Land Title Through a Deep Reform of Land Administration: The MCA-Benin-Led Reform (2006–2018)

C Conclusion: Temporality of Projects versus Temporality of Policy Reform

The five years following the end of the MCA project (2012–2016) were a period of further institutional change and consolidation of the reform. The tight schedule provided for in the MCA project was considerably extended. The initial project, which in five years wanted to link legal reform and a scaling-up in the field, was confronted with the reality of policy change and project implementation, with induced negotiations, power relations, and operational constraints. One can finally consider that the temporalities were eased with a policy reform that was almost done in 2016, allowing implementation to begin, while results on the ground were far below the initial objectives (Figure 7.2).

Figure 7.2 The MCA project: Delays in time and results

The objectives and timeframe planned into the Compact had been very optimistic, not to say unrealistic. The corporatist struggles largely slowed down the operational aspects. But even more, the conception of the reform created a confusion between the temporality of the policy reform, which is not predictable as it includes political negotiation and compromise, and the temporality of projects, which are supposed to be feasible in a given timescale. The MCA team saw land policy reform as a technical issue that they could achieve in a short timeframe, allowing for a quick implementation in the field. However, negotiating the legal reform took much more time than planned. In consequence, land reform and field operations were done simultaneously. The latter were implemented within the former legal framework, in an institutional in-between period. Therefore, the transformation of housing permits into land titles could not benefit the intended flexibility in the registration procedure and PFRs were made within the context of the 2007 law, whose institutional arrangements were under question. One can consider that the operational component has been quite a failure and a big waste of money. It nevertheless obliged reformers to take stock of implementation issues.

The institutional component has been more successful. In 2016, however, the reform was not yet fully stabilised. The Code was slightly revised in 2017. The Finance Law reduced the cost of land titles and customary ownership certificates and temporarily offered free registration of transactions (instead of at a cost of 8 per cent of their amount), which led to many regularisations. However, the compilation of available land information is still ongoing, and not all the tools are set up. The agency’s decentralised offices are open in only fourteen communes out of seventy-seven. The teams face difficulties in processing land title applications in a timely manner. The cost of the land title has not dropped significantly, because the main cost – plot demarcation and landmark setting – is still at the discretion of the surveyors. Even if new offices have been opened, the number of notaries remains very low, and above all very unevenly distributed throughout the territory. The same applies to surveyors. The cadastre is being built gradually from existing documentation, but with uncertain information on owners outside the areas with land titles. Extension to areas without cartographical documentation will face the same difficulties as PFRs and will require considerable resources, which are not yet available.

IV Five Years After the Code: The Reform’s Strengths and Limitations

V Conclusion

Land tenure is at the heart of societies and the relationships between states, social networks, and citizens. The way in which a society defines property rights and ensures their security has a deep connection to the way in which social relations are thought of, whether inequalities (of status, wealth, and power) are considered acceptable or opposed, and the way in which people see the state and its role. Any land reform project necessarily has simultaneous, intricate political, economic, and societal stakes (Léonard and Lavigne Delville, Reference Léonard, Lavigne Delville, Colin, Lavigne Delville and Léonard2022). It also necessarily crystallises multiple issues at very different levels.

In Benin, negotiating the reform, in its orientations and modalities, has been a complex process, involving multiple actors: institutional, private, and customary, but also international experts and donors. It first gave rise to a battle on the very vision of what the reform had to be, and behind that on divergent conceptions of society, law, and property. It also confronted visions, institutional logics, and interests all along its history and the current state of reform is the unplanned product of power, compromise, and bricolage. In this process, donors have been instrumental, in funding but also in providing ideas, models, and expertise, the succession of priorities corresponding to different donors. However, the opposition between adaptation and replacement paradigms has to be analysed in terms of concurrent policy networks, each one with national and international state agents and experts, and not in terms of opposition between the national state and external actors.

Benin land reform has the real merit of confronting long-standing institutional deficiencies and consolidated interests. It has deeply transformed the legal and institutional framework for land management, with the creation of ANDF and its decentralised offices, which now have many more staff and resources than the former land administration and have opened some institutional locks. It has set up an efficient geodetic infrastructure, making it possible to link topographical surveys to a single reference frame. It has digitised existing land documentation, corrected spatial referencing errors, centralised information, and made it accessible. The time and cost of issuing a land title have been reduced. Transparency and rigorous management are highlighted and have to be confirmed in the field.

However, framing issues in terms of classic titling is not the same as framing them in terms of securing people’s property rights. It must be noted that the quantitative data available for the 2000s confirm neither that informality is the main source of conflicts, nor that having a land title allows one to have credit, which are the two main assumptions of the reform (see Section II.B.4). This should not be surprising given the huge amount of economic research challenging these ideas (see, e.g. Binswanger et al., Reference Binswanger, Deininger, Feder, Behrman and Srinivasan1995; Platteau, Reference Platteau1996; Bromley, Reference Bromley2009 for rural, and Durand-Lasserve and Selod, Reference Durand-Lasserve, Selod, Lall, Freire, Yuen, Rajack and Helluin2009 for urban areas). Our broader institutional analysis showed that the blockages identified and addressed by the reform are more related to what the ‘Institutions and Economic Development’ research framework calls the ‘causes of proximity’ than to the ‘underlying factors’ (see Table 7.1).

Standard land titling is based on a colonial model of ‘creating ownership from the top’ (Comby, Reference Comby and Lavigne Delville1998a). It is very different from the logic of the state recognising property rights that have been constructed ‘from the bottom up’, which has historically been the experience in Europe (Stamm, Reference Stamm2013). Benin’s land reform is above all a reform of land administration, which does not question the land title and its logic, which, as we have seen, was the case for promoters of rural reform and some experts working on urban issues. Refusing to recognise the role played by existing intermediate solutions, and thus failing to build a plural system offering a range of legal solutions, Benin’s land reform reproduces in practice the legal dualism that previously left a large part of the population in the ‘informal’ or semi-formal category, which it had claimed it wanted to fight. It has been obliged to create new and sometimes ill-defined intermediate documents. It will also probably give rise to new intermediate, semi-palliative, semi-instrumental practices of the type the reform sought to combat, either for areas where the transition to title is complex or poorly justified, or after the title has been issued, due to the cost of registering transfers for poor households.

Despite the current government’s clear commitment, access to land title has been facilitated but will remain low for a long time. The risk is that this excludes an important part of the population, and thus maintains and even recreates informality. Holders of existing housing permits or sales contracts that are no longer recognised are even more in an informal situation than before, and rural buyers who are not able to fulfil the requirement of titling before selling a plot are not fully protected from spoliation during the titling process. The risk is therefore that the reform will serve above all to extend access to land ownership for an expanded but still small minority of quite wealthy actors who are able to mobilise the law and to take advantage of faster procedures (particularly urban dwellers buying land in rural areas).

Another strategy was possible, which would have started more from the situation ‘in the field’, problems, and people’s resources, and from an analysis of the role played by semi-formal mechanisms, in order to reduce contradictions and ensure greater land security in line with pro-poor approaches (Zevenbergen et al., Reference Zevenbergen, Augustinus, Antonio and Bennett2013). While also making land title more accessible and reliable for those who really need it – and in particular those who need mortgage credit – such a strategy would have focused mainly on the concrete needs of all citizens as regards securing their diverse rights over land. It would have offered them a range of institutional solutions, from which they would choose depending on the context and their own situation. Such institutional solutions would be based on the will to protect existing rights against spoliation, to favour acquisitive prescriptions to solve old cases, and to secure the negotiation and formalisation of land sales, even for untitled plots of land. In such a strategy, all transfers – except for local sales in rural areas – would be included in the land cadastre, which would focus on plots of land with legal status and would gradually expand. In this perspective, sales and inheritance contracts, drafted and formalised according to strict procedures, with a notary for urban areas and in the field with the Village Land Committee and Land Office agents for rural areas, would be the basis of ownership, including when they concern untitled land. Sale or inheritance contracts would assess the seller’s right to sell and specify the origin of the rights held and the content of the rights transferred, including various easements linked to other rights holders or local rules. Family land could not be sold without a family council record explicitly authorising the sale and specifying the distribution of its proceeds among rights holders and validated by the Village Land Committee for rural areas. Actors who do not have such documents and need to secure themselves legally could request an attestation of customary possession, which would rely on a cross-checked field survey. The plots sold or plots having an attestation would be surveyed by local surveyors using GPS of a sufficient (but not centimetre) precision and data would be integrated into the national cadastre, which would gather information on land titles as well as on sales, transfers, and ADCs on untitled plots of land. A PFR-like systematic survey would be carried out where the stakes are high, in peri-urban areas where the land market is developing, leading to certificates. The integration of plots into the cadastre would be a progressive process, along with social and economic evolution and people’s needs.

Altogether, the Benin land reform, its achievements and limits, and the fierce debate that took place during those years contribute to the general debate on land reform strategies. The reform raises questions about the potential and limits of improvement strategies that do not question the global model of land title. It contributes to a rethinking of the relevance of adaptative strategies, which organise over time the transition from an existing and dynamic situation that is problematic in specific contexts to better land governance that focuses primarily on the security of land tenure of citizens and economic actors, starting from their real situations. History will show whether and to what extent the actors in charge of the reform’s implementation will integrate pragmatic adaptations to the challenges they face, and to what extent they will be able to face the issue of social inclusion.

Afterword on Land Reforms

This text was first written in mid-2019. Since, the issue of inclusion and that of the land register have evolved. The slow delivery of titles by the ANDF and the blockages linked to the prohibition on communes’ legalisation of sales on untitled land revealed the limits of the model. ANDF issues only a few thousand new titles each year. As experts from ANDF and PMAF now recognise, it is not possible to register a significant part of the territory before the end of the transition period in 2023 (Mekking et al., Reference Mekking, Kougblenou, Vranken, Kossou and Van den Berg2020, p. 4). The reflection and experimentation around the cadastre have legitimised the search for alternative solutions integrating issues of rapid expansion and inclusivity, with a new cost–quality balance (Mekking et al., Reference Mekking, Kougblenou, Vranken, Kossou and Van den Berg2020, Reference Mekking, Kougblenou and Kossou2021). The cadastre development approach proposed by PMAF is connected to the concept of a ‘fit for purpose’ cadastre promoted by Dutch surveyors and presented as new, even if it built on the PFR methodology. It aims at rapidly expanding the registration of presumed individual or family ownership rights by field surveys on legitimate rights and plot demarcation, with only metre precision. Social intermediation prepares the survey, landowners themselves place markers on the boundaries of their plots, and surveyors are mobilised to check the maps and not for plot demarcation. Reflection is going on around the possibility of introducing a deed-based system along with the existing title-based system (Mekking et al., Reference Mekking, Kougblenou, Vranken, Kossou and Van den Berg2020, p. 7) or creating certificates of presumed rights registration that could easily be transformed into titles. Expanding the transition period and recognising a role for communes in validating land sales where there are no notaries is also in debate. Confrontation with the limits of the model seems to have opened new opportunities for building sound intermediate solutions that, for one part, had already been proposed and that, until recently, ANDF refused to consider. It could represent a new bifurcation in the reform and offer answers to at least part of its shortcomings, a kind of ex post revenge of the adaptation paradigm, imposed by reality. However, the focus is still on private ownership, and the issue of updating is far from being solved. It remains to be seen if and how far these propositions will be institutionalised, for example in the new revision of the Code, currently under discussion.

I Setting the Scene

As a resource, land produces a range of services for human development, such as food production, housing, and ecosystem services through forested areas. While statistics related to homelessness are scarce for Benin, the most recent statistics of the United Nations Food and Agriculture Organization (FAO) estimate that agriculture and forest represented respectively 33 per cent and 38 per cent of the land area of the country in 2016. However, in terms of contribution to food security, employment, income generation, and the creation of goods and services, agricultural activities play a central role in the social and economic life of the country. According to the most recent statistics, the share of the employed population working in agriculture in 2018 was estimated at 41 per cent, and contributed to producing 23 per cent of the value generated by economic activities (World Bank, 2018).

Despite this position and the positive economic performance in recent years, the agricultural performance in Benin is still very much lagging behind in international comparisons (Food and Agriculture Organization Corporate Statistical Databasem FAOSTAT, www.fao.org/faostat/en/#home). While the rest of the world experienced gradual and substantial productivity gains through the entire period, despite steady growth since the 1990s land productivity remains low in Benin. Moreover, even though the country has privileged access to trade routes and imports food from abroad, the latest report on the state of food security and nutrition in the world ranks Benin among low-income, food-insecure countries. This underlines the fact that agricultural output is not sufficient to meet local demand for food and the country lacks the resources to fill the gap by purchasing food on the international market. In that context, it is estimated that the population is affected by multiple forms of malnutrition – including a high prevalence rate of anaemia among women and child stunting – and that one out of ten persons (i.e. 1.1 million persons) was undernourished in Benin between 2015 and 2017. Agricultural production is also particularly vulnerable to climate change and this situation raises concerns regarding the future prospects of food security in Benin (see FAO et al., 2018).

This chapter on land reforms provides a thorough and in-depth analysis of the political forces that shaped the orientations of successive land reforms in Benin. In this discussion, we propose to analyse the land reforms in Benin through their impacts on the social and economic lives of individuals. To pursue that goal, we provide a bird’s-eye view of the theoretical and observed effects of the land reforms implemented and offer remarks on some of the challenges and opportunities ahead to promote sustainable improvement of the social and economic lives of individuals in Benin.

II Land Reforms in Benin: Theoretical Expectations

A property right refers to socially recognised structures of allowable individual actions. It determines how a resource is used for consumption and/or income generation (see, e.g. Besley and Ghatak, Reference Besley, Ghatak, Rodrik and Rosenzweig2010). Hence, a system of property rights provides the incentives and devises the constraints that shape human interaction, whether political, social, or economic (North, Reference North1990).

There is a well-established theoretical literature that shows that the enforcement of private property rights, which makes it possible to legally exclude others from using a good or asset, within an effective legal framework should in theory increase productivity and spur economic development (Besley and Ghatak, Reference Besley, Ghatak, Rodrik and Rosenzweig2010). The literature proposes three channels through which productivity gains arise in these contexts. First, the codification and enforcement of private property rights reduce expropriation risks and promote long-term investments. Second, enforceable property rights should lower transaction costs and allow productive farmers to negotiate land use rights from less productive farmers, thus making both parties better off. Third, a clear definition of property rights reduces information asymmetry about ownership rights and can allow individuals to use their property as collateral for loans. Nevertheless, to be effective, the ability to use land as collateral requires a number of conditions, including the presence of a properly functioning credit market.

Theoretical predictions of the effects of the enforcement of private property rights on productivity suggest that places where property rights are clearly defined and enforced should be more productive. However, most agricultural land in Benin is held under customary rules, where the allocation and enforcement of land rights involve a diverse and complex set of arrangements made and upheld by local stakeholders, such as village chiefs, councils of elders, and land chiefs (Le Bris et al., Reference Le Bris, Le Roy and Leimdorfer1982). Therefore, private property rights, as conceptually defined in theory, do not match local practices of land rights management.

Yet, there are good reasons to consider that land tenure insecurity represents a challenge for investment and living conditions in Benin. First, using detailed information on agricultural practices on plots, Lawin and Tamini (Reference Lawin and Tamini2019) find evidence suggesting that land tenure arrangements significantly influence farmers’ decisions to invest in practices that improve agricultural productivity while preserving the environment. Second, there is evidence that under customary land management, land tenure insecurity prevents farmers from leaving their land fallow, a low-cost soil fertility management investment practice that improves agricultural practices (Goldstein et al., Reference Goldstein, Houngbedji, Kondylis, O’Sullivan and Selod2018). Third, available statistics estimate that 34 per cent of the population in Benin felt insecure about their tenure rights over the home they owned or rented in 2018 (Prindex, 2019).Footnote ²⁷ Though home tenure insecurity appeared to be evenly distributed across urban and rural areas, it varied geographically and was highest for vulnerable groups, such as women and renters.

To reduce land tenure insecurity, in a context where allocation and enforcement of land rights have historically been vested in customary practices, policy makers in Benin approved the Rural Landholding Law of 2007, which provided formal recognition of land held under customary arrangements. A new land law was then adopted in 2013 to improve the definition of property rights. This established ANDF, a national agency with responsibility for the implementation of land policies.

While little is known about the effects of the implementation of the 2013 land law, more can be learned from studying the effects of the implementation of the Rural Landholding Law of 2007. In practice, the Rural Land Law allowed willing villages to produce Rural Land Use Plans, or PFRs, which embed the resolution of land disputes, the demarcation of plots, and the recognition of individual land rights within customary practices, and which provide documentary evidence of those rights. PFRs are a community-driven approach that seeks to provide legal recognition of land rights held under customary tenure systems (see, e.g. Colin et al., Reference Colin, Le Meur and Léonard2009; Cotula et al., Reference Cotula, Toulmin and Hesse2004; Lavigne Delville, Reference Lavigne Delville2014). The approach systematically demarcates several plots at once, making it an affordable policy option. However, the impacts of the PFRs are theoretically unclear, since customary land rights that are formalised are not necessarily private and still remain (partly) vested in customary practices.

III Empirical Effects of the Plan Foncier Rural in Benin

To our knowledge, available empirical studies of the effects of Benin’s PFRs include a study of changes in land security for landowners and access to land for tenants (Yemadje et al., Reference Yemadje, Crane, Mongbo, Saïdou, Azontonde, Kossou and Kuyper2014), variation of agricultural investment decisions (Goldstein et al., Reference Goldstein, Houngbedji, Kondylis, O’Sullivan and Selod2018), and changes in individual levels of cooperation and trust (Fabbri, Reference Fabbri2021) as a result of land registration activities.

In the oil palm-based cropping system on the Adja Plateau, Yemadje et al. (Reference Yemadje, Crane, Mongbo, Saïdou, Azontonde, Kossou and Kuyper2014) report that following the land registration activities carried out as part of the PFRs, land conflicts have decreased and there was a shift towards agricultural intensification. Tenants and landowners increasingly invested in land through rotations between maize and cowpea (rather than maize mono-cropping) and the use of mineral fertilisers, without increased use of household waste. The paper suggests also that as a result of the PFRs there was a shift from oral to written land rental contracts, from unwitnessed to witnessed contracts, and from contracts backed up by local chiefs under customary rules to contracts backed up by the state in a legal system.

Covering a larger study area that spreads across forty of the seventy-seven communes in Benin, Goldstein et al. (Reference Goldstein, Houngbedji, Kondylis, O’Sullivan and Selod2018) compare the agricultural decisions of rural households in villages that were randomly selected to receive a PFR intervention to otherwise comparable households in villages that were not selected. The authors find that following land demarcation agricultural households were on average more likely to have their plots demarcated. In line with theoretical predictions, households in villages that implemented a PFR were also on average more likely to shift their investment decisions to long-term and perennial cash crops. There was also evidence that, on average, the PFRs helped to reduce the gender gap in fallowing, a key soil fertility investment.

The results reported by Yemadje et al. (Reference Yemadje, Crane, Mongbo, Saïdou, Azontonde, Kossou and Kuyper2014) and Goldstein et al. (Reference Goldstein, Houngbedji, Kondylis, O’Sullivan and Selod2018) are in line with the effects reported for similar interventions in other countries of sub-Saharan Africa. In Ethiopia, Deininger et al. (Reference Deininger, Ali and Alemu2011) find that the registration of land rights in Amhara significantly reduced fear of land loss, and increased the propensity to rent out land and the propensity to invest in soil and water conservation measures by 20 percentage points. Studying the effects of Rwanda’s large-scale land tenure regularisation programme, Ali et al. (Reference Ali, Deininger and Goldstein2014) find that the land tenure regularisation increased soil conservation investments among male-headed households by approximately 10 percentage points, and that the impact for female-headed households – at 19 percentage points – was nearly twice as large.

The long-term impacts of the registration of customary land rights on agricultural productivity and food security in Benin remain an area of active research. However, outside Benin, Holden et al. (Reference Holden, Deininger and Ghebru2009) find that, up to eight years after the rural land registration in the Tigray Region in Ethiopia, plot productivity increased. In Vietnam, Newman et al. (Reference Newman, Tarp and van den Broeck2015) studied the effect of the land use certificate (LUC) on rice production and find that ‘plots that move from not having a LUC to having a LUC experience gains in rice yields of 4.9%’ (Newman et al., Reference Newman, Tarp and van den Broeck2015, p. 99).

IV Concluding Remarks

Theoretical and empirical results suggest that land tenure arrangements matter for agricultural practices. Empirical studies of the PFRs provide evidence that the land registration activities have on average increased agricultural investment and have encouraged the adoption of soil fertility management techniques in parts of Benin. While detailed studies of the long-term impacts of the PFRs on land productivity in Benin remain to be carried out, it seems unlikely that the formalisation of land rights alone will boost agricultural productivity to the level observed in the rest of the world. To sustain investment in agriculture and maximise the chances of improving food security in Benin, a systemic approach is needed to connect farming to local demand for food while reducing externalities on the environment.

While the evidence suggests that the formalisation of land rights in rural areas can be instrumental in increasing land tenure security, it raises a number of concerns about the distributional effects of land registration under customary settings. As pointed out by Yemadje et al. (Reference Yemadje, Crane, Mongbo, Saïdou, Azontonde, Kossou and Kuyper2014), land registration of customary rights does not exist in a vacuum. Land registration activities take place in contexts marked by spatially heterogeneous land tenure management systems, and the issuance of formal documentary evidence of land rights changes expectations and coordination between individuals. For instance, the issuance of land certificates can skew land tenure security towards holders of land certificates. This can reduce tenure security for other individuals who may have claims to the same piece of land and to different dimensions of use of that land (Lavigne Delville, Reference Lavigne Delville2014; Udry, Reference Udry, Aryeetey, Devarajan, Kanbur and Kasekende2012). This is particularly a salient concern for women, who typically obtain land use rights via a male intermediary. Alternatively, land registration activities can embed conflict resolution mechanisms and can help uphold the land rights of vulnerable groups, as protected by the legal system. In this way there are also reasons to expect that land registration activities act as a magnet that helps customary and legal practices coevolve and converge (Aldashev et al., Reference Aldashev, Chaara, Platteau and Wahhaj2012).

Overall, given, on the one hand, the role that access to land plays in social recognition, access to housing, and the economic lives of individuals, and, on the other hand, the spatial variation of existing customary practices, land registration activities are expected to produce an array of impacts depending on the constraints that are locally relaxed and/or exacerbated. It therefore seems worth considering various approaches to land registration activities depending on local context.

I Introduction

Benin’s approximately 800 km north–south border with Nigeria plays a critical role in Benin’s economy. Nigeria’s population of around 190 million is nearly twenty times larger than Benin’s and the differential in gross domestic product (GDP) is even larger, with Nigeria’s output equal to nearly forty times Benin’s, reflecting Nigeria’s oil wealth rather than a higher standard of living. Thus, the economic relationship between the two countries is necessarily asymmetrical, with Nigeria’s influence on Benin much more powerful than vice versa. Moreover, Nigeria’s combination of massive oil wealth, interventionist economic policies, and high levels of corruption has led to pervasive distortions and inefficiencies.

It is in this context, during the first oil shock in 1973, that Benin adopted a development policy centred on serving as an ‘entrepôt state’ vis-à-vis its neighbours, particularly Nigeria (Igué and Soulé, Reference Igué and Soulé1992). That is, Benin aimed to expand its role as a trading hub, importing goods and re-exporting them to Nigeria, thus profiting from the distortions in Nigeria’s economy. Heilbrunn (Reference Heilbrunn and Wright1999) aptly described Benin as the ‘Flea on Nigeria’s Back’.

Benin’s dependence on Nigeria is not apparent from official trade statistics, with Benin’s reported trade with Nigeria accounting for only about 6 per cent of Benin’s exports and 2 per cent of Benin’s imports in 2015–2017.Footnote ¹ These official statistics are very misleading, however, as they ignore the huge unrecorded informal trade between the two countries (Benjamin et al., Reference Benjamin, Golub and Mbaye2015). As we discuss in detail in this chapter, Benin imports very large quantities of consumer goods that are subject to high import protection in Nigeria and then transships them to Nigeria through elaborate institutional mechanisms. Conversely, Benin illegally imports a large proportion of its petroleum products from Nigeria, where consumer prices are highly subsidised. This two-way informal cross-border trade (ICBT) has in the past accounted for a large share of Benin’s income, employment, and fiscal revenues. Recently, however, the volume of this trade has dropped considerably due to a recession in Nigeria, revealing its fragile foundations. This chapter will analyse the nature, institutional foundations, and consequences of ICBT between the two countries, and it will draw out policy implications.

ICBT is pervasive in sub-Saharan Africa, reflecting a confluence of historical and institutional factors: artificial national borders established in the colonial era and maintained after independence; porous borders between contiguous nations; a long history of regional trade pre-dating the colonial era; kinship groups that transcend national borders; weak border enforcement capabilities; corruption of high- and low-level officials who profit from collusion with traders; and, perhaps most importantly, lack of coordination of economic policies among countries sharing these borders (Golub, Reference Golub, Morrissey, López and Sharma2015). We will show how these factors play out in a particularly dramatic way in Benin.

An interesting dimension of regional ICBT is the intense competition between Benin and Togo for informal access to the Nigerian market. Togo is less well situated geographically than Benin for transshipping to Nigeria, since goods coming from Togo must go through Benin or Niger, but Togo compensates in part through lower taxes and fees (Golub, Reference Golub2012). Although land-locked, Niger is also heavily involved in smuggling to Nigeria (Hashim and Meagher, Reference Hashim and Meagher1999); so too is Cameroon, though to a lesser extent (Golub and Kobou, Reference Golub, Kobou, Mbaye, Golub and Gueye2019).

Benin has developed elaborate institutional mechanisms to support ICBT, notably through specific customs procedures. In some respects these mechanisms are quite efficacious, belying the notion that institutions in Benin are dysfunctional. At the same time, however, the national priority placed on promoting unofficial trade is not a viable long-run strategy for development. The recent downturn in the re-export trade starkly reveals Benin’s vulnerability to shocks in Nigeria. Even more so than for other countries of the region, Benin’s economy is dominated by the informal sector, which provides a dubious foundation for sustainable long-term development (Benjamin and Mbaye, Reference Benjamin and Mbaye2012; Mbaye et al., Reference Mbaye, Golub and Gueye2019).

Despite the vulnerability to shocks in Nigeria and the questionable sustainability of informal trade, Benin’s heavy dependence on this trade for government revenues and the numerous beneficiaries among both formal and informal operators explain the government’s reluctance to crack down on smuggling. Furthermore, even if the government were determined to shut down informal trade with Nigeria, it would be difficult to do so as long as the underlying incentives created by Nigeria’s distortions remain. Large price differences between adjacent countries with porous borders are an invitation to smuggling that ingenious traders are bound to exploit. Thus, rather than focus on eradicating ICBT, the government should pursue policies to diversify Benin’s economy to reduce its vulnerability to Nigeria’s instability.

In this chapter, we focus on two of the main dimensions of Benin’s ICBT with Nigeria: imports of goods subject to heavy protection in Nigeria, particularly used cars and rice, which are then re-exported to Nigeria; and Benin’s imports of petroleum products, which are highly subsidised in Nigeria. The remainder of the chapter is organised as follows. Section II provides historical background. Section III discusses the effect of divergent economic policies as a key driver of informal trade between Benin and Nigeria, particularly Nigeria’s high import protection and fuel subsidies. Section IV provides evidence on the magnitude of informal trade. Section V describes the institutional processes governing informal trade, particularly the role of customs administration, with illustrations in the cases of used cars, rice, and petroleum products. Section VI analyses the effects of informal trade on Benin’s economy, particularly fiscal revenues. Section VII concludes.

II Historical Economic Relations Between Benin and Nigeria

Benin and Nigeria have deep historical economic ties, reflecting their geographical and cultural proximity. The two countries share several languages and ethnicities. Trade within the region pre-dates the colonial period, was altered by colonial economic and political relations, and further adapted to post-colonial political and social developments, most importantly divergent trade and other economic policies.

Yoruba, Hausa, and Ibo trading networks operated prior to the colonial era, but expanded in response to the arrival of European traders in the seventeenth century (Igué and Soulé, Reference Igué and Soulé1992; Hashim and Meagher, Reference Hashim and Meagher1999). Long-distance caravan trade routes linking coastal West Africa with the Sahara and the interior were based on artisanal and ecological comparative advantages, but even in pre-colonial times trade patterns of taxation and tolls impinged on trading routes. The kingdom of Dahomey, corresponding geographically to a southern part of contemporary Benin, had highly developed institutions that facilitated economic ties with Europe, notably the slave trade centred around the town of Ouidah. English, Portuguese, Dutch, and French ships arrived in Ouidah loaded with tobacco, liquor, guns, and miscellaneous items of cheap junk much prized by the local population, which were exchanged for large numbers of slaves. The slave trade was a major source of revenue for the kings of Abomey, who designated a special representative (‘Yovogan’ or ‘chief of whites’) to administer the trading relationships between leading local merchants with European slave traders (Igué and Soulé, Reference Igué and Soulé1992).

In the second half of the nineteenth century, as the slave trade collapsed, traders switched from slaves to palm oil, transacting with French trading firms from Marseille, which created trading posts in Dahomey exporting palm nuts and oil in exchange for tobacco, guns, cloth, and vegetables.

The official colonisation of Dahomey in 1894 by the French altered trading relationships for several reasons. The French colonial government granted a monopoly to French trading companies, spurring the creation of unofficial networks by displaced local businesspeople. The geographical situation of the new colony of Dahomey, sandwiched between German-controlled Togo and English-controlled Nigeria, provided a corridor for French trade with its land-locked colonies, Niger and Upper Volta (now Burkina Faso), creating a precursor to Benin’s role as an entrepôt. Furthermore, Dahomey’s relatively advanced educational system reinforced its advantage as a commercial hub. The Yoruba group’s spread provided a network across the region along the Gulf of Guinea.

The colonial borders between Dahomey and Nigeria were largely retained as national frontiers when the countries gained independence in the 1960s. These borders artificially separated people sharing similar cultural backgrounds, who largely disregarded official borders in their social relations. As Isyaku (Reference Isyaku2017, pp. 210–13) describes it:

In the post-colonial period, kinship groups continued to play a major role in organising informal trade between Benin and Nigeria, notably the Yoruba (Igué and Soulé, Reference Igué and Soulé1992; Igué, Reference Igué2003; Golub and Hansen-Lewis, Reference Golub, Hansen-Lewis, Benjamin and Mbaye2012). Along the northern frontier between the two countries, the Hausa are dominant. Adherence to Islam is a source of solidarity and motivation for both the Hausa and the Yoruba, providing security for transactions, mutual assistance, and credit, all based on trust rather than formal contracts (Sudarkasa, Reference Sudarkasa and Lindsay1985). In recent years, however, there have been numerous clashes between Yoruba and Hausa traders over control of markets (Porter et al., Reference Porter, Lyon, Adamu and Obafemi2010).

Informal trade was boosted by the instability in Nigeria following the Biafra war in 1967, with an influx of Ibo refugee traders into Benin, and Benin supplying goods to sections of Nigeria cut off from supplies. During the war, Benin became a major cocoa exporter, despite non-existent production of this product, as Nigerian cocoa was diverted through Benin.

Starting in 1973, Benin adopted low-tariff policies to facilitate the entrepôt role of Cotonou to take advantage of the oil boom in Nigeria following the first oil shock. Benin also took steps to expand access to credit to importers by opening up the banking system, and deregulated the importation of key products, such as rice, formerly monopolised by state-owned firms. The Marxist government of Benin deployed the nationalised banking system in favour of the re-export trade. These credits were limited to Beninese nationals, with defaults on these loans contributing to the banking crisis of the late 1980s (Hashim and Meagher, Reference Hashim and Meagher1999). During the 1980s and 1990s, Benin took several further steps to liberalise its imports. Customs duties were waived on the two main items re-exported to Nigeria at that time: rice and cloth. In 1985, the state monopoly on imports was eliminated. In 1993, all remaining quantitative restrictions on imports were removed. In 1994, a simplified system of customs duties with a maximum rate of 20 per cent was established, with rice and cloth still exempt (IMF, 1996).

The West African Economic and Monetary Union (WAEMU), a group of mostly francophone countries of which Benin is a member (and of which anglophone Nigeria is not), established a common external tariff (CET) in 2001 that lowered import duties for most member countries but raised them for Benin (and Togo), particularly for cloth, rice, and other important re-export goods (Soulé, Reference Soulé2000, Table 7.3). Nevertheless, the WAEMU duties remained well below those in Nigeria. Moreover, Benin has found ways of circumventing WAEMU import taxes by exercising customs valuation with consideration discretion, and most importantly making greater use of special customs regimes for transit and re-exports, through which it imports at very low tax rates. These customs regimes are described in detail in Section V.

Both Benin and Nigeria are members of the larger regional group the Economic Community of West African States (ECOWAS), which encompasses both the francophone and anglophone nations of West Africa. ECOWAS has progressed far less than WAEMU in regional integration. Some cooperative regional efforts have advanced, particularly in the political realm, but Nigeria is large enough that it has seen little need to coordinate with its much smaller neighbours, and it has sometimes obstructed or failed to implement ECOWAS harmonisation efforts (Hoffman and Melly, Reference Hoffman and Melly2015). After numerous delays, ECOWAS agreed to a CET in 2013. Although Nigeria is among the countries that have adopted the CET in principle, in practice it has not fully implemented this regime, or has availed itself of escape clause provisions that allow higher protection. Thus, a number of Nigerian imports face tariffs that exceed the ECOWAS maximum of 35 per cent, and there remains a list of items facing outright bans, as discussed later.

Nigeria has made repeated threats to eradicate smuggling, but with little lasting effect. The borders have sometimes been closed due to other political tensions between the two countries. From February 1984 to February 1986, Nigeria shut down the border with Benin in an effort to curb smuggling of petroleum products out of Nigeria. During this time, Nigeria closed down all service stations within 10 km of the border with Benin, in a futile attempt to curb smuggling. Heilbrunn (Reference Heilbrunn and Wright1999) observes that the effects of the border closures were short-lived at best and that the recession in Nigeria in 1985 had far larger effects on lowering ICBT than the ineffectual measures of the Nigerian authorities.

In 1996, President Abacha of Nigeria closed the border in a political dispute with Benin’s President Soglo, related to the latter’s military cooperation with the USA, which Abacha viewed as a threat. The resulting dislocations in Benin, notably gasoline shortages, contributed to Soglo’s loss in the 1996 presidential elections.

In August 2003, the border was closed for a week following a confrontation between the Nigerian and Beninese governments precipitated by the harbouring of a suspected Nigerian criminal in Cotonou.Footnote ² Only when he was turned over to the Nigerian authorities following a meeting between Obasanjo and President Kerekou of Benin in Badagry, Nigeria, was the border re-opened. Following the meeting, the two presidents issued the ‘Memorandum of Badagry’, which committed the Benin and Nigerian governments to fostering formal trade relations while curtailing smuggling and criminality. In March 2008, Nigeria initiated a crackdown on imports of used cars, holding up car convoys at the usual crossing points such as Kraké and Igolo (Houngbo, Reference Houngbo2008). More recently, President Buhari has taken a number of measures to curb smuggling from Benin, notably prohibiting imports of rice and cars through land borders once again.

Notwithstanding these occasional border closings and frequent threats from Nigeria, the re-export trade has always recovered as the enforcement of border controls reverts to its normal laxity. A sharp downturn in informal trade in 2015–2017 for some products, notably used cars, has yet to be fully reversed. As discussed in what follows, this prolonged decline is likely due more to the recession in Nigeria dampening demand than to border closures. Regardless, these episodes reveal Benin’s acute vulnerability to economic shocks from Nigeria.

Officials from Benin and Nigeria have recently announced joint efforts to curb smuggling (Goudreau, Reference Goudreau2018). Further, the two governments have just opened a joint centre for customs control at the largest official border crossing between the countries – the Seme–Kraké corridor. As commentators have noted, however, most smuggling does not go through official border posts, so the utility of this initiative is questionable (AFP, 2018). More generally, the implementation of anti-smuggling measures is likely to remain ineffectual given the disparate interests of the countries involved, and, more importantly, given the beneficiaries of smuggling within them, as will be described.

III Causes of Informal Trade: Nigeria’s Pervasive Distortions Incentivise Smuggling

The most important underlying source of Benin’s informal trade is Nigeria’s dysfunctional economic policies, which provide incentives for traders to profit from circumventing them. It is beyond the scope of this chapter to analyse in detail the reasons for Nigeria’s corruption and mismanagement, but it surely reflects a combination of Nigeria’s size, ethnic fractionalisation, and oil wealth. Indeed, Nigeria has been one of the starkest examples of the ‘resource curse’, whereby natural resources such as oil contribute to inefficiencies and corruption (Venables, Reference Venables2016). Revenues from natural resources crowd out manufacturing and agriculture. Nigeria has attempted to maintain its industrial and agricultural base through import substitution, but this has largely fostered inefficiency and incentives for evasion. Worse, large resource rents can provide an irresistible political temptation to engage in the notorious wasteful spending and corruption that occur in Nigeria.

In effect, therefore, Nigeria’s resource curse and institutional weaknesses have been transmitted to Benin. The distortions in Nigeria fuelled by oil and corruption provide economic rents to smugglers in Benin, so much so that much of Benin’s institutions, both formal and informal, have evolved to capture these rents.

The dominance of the informal sector and the artificial nature of national borders in West Africa are also crucial underlying causes of the informalisation of trade. Throughout West Africa, and particularly in Benin, the informal sector represents approximately 50 per cent of GDP and 90 per cent of employment. The ascendency of the informal sector, including ICBT, is both the cause and effect of the weakness of the formal sector. With the economic crisis and subsequent structural adjustment programmes of the 1980s, government employment dropped sharply in Benin as in other sub-Saharan countries and formal private-sector employment failed to pick up the slack as the business environment remained poor (Golub and Hayat, Reference Golub, Hayat, Monga and Lin2015). The informal sector became the employer of last resort, particularly for young people newly entering the labour market, even those with substantial education (Benjamin and Mbaye, Reference Benjamin and Mbaye2012; Mbaye et al., Reference Mbaye, Golub and Gueye2019). Many of the informal gasoline transporters and retailers are young people with secondary education who are unable to obtain formal jobs. The booming informal sector in turn contributes to the hostile climate for formal business investment, creating a vicious cycle.

Moreover, contrary to common perceptions, the informal sector is in some respects better organised than the formal sector, with large informal firms often rivalling formal firms in size, and kinship groups linking together informal operators into networks that cross borders and even continents. The Yoruba and the Hausa are particularly important for Benin–Nigeria ICBT, as previously noted.

B Macro-economic and Exchange Rate Policies in Nigeria

Macro-economic policies, particularly exchange rate policy, are another relevant factor driving cross-border trade, with Nigeria having a crawling peg to the US$ but an inconvertible exchange rate regime, while Benin is a member of the WAEMU Communauté Financière en Afrique (CFA) Franc single currency, formerly pegged to the French Franc and now to the Euro.

Nigeria’s economy is highly dependent on oil, and thus subject to shocks from fluctuations in world oil prices. The recent recession in Nigeria in 2015–2017, associated with a sharp downturn in world oil prices, provides a clear example of the spill-over effects of Nigerian macro-economic developments on Benin. The Buhari administration resisted devaluing the Nigerian Naira (NGN) despite severe balance of payments pressures. As a result, a shortage of foreign currency exacerbated the recession in Nigeria. Equally importantly, the black market exchange rate depreciated sharply while the official exchange rate remained fixed, as shown in Figure 8.1. With ICBT largely operating in the parallel foreign exchange market, the purchasing power of Nigerian consumers fell further as the black market exchange rate depreciated precipitously. At the end of 2014, Nigeria’s black market exchange rate was at less than a 10 per cent discount under the official exchange rate of about NGN 180 per US$. As the foreign exchange shortage worsened, in early 2016 the black market rate had depreciated to about NGN 350 per US$. A 30 per cent official devaluation in June 2016 temporarily eased pressures, but the situation soon deteriorated again after the official exchange rate was repegged at NGN 300 per US$. By February 2017, the black market exchange rate had tumbled again to about NGN 500 per US$. Since mid-2017 the black market discount has declined considerably due to the recovery of the price of oil and Nigeria’s balance of payments.

Figure 8.1 Nigeria’s official and black market exchange rates (NGN per US$)

The recession in Nigeria and the depreciation of the black market exchange rate were major causes of the sharp downturn in Benin’s ICBT in 2016–2017, as described in Section III.C.

IV Magnitude of Entrepôt Trade Between Benin and Nigeria

This section provides estimates of the magnitude of ICBT between Benin and Nigeria for Benin’s smuggling of imported goods into Nigeria and Benin’s informal imports of petroleum products.

Smuggling is of course difficult to measure, but can be estimated indirectly through the magnitude of official imports per capita into Benin compared to Nigeria and other countries (Benjamin et al., Reference Benjamin, Golub and Mbaye2015). Our previous work showed that imports per capita into Benin of certain products that are heavily protected in Nigeria are far too large to be explained by Benin’s domestic consumption. In this section we update our comparisons of imports per capita in Benin, Togo, and Nigeria for some of the key products of the entrepôt trade – namely, those that are heavily protected in Nigeria. We confirm that imports into Benin (and also Togo) are much too large to be explained by domestic consumption. Recently, however, Benin’s imports of some of these key products have dropped off sharply. Figures 8.2a–d show imports per capita for cars, rice, cotton cloth, and poultry, respectively, for Benin, Togo, and Nigeria.Footnote ⁵

Figure 8.2a Imports per capita in US$ for Benin, Togo, and Nigeria: Cars

Figure 8.2b Imports per capita in US$ for Benin, Togo, and Nigeria: Cotton cloth

Figure 8.2c Imports per capita in US$ for Benin, Togo, and Nigeria: Rice

Figure 8.2d Imports per capita in US$ for Benin, Togo, and Nigeria: Poultry

While there is some domestic Nigerian production of these products, which is, after all, why they are protected, it is typically low relative to domestic consumption, or not large enough to explain the very large differences in import patterns displayed in these figures.

E Summary on Entrepôt Imports

Entrepôt imports into Benin are very large but also highly volatile. The sharp downturn in entrepôt trade in 2016–2017 illustrated in Figures 8.2a–8.2d is a case in point. There are two main causes of this recent decline: the recession in Nigeria, with an accompanying sharp depreciation of the Naira, and President Buhari’s efforts to close the border to smuggling from Benin. Of these two, there are several reasons why the recession in Nigeria is likely to have been far more significant than the Nigerian government’s crackdowns. First, the efforts to curb smuggling have a long history of ineffectiveness. Traders are skilled in evading official detection and, more importantly, there are numerous beneficiaries from smuggling in Nigeria, including customs officials. Furthermore, Figures 8.2a–8.2d show that imports into Nigeria also declined in 2016–2017, whereas they should have risen if supply from Benin was cut off, given that Nigerian production did not rise during this period for these products. In particular, car production in Nigeria remains minuscule. Also, the fact that rice imports in Benin declined only briefly in 2016, before shooting back up in 2017, is consistent with the fact that rice is a basic necessity, more so than the other goods shown in Figures 8.2a–8.2d. Thus, rice demand is likely to have fallen less as incomes plummeted in Nigeria. All of this suggests that a fall of demand in Nigeria rather than the Buhari administration’s hardened policies on smuggling is the primary cause of the decline in Benin’s entrepôt trade. A sharp increase in Benin’s taxation of entrepôt imports of cars in 2012–2015 likely also contributed, as discussed later.

The importance of the world oil price in driving Nigeria’s economy, and in turn Benin’s imports of goods intended for transshipment to Nigeria, is illustrated dramatically in Figure 8.3. The left axis shows the world oil price and the right axis the value of imports of nine products that are subject to import protection in Nigeria (cars, rice, cotton cloth, new clothes, used clothes, poultry, sugar, vegetable oil, and cigarettes) in millions of US$. Both series are deflated by the US GDP deflator. Changes in the world price of oil are followed with a short lag by very similar movements in Benin’s imports of key products. In 2011–2014, when world oil prices peaked, imports of these nine products alone rose to about US$4 billion, equivalent to about half of Benin’s GDP. About 80 per cent of these imports were likely destined for Nigeria. When the price of oil collapsed in 2015–2017, Benin’s imports declined by around 50 per cent. As seen in Figures 8.2a–8.2d, individual products have some idiosyncratic variation but generally followed this general pattern, illustrating their sensitivity to the world oil price due to its importance for the Nigerian economy.

Figure 8.3 Benin’s imports of selected key products that are subject to protection in Nigeria (right vertical axis, 2015 US$ millions) and the world price of oil (left vertical axis, 2015 US$ per barrel)

The products are cars, rice, cotton cloth, new and used clothes, poultry, sugar, vegetable oil, and cigarettes. Benin’s imports are measured by rest-of-world exports to Benin of these products, in millions of US$. The oil price is the average annual Brent crude price in Europe. Both series are deflated by the US GDP deflator to remove common trends due to inflation.

Sources: Authors’ calculations using data from United Nations Comtrade database and Saint Louis Federal Reserve Bank database

Import taxes and competition with Togo are also factors affecting the volume of entrepôt imports in Benin, as described in more detail in Section VI. In particular, Benin raised transit taxes on imported cars in 2012, leading to a dip in Benin’s imports and a rise in Togo’s. This explains why Figure 8.3 and Table 8.2 show that Benin’s entrepôt imports dropped in 2012 despite the high price of oil at that time.

Table 8.2 Value of Benin’s imports by customs regime (per cent of GDP), 2002–2017

	Domestic use	Transit	Re-exports	Total imports	Transit and re-exports
2002	21	53	5	79	58
2003	21	20	2	44	22
2004	22	23	0	45	24
2005	19	28	0	47	28
2006	18	41	0	59	41
2007	18	44	1	63	45
2008	21	53	2	75	54
2009	20	58	1	79	59
2010	20	70	1	91	71
2011	16	50	1	67	51
2012	16	28	1	45	29
2013	20	39	3	62	41
2014	26	41	15	83	57
2015	22	33	3	58	36
2016	21	24	1	46	25
2017	23	31	1	54	32

Source: Authors’ calculations based on Benin customs data (imports) and World Bank World Development Indicators (GDP)

G Comparison to Other Estimates

The overall magnitude of informal trade is difficult to measure precisely, but generalising from these sectors, as well as the evidence on imports by customs regime discussed in Section V below, it is clear that informal trade is much larger than formal trade, perhaps double in size. These estimates are larger than those in most previous literature because, as noted in Golub (Reference Golub2009), previous studies have ignored the role of goods declared in transit regimes. The following paragraph shows that goods declared in transit and re-export regimes are about double the value of goods declared for domestic use.

In 2011 Benin’s Institut National de la Statistique et de l’Analyse Economique (INSAE) carried out a large-scale survey of informal trade in Benin over a ten-day period, as described in Bensassi et al. (Reference Bensassi, Jarreau and Mitaritonna2018). The INSAE study involved thousands of interviews at unofficial border crossing posts on the Benin–Nigeria border. While the survey had some important limitations, such as only taking place during the daytime and the fact that the veracity of the answers provided by traders can be questioned, the survey provides the only available direct estimates of the composition and magnitude of informal trade. Bensassi et al. (Reference Bensassi, Jarreau and Mitaritonna2018) focused only on domestically produced goods, but the INSAE dataset also surveyed trade in entrepôt regimes.Footnote ⁷ An examination of the summary INSAE data by product and regime reveals that the key smuggled products identified earlier constitute the bulk of goods reported in entrepôt status. That is, cars, rice, cotton cloth, new clothes, used clothes, poultry, sugar, vegetable oil, and cigarettes accounted for about 60 per cent of the goods reported by traders as transit and 90 per cent of the goods reported as re-export. The INSAE magnitudes, however, are well below those estimated indirectly, as the surveys undoubtedly did not cover many traders, particularly those crossing at night when the largest traders generally operate. On the side of exports from Benin to Nigeria, the INSAE data report that over 90 per cent of Benin’s informal exports to Nigeria consist of petroleum products. Thus, the INSAE data corroborate the focus of this chapter on a few key entrepôt goods subject to high levels of protection in Nigeria and petroleum products, which are heavily subsidised in Nigeria.

It may also be of interest to compare our indicators of unofficial trade with officially reported Benin–Nigeria trade. As already noted, official bilateral trade is very low. Figures 8.4a, b show the composition of official Benin exports to and imports from Nigeria, in US$.

Figure 8.4a Official Benin trade with Nigeria, principal products, in US$ millions: Exports

Source: Authors’ calculations using data provided by Benin government

Figure 8.4b Official Benin trade with Nigeria, principal products, in US$ millions: Imports

Source: Authors’ calculations using data provided by Benin government

Interestingly, the most important products in official trade are much the same as those that are smuggled, although official trade is much smaller, highly volatile, and three products accounted for almost all of official Beninese exports to Nigeria over 2009–2017: poultry, rice, and vegetable oil (in sharply varying proportions). Whereas total entrepôt trade approached US$5 billion at its peak, the vast majority of which was destined for Nigeria, official Benin exports to Nigeria peaked at US$200 million in 2010 and have since been below US$100 million. In 2009–2010, poultry and rice were the two largest of Benin’s official exports, but these two dropped sharply starting in 2011. Recently, vegetable oil has been the largest official Benin export to Nigeria. These fluctuations likely reflect shifting degrees of enforcement of Nigeria’s restrictions on informal trade for selected products, with these products sometimes allowed to enter Nigeria officially.

Figure 8.4b shows that reported imports to Benin from Nigeria are even smaller. Petroleum products are usually the largest official import by far, although these official imports are dwarfed by smuggling of gasoline and diesel.

In short, the composition of official trade between Benin and Nigeria seems roughly similar in structure to that of unofficial trade, but it is much smaller and subject to erratic changes in product composition.

V The Institutional Structure of Informal Cross-Border Trade in Benin: Highly Organised Informal Trade

This section describes the institutional processes through which goods are transshipped to Nigeria and fuel is smuggled into Benin.

A Customs Regimes

Goods imported into Benin are rarely ordered by the final consumers of these goods prior to arrival in the port. Instead, large importing companies, both domestic and foreign owned, bring goods into the port of Cotonou to sell to domestic and regional buyers. Only when the goods are purchased are they declared under one of three main customs regimes:

• mis à la consommation (for domestic use);

• transit; and

• re-exports.

If declared for domestic use, the purchaser must clear all import taxes, including customs duties, value-added taxes, and several other smaller taxes. The import duty rates are set by the ECOWAS CET. For final consumer goods the total tax rates are about 45 per cent.

There are two main regimes for the transshipment of goods in Benin and Togo: transit and re-exports. The classification of goods into these two categories is complex, with rather minor differences often determining whether transactions are classified as re-exports or transit. These two rubrics include a variety of subcategories of transshipment based on practices that have evolved over time. In any case, the differences between the two regimes are quite small and the main point is that under both of these regimes imports are taxed much more lightly than when they are declared for domestic use, as explained in the following. In practice, the magnitude of transit trade is much higher than re-exports in almost all cases. We will use the term ‘entrepôt imports’ to describe both transit and re-exports. Togo has very similar regimes for imports.

Transshipped goods do not necessarily – or even usually – end up in the stated destination country. Most goods in transit in Benin are declared for Niger, but everyone knows that most of them end up in Nigeria. On-site visits by the authors to car parks in Benin confirmed that the buyers of vehicles are overwhelmingly Nigerian. Numerous international and local press reports also observe smuggling from Benin to Nigeria. As will be discussed, entrepôt imports are affected by Benin’s competition with Togo, as well as by events in Nigeria.

Table 8.2 displays Benin’s imports according to the three customs classifications noted earlier – domestic use, transit, and re-exports – over 2002–2017 as a ratio of Benin’s GDP. These data are reported by Benin’s customs, whereas the trade values in Section IV are from the UN Comtrade database as reported exports from Benin’s trade partners. The overall magnitudes of the Beninese data and the UN Comtrade data are similar. The advantage of the Benin customs data is that they disaggregate by customs regime, but they are not available on a consistent basis for as long a time period as the UN Comtrade data. The Benin customs data importantly also include revenues collected, and thus enable a computation of effective import tax rates for each customs regime.

Benin’s entrepôt trade (transit and re-exports) is generally much larger and more volatile than imports declared for domestic use. While imports for domestic use are stable at around 20 per cent of GDP, entrepôt imports vary from 20 to 60 per cent of GDP.

The composition of imports between domestic use and entrepôt trade may be affected by differential taxation of the two regimes. Tax competition with Togo may also play a role, as discussed in Section VI. Statutory taxes on entrepôt imports in Benin are generally very low, with the notable exception of used cars. Statutory rates are largely irrelevant, however, as there is substantial discretion in applying tax rates. In particular, tax rates are much lower if goods are labelled for land-locked countries, usually Niger, but in reality the stated destination is almost always modified from Niger to Nigeria once the goods leave the port. Thus, in the analysis we use actually applied tax rates, measured by tax revenues divided by value of imports, rather than statutory tax rates.

Figure 8.5 shows the share of entrepôt imports of total Benin imports for the three most important products exported informally from Benin to Nigeria: cars, cotton cloth, and rice. It shows that for cars, and until recently cloth, imports in entrepôt status constituted about 90 per cent of total declared imports, or, equivalently, imports declared for domestic use were only 10 per cent of total imports. The entrepôt share for cars and cloth dropped in 2016–2017 to around 70 per cent, likely due to the general reduction of informal trade to Nigeria, most of which is declared in transit or re-export. To the extent that domestic consumption in Benin did not fall as much, the share of imports for domestic use rose. The share of imports of rice declared in entrepôt regimes was lower than for cars and cloth, at about 50 per cent from 2009 to 2013, and then dropped quite sharply in 2014–2017 to about 25 per cent. This was likely due to a reduction in taxes on rice imports for domestic use, from 33 per cent prior to 2014 to 14 per cent in 2014–2017. Thus, for rice it became less advantageous to use transit status relative to importing through the regular channel for distribution in Nigeria, and a sizeable share of imports of rice was shifted from the transit regime to import for domestic use.

Figure 8.5 Share of Benin’s key imports declared in entrepôt regimes (transit and re-export): Cars, rice, and cloth (per cent of total imports of respective products)

Source: Authors’ calculations using Benin customs data

B Social Organisation of Informal Trade

Although goods are sometimes imported legally by formal firms, distribution is dominated by informal or semi-formal operators, both foreign and domestic, once the goods are sold and exit the port storage depots. Smuggling is largely controlled by sophisticated and well-organised networks, with many small operators involved on the margins. The trust and connections provided by these informal networks, often ethnic or religious in nature, facilitate market transactions spanning continents, and enable the provision of credit and transfers of funds.

In many cases, importers and distributors are large informal firms, as described in Benjamin and Mbaye (Reference Benjamin and Mbaye2012) and Mbaye et al. (Reference Mbaye, Golub and Gueye2019). These firms have a large volume of business, yet in other respects operate in much the same way as smaller informal firms do; that is, they are controlled by a single businessperson, have falsified accounts, and do not pay regular business income taxes. Their financing is sometimes through banks, but more typically from own or family savings and retained earnings. The fate of the firms is inextricably linked to that of the owner, who often relies on political connections to maintain his status as a large businessman operating outside of the legal and regulatory system.

For bulk items, such as rice, wheat, and sugar, importers purchase directly from international brokers, with whom they are in regular contact. A few major importers dominate the rice market, with Difezi et fils controlling more than half of sales.Footnote ⁸ Likewise, Cajaf Common, owned by Sébastien Ajavon, is the dominant importer of frozen chicken ultimately destined for Nigeria. Lebanese business networks dominate the used car trade.

Importers of second-hand goods, such as used cars, often travel abroad or have foreign correspondents who provide information about sourcing opportunities. Overall, traders display remarkable flexibility in adapting to changing market opportunities (Golub, Reference Golub2009, Reference Golub2012).

ICBT has developed a sophisticated infrastructure and is often organised much more efficiently than public services. Goods can cross the border by land or water. By land, there are numerous and ever-changing tracks used by traders along the long borders. A complex network of canals is also used, with new canals being dug when customs agents patrol existing routes. Specialised warehouses for various goods, such as rice, are located along the Benin–Nigeria border, built and operated by brokers or private traders. A network of markets is also dotted on both sides of the Benin–Nigeria border, with sister markets on either side of the frontier.Footnote ⁹

Complex relationships between traders and government officials alternate between cooperation and conflict in both Nigeria and Benin. Importers have elaborate ruses for evading import taxes. Nigerian prohibitions on imports through land borders are evaded quite easily considering that the number of unofficial crossing points far exceeds official border posts. Bans simply lead to declining traffic at official posts, in favour of unofficial posts, mainly in the northern part of the frontier or through Niger. Further, poorly paid customs officials often collude with traders to get around government efforts to curb smuggling. Traders refer to the bribes they pay as ‘sacrifice’. A Nigerian trader with the pseudonym Delani vividly described the process of rice smuggling:

‘I work within a group of about seven [smugglers]. The least any of us handles is 1,000 bags. When people say rice importation has been banned though the land border, people like us just laugh. We have a leader. How we operate is that each person shops for the rice he has been contracted to supply. Any week we have a large shipment, we gather everything together. We load them on some trailers. Sometimes it may be 5,000 bags […] Then our leader approaches our contacts in customs to arrange how the cargo gets through the border. We pay the customs officials NGN 1,000 on each bag of rice and we are issued a time, date, and route we could pass through that is not being monitored. Usually, we cross the border around 11 PM’.

(Oluwagbemi, Reference Oluwagbemi2017)

Even if officials were to implement orders to crack down on smuggling, smugglers are frequently more heavily equipped and armed than customs and police officials. The situation is vividly illustrated by an incident where an anti-smuggling officer in Nigeria was shot dead by an army officer of the same nationality escorting a convoy of smuggled cars into the country (Sesan, 2017).

Boxes 8.1 and 8.2 provide a more detailed description of Benin’s trade in used cars and petroleum products, respectively.Footnote ¹⁰

Box 8.1 Trade in Used Cars

Used cars have been by far the most important of Benin’s entrepôt imports in terms of employment, income, and customs revenue since about 2000. Imports of vehicles in transit status rose steeply from 50,000 in 1996 to 200,000 in 2000, and to 250,000 in 2002 and 2003. After a dip in 2004–2005 to about 150,000, they then increased steadily to nearly 350,000 in 2014.Footnote ¹¹ Cars imported for domestic use are of the order of 20,000; that is, less than 10 per cent of cars imported in transit status. However, car imports declared for transit plunged in 2016–2017, falling below 100,000, still far above domestic consumption but down to levels not seen since before 2000.

The used car trade is one of Benin’s major industries. Huge car parks can be seen on the outskirts of Cotonou. The business is estimated to employ 10,000–15,000 people directly, in importing, selling, storing, driving, and so on, and several thousand more indirectly (Golub, Reference Golub2009). The value-added generated by the distribution and handling of used cars has been estimated at about 10 per cent of Benin’s GDP, roughly the same as cotton.

Cars are imported into Benin through a process of elaborate subterfuge. The vast majority of cars imported in transit status are declared as having Niger as their destination, but it is common knowledge that at least 90 per cent end up in Nigeria. For example, in 2014, of the approximately 332,000 cars imported in transit status, 326,000 were declared for Niger – obviously bearing no resemblance to actual shipments to Niger, where annual car purchases are almost certainly below 10,000. There is a well-established set of procedures for obtaining documents from customs authorising diversion of the cars to Nigeria.

Used car imports follow a complicated and well-organised circuit. Importers with connections in developed countries locate, purchase, and arrange for the transportation of the cars. Some of the importers are affiliated with international shipping companies, such as Grimaldi, that own their own boats. Others rent the boats. Freight forwarders (transitaires) handle all the paperwork and authorisations. Other intermediaries play a role in matching buyers and sellers of cars. After the cars clear the port, they are stored in car parks in Cotonou, before being driven to their destination by companies specialising in the delivery of cars to the border, under escort from customs and with police permission. The cars are driven at night in convoys of about 100 cars. They cross the border to Nigeria after paying bribes to both Beninese and Nigerian customs inspectors. The bribe is routine and the amount is largely set by precedent, according to the transitaires interviewed. The cars then receive valid licence plates in Nigeria. In short, government officials – from the highest to the lowest levels – on both sides of the border facilitate and benefit from this trade.

Customs also apply considerable discretion in the valuation of imported cars, which alters the effective tax rate. A lower valuation may reduce the amount of ad valorem taxes collected. Figure 8.6 shows average customs valuations of cars declared for transit and for domestic consumption in Benin and Togo, measured in US$.Footnote ¹² Presumably, cars imported in the two regimes are similar in quality, since the per capita incomes and demand for cars do not differ much between Nigeria and Benin. In 2004–2007 cars imported for domestic use in Benin were assigned much higher values than cars in transit, a system that ceased from 2008 to 2011 and then resumed to a lesser extent in 2012. In Togo, on the other hand, customs valuations are higher for cars imported in transit than for domestic consumption. Customs officials in both countries are likely responding to domestic political pressure from consumers, other government branches, and smugglers.

Figure 8.6a Average valuations of cars imported under regimes for transit and domestic use, in US$: Benin

Source: Authors’ calculations based on Port of Cotonou and Customs data

Figure 8.6b Average valuations of cars imported under regimes for transit and domestic use, in US$: Togo

Source: Authors’ calculation based on Port of Cotonou and Customs data

Togo competes intensely with Benin for access to the Nigerian market. Togo charges lower fees for a speedier service in handling car imports, in an attempt to offset Benin’s geographical advantage.

The ample supply of ageing vehicles in developed countries and low incomes in West Africa provide a natural basis for trade in used cars. Toyota, Mercedes, and Peugeot cars predominated in the early 2000s, but other Japanese and European companies are increasingly prevalent. An accompanying market in spare parts has also flourished.

Nigeria’s ineffective attempts to protect its own struggling car industry have diverted this trade to the parallel market. At the end of the 1970s Nigeria assembled 100,000 cars, but the car industry has been moribund in the country for many years. In 1994, Nigeria banned imports of vehicles more than eight years old. In 2002, the law was further tightened to a ban of all cars more than five years old. Since then the permissible age has gradually increased. In 2013, steep tariffs were implemented as Nigeria unveiled another attempt to revive the auto industry with the Nigerian Automotive Industry Development Plan. Vehicle production increased moderately at first, but has fallen back to very low levels in the last few years, declining even more rapidly than the rest of the manufacturing sector (Economist Intelligence Unit, 2017).

Nigeria has repeatedly banned imports of cars by land routes. These bans, however, have until recently proved impervious to the porous border between the two countries, the strong demand for cheap vehicles, and the ambiguous attitudes of the authorities in Nigeria. The recent sharp downturn in Benin’s imports is likely more due to the recession in Nigeria than to the effectiveness of the import ban. Regardless, the collapse of car distribution in Benin has had severe effects on income and employment. A recent article describes the change vividly: ‘Residents say drivers used to pass by in huge convoys, speeding towards the border, beeping their horns in celebration. Bars that sprang up to cater to visiting clients have closed and dozens of Lebanese, who dominate the import business in West Africa, have departed’ (Sasse and Carsten, Reference Sasse and Carsten2017).

Box 8.2 Petroleum Product Imports from Nigeria

Smuggling of oil products into Benin began around 1980 and increased dramatically in 2000. Like the entrepôt trade from Benin to Nigeria, smuggling of petroleum products into Benin reflects differential policies combined with the ease of slipping goods across the border and the complicity of the two countries’ officials, including at the highest levels of the military. In this case, however, the main factors are the large subsidies in Nigeria, along with the alignment of domestic to world prices in Benin, which together result in much lower consumer prices in Nigeria compared to Benin (Morillon and Afouda, Reference Morillon and Afouda2005; Mbaye et al., Reference Mbaye, Golub and Gueye2019). In recent years Nigeria has partially deregulated petrol prices, but they remain well below Benin’s, although to a lesser extent for diesel than for gasoline.

The black market price in Benin is determined by a mark-up on the Nigerian official price and has little connection to Benin’s official price. In 2016, our field research revealed a persistent although variable differential between the official and black market price.

The share of gasoline supplied by informal imports from Nigeria rose from about 10 per cent in 1998 and 1999 to about 50 per cent in 2000, and to 83 per cent in 2001 and 2002, only tapering off slightly in 2003–2004 to 72 per cent (Morillon and Afouda, Reference Morillon and Afouda2005). Despite some increases in Nigerian gasoline prices, the share of smuggled gasoline was estimated at about 80 per cent of Benin’s domestic consumption in 2013 (Mbaye et al., Reference Mbaye, Golub and Gueye2019).

The dominance of the informal market in Benin is reinforced by the lack of official gas stations, and the lack of stations in turn reflects the dominance of the informal market, with the zones bordering Nigeria in particular witnessing a decline in the number of operating service stations. In contrast, there is a very dense network of service stations in Nigeria, which readily supply the informal traders who smuggle the gasoline into Benin.

The distribution network in Nigeria includes large wholesalers who have storage depots along the border that hold up to 1,000 litres of gasoline. These wholesalers have close political ties to high-level officials in Nigeria. Wholesalers sell to various intermediary distributors of various sizes, who sneak the gasoline through the border by pirogue, cars whose gas tanks have been expanded, in small quantities on scooters, or on foot.

The net effect of this massive trade in petroleum products on Benin’s economy is complex. It entails a large loss of fiscal revenues, but is also a source of employment and income for traders and distributors, accounting for about 1–2 per cent of GDP and 15,000–40,000 jobs, depending on the method of estimation (Golub, Reference Golub2009).

VI The Effects of Informal Trade on Benin

The effects of ICBT on Benin are mixed (Galtier and Tassou, Reference Galtier, Tassou, Egg and Herrera1998). Golub (Reference Golub2009) estimated that ICBT generates about 20 per cent of Benin’s GDP, and a somewhat smaller but still large part of employment, most of it in the handling of used cars and the distribution of petroleum products. The effects on fiscal revenue are particularly important. On the negative side, informal trade contributes to an institutional environment that favours informality, and that thus may impede the development of a modern formal private sector. There are also allegations of an association of informal trading with more insidious forms of illegal trade in arms and narcotics, but we do not have access to information about its extent.

B Effects on Government Revenues

Benin’s system of import taxation has revolved around maximising the income from entrepôt trade, by taxing goods when they enter Benin at a rate well below that in Nigeria, or taking advantage of Nigeria’s import prohibitions. However, avoidance of indirect taxes on smuggled petroleum products from Nigeria mitigates this revenue gain from entrepôt trade.

Benin has a high dependence on import tax revenues, which account for about half of tax revenues, far above the average share of about 10 per cent of international trade taxes in tax revenues in low-income countries (Coady, Reference Coady2019). In 2015–2017 there was a substantial drop in the tax revenue-to-GDP ratio from 14.5 to 12.6 per cent, which was mostly due to reduced revenues from international trade taxes. This drop in international trade taxes was in turn due to a sharp decline in revenues from entrepôt trade (Table 8.3).

Table 8.3 Entrepôt trade tax rates and revenues in Togo and Benin, 2008–2017

	2008–2010	2011	2012–2015	2016	2017
Effective tax rates on transit and re-exports (%)
Benin – Cars	12.90	16.40	33.60	29.70	23.60
Benin – All goods	3.40	4.40	6.90	3.60	2.10
Togo – Cars	0.80	0.80	0.50	0.40	0.40
Togo – All goods	0.40	0.10	0.50	0.50	0.50
Share of import tax revenue due to transit and re-exports (%)
Benin – Cars	15.80	21.90	25.10	11.50	6.30
Benin – All goods	25.80	38.70	41.10	17.50	11.30
Togo – All goods	0.30	0.30	3.00	2.20	2.40

Source: Authors’ calculations based on Benin and Togo customs data.

Table 8.3 shows the effective tax rates in Benin and Togo on entrepôt imports. These are calculated from customs data provided by the governments in both countries as the value of revenues from taxing imports in the transit and re-export regimes divided by the value of entrepôt trade. Table 8.3 presents information for cars as well as aggregate trade. A number of interesting features appear from these data.

First, the tax rates on Benin’s imports of cars in transit status are much higher than the rates for other goods. The effective tax rates on goods imported in transit status other than cars are well below 1 per cent, whereas the rates on cars are in double digits. Second, Benin sharply raised the effective tax rate on cars imported in transit from about 13 per cent in 2008–2010 to above 30 per cent in 2012–2015. With the recession in Nigeria lowering demand, Benin rolled back the effective transit tax rate on cars to 23.6 per cent in 2017. Third, Togo’s effective tax rates on entrepôt trade are very low for both cars and other goods, at well below 1 per cent. Undoubtedly, this reflects Togo’s efforts to remain competitive despite its geographical disadvantage in smuggling goods, particularly cars, into Nigeria. Togo, like Benin, lowered transit taxes on cars in 2016–2017, but starting from a much lower level of only 0.8 per cent.

Table 8.3 also presents the contribution of entrepôt trade regimes to tax revenues in the two countries. Not surprisingly in view of the effective tax rate differences, Benin collects much more revenue than Togo. Furthermore, and also related to the high rate of taxation on cars, cars account for more than two-thirds of Benin’s revenue from entrepôt trade. At its peak in 2012–2015, entrepôt trade regimes contributed 41 per cent of customs revenue, with cars alone accounting for 25 per cent. With the sharp downturn in trade with Nigeria, the share of entrepôt trade in revenue collection dropped dramatically, falling in 2017 to 11 per cent for all trade and 6 per cent for cars. Togo, on the other hand, receives very little revenue from entrepôt trade due to its low tax rates. However, Togo did experience an increase of this ratio from 0.3 per cent in 2008–2011 to 3 per cent in 2012–2015, due both to a slight increase in its effective tax rates and more importantly to a surge in entrepôt trade likely incentivised by trade diverted to Togo due to Benin’s higher tax rates. Like Benin, Togo’s revenues fell in 2016 and 2017 because of the recession in Nigeria.

The estimates in Table 8.3 do not include revenues from goods imported under the regime for domestic consumption. Some of these goods, particularly for rice and a few other key products, are likely intended for Nigeria, although the proportion is difficult to ascertain precisely. Since goods imported for domestic consumption face higher import taxes than those in entrepôt status, such imports have a disproportionately higher effect on government revenues, although they constitute a relatively small part of smuggling (we assumed it constituted 20 per cent of entrepôt trade in the calculation of value-added). Including these goods labelled for domestic use but intended for Nigeria raises the share of import tax revenue from informal exports to Nigeria to about half of total import tax revenue; that us, 3–4 per cent of Benin’s GDP prior to the recent downturn.

Against this, Benin’s loss of fiscal revenue due to smuggling of petroleum products from Nigeria was estimated by Morillon and Afouda (Reference Morillon and Afouda2005) at about 1 per cent of GDP. A recent government estimate reported in the press put these losses at US$37.5 million, or also about 1 per cent of GDP (Energies Media, 2018). This suggests that the net contribution of fiscal revenues from informal trade with Nigeria was equivalent to about 2–3 per cent of GDP in 2012–2015, before the recent recession in Nigeria.

Figure 8.7 looks more closely at the effects of tax competition between Benin and Togo over the period 2002–2017. The line shows the differential in the average effective tax rate on entrepôt trade between Benin and Togo (right axis). The two bars show Benin and Togo’s entrepôt trade-to-GDP ratios, respectively (left axis). Until 2015, a correlation between the tax differential and entrepôt trade is discernible, with Benin’s trade falling and Togo’s rising when the tax differential rises. In particular, Benin raised its taxes in 2003 and again in 2012, and Benin’s entrepôt trade fell while Togo’s rose. After 2014 the correlation breaks down due to demand-side shocks coming from Nigeria, causing Benin’s trade to fall despite a declining tax rate. Over the period 2002–2014 the correlation coefficient of the tax differential with the entrepôt-to-GDP ratio is –0.44 for Benin and 0.52 for Togo, confirming the visual impression.

Figure 8.7 Entrepôt tax rate differential (Benin minus Togo, in per cent) and entrepôt trade in Benin and Togo (per cent of GDP)

Source: Authors’ calculations based on Benin and Togo customs data.

In summary, informal entrepôt trade constitutes a large part of national income and fiscal revenues, but they are subject to high variability due to competition from Togo and shocks in Nigeria.

VII Summary and Policy Conclusions

Much of Benin’s economy is under the spell of the policies and institutions of its giant neighbour Nigeria. Nigeria’s power as the largest economy on the African continent is unfortunately distorted by the resource curse of dependency on oil in a setting of weak institutions. A rather unhealthy, even parasitic, relationship has developed between Benin and Nigeria. Resource rents in Nigeria are ultimately transmitted to Benin through smuggling rents.

Benin has developed a sophisticated institutional structure to support its role as a smuggling hub for Nigeria. The resulting entrepôt trade has become one of Benin’s largest industries. This trade can be quite lucrative, both for the participants and for Benin’s government, which collects substantial revenues from it. Used cars are by far the most important industry in terms of national income and fiscal revenue, accounting for about two-thirds of aggregate import tax revenue from entrepôt trade. Customs administration in particular is configured to enable smuggling. The Benin tax authorities balance the priority to raise additional revenues against fostering the growth of this trade.

These benefits of ICBT to Benin, however, are very fragile, dependent as they are on the vagaries of economic policy in Nigeria. The repeated closures of the border are ominous demonstrations of Nigeria’s ability to shut down the re-export trade if it chooses to do so. Likewise, if Nigeria ever did really harmonise its trade policies within ECOWAS, the raison d’être of this trade would largely disappear. Perhaps of greater immediate concern is Benin’s vulnerability to macro-economic shocks emanating from Nigeria. The recent sharp drop in most entrepôt imports in Benin is due primarily to the recession in Nigeria rather than border closures. The severe shortage of foreign exchange in Nigeria in 2015–2017, combined with a fixed official parity, led to large depreciation of the Naira on the black market. This black market depreciation has exacerbated the downturn, as Nigerian consumers must pay higher prices in Naira for goods invoiced in foreign currencies.

At a broader level, a case can be made that the flourishing of informal trade has retarded Benin’s development. The large fiscal benefits of re-exporting have reduced the government’s impetus to promote productive economic activities. The lure of the rents in Nigeria’s distorted markets exacerbates a culture of corruption and tax evasion that is not conducive to a productive economy. It is doubtful that a development strategy based on smuggling and fraud is a viable long-run path to emerging market status.

In principle, it would be desirable for Benin to coordinate macro-economic and trade policies with Nigeria, to avoid creating incentives for Benin to circumvent discrepancies in prices between countries. It is highly unrealistic, however, to expect Nigeria to coordinate its policies with Benin. Benin is far too small to exert any substantial influence on Nigeria’s policies and Benin has limited autonomy insofar as it is tightly integrated into WAEMU. Nigeria is unlikely to abandon the protection of influential industries any time soon. For Nigeria, domestic interest groups and perceived national interest are going to trump Benin’s interests. Thus, the numerous announcements of separate or joint efforts to combat smuggling by the two governments, such as those discussed in Section II, have had no discernible long-run effects on informal trade. The incentives to take advantage of large pricing differences due to Nigeria’s high import barriers and subsidies are very powerful inducements to both traders and border officials to engage in or enable smuggling. The only sustainable solution is for Nigeria to realise that it is not in its interest to pursue policies of relying on import protection to boost inefficient domestic industries and subsidising gasoline use.

Benin can work within ECOWAS to gradually promote harmonisation of policies, but Nigeria is unlikely to cede a great deal of sovereignty to ECOWAS either. ECOWAS does have agreements to combat child trafficking and other illegal activities, but has no programmes to stop smuggling in legal goods, as far as we know. For example, Nigeria has retained an import prohibition list for which there are no provisions in ECOWAS. The Buhari government’s refusal to join the Africa Continental Free Trade Area (ACFTA) further reveals Nigeria’s intention to continue to protect domestic industries. Benin is also one of the three remaining countries that have yet to sign ACFTA (Eritrea is the third) (Wilson and Munchi, Reference Wilson and Munshi2019).

Instead, Benin should focus on improving its own institutions and productive capabilities. In some respects, Benin’s combination of formal and informal institutions supporting entrepôt trade is quite sophisticated and effective in its objective of promoting Benin as an informal trade hub. The problem is that a development policy oriented towards informality and smuggling is unsustainable. The challenge for Benin is therefore to channel its evident energy and creativity in a more viable direction. Benin is well placed to continue to serve as a regional trading and service centre for legal trade and services, benefiting from its proximity to Nigeria and links to the land-locked countries to the north. Moreover, if Benin moves away from smuggling towards formal trade, avenues for cooperation with Nigeria could open up.

Rather than focus on eradicating smuggling, which it is largely impossible to do under current Nigerian policies, Benin should take measures that improve the business environment for legal businesses. The 2005 Benin Diagnostic Trade Integration Study (DTIS; World Bank, 2005) argued that Benin could emulate Hong Kong.Footnote ¹³ Hong Kong transitioned from being an entrepôt for illegal trade to China in the 1950s into a diversified manufacturing and service economy (Chau, Reference Chau1997). Hong Kong developed world-class institutions, particularly trade facilitation (port and customs), a reliable legal system and property rights, and efficient infrastructure. Hong Kong managed to maintain the efficiency and probity of its own public services even as it served as an entrepôt for illicit trade. In Benin, by contrast, the institutional underpinnings of a market economy, such as the legal system and infrastructure, are better than Nigeria’s but generally still poor.

The sharp downturn in entrepôt trade in 2016–2017 (see Figure 8.2a–d), due to the recession in Nigeria and Nigeria’s efforts to close the border to smuggling from Benin, should be a wake-up call to Benin to initiate fundamental reforms. The 1951 United Nations embargo on China was a major impetus to Hong Kong’s shift from an entrepôt economy to a producer of manufactured and service exports for developed countries.Footnote ¹⁴ At the same time, if Nigeria is able to rein in corruption and tap its own massive potential it could then benefit Benin, just as Hong Kong re-invented itself as a financial and organisational service centre for Chinese manufactured exports with China’s opening to the world economy in the 1980s.

Benin is much less developed than Hong Kong, but the precedent set by Hong Kong in transitioning from illicit to formal trade is still relevant as providing a general plan. In particular, Benin needs to follow Hong Kong’s example in two ways: (1) reinvent itself as a legal commercial centre serving the region; and (2) develop competitive domestic industries. In the case of Hong Kong, export diversification involved shifting into labour-intensive manufacturing; Benin has a comparative advantage in tropical produce and horticulture. At present, Benin’s trade facilitation institutions and business climate are sufficiently superior to Nigeria’s to circumvent Nigeria’s trade barriers, but inadequate for serving as a regional service centre for legal trade and facilitating foreign and domestic investment. The mediocre quality of public services in Benin extends to the port and customs administration, which are critical for a country with ambitions to serve as a trading centre.

The two Benin DTIS (World Bank, 2005, 2015) provide detailed recommendations for improvements in trade facilitation and other institutions that could contribute to Benin’s becoming a hub for formal trade with Nigeria and other countries in the region. These include modernisation of customs, using more information technology and formal management procedures that improve accountability and transparency; improved port logistics; and linked rail and road infrastructure investments. Some progress in this regard has been made. The Millennium Challenge Corporation’s programme for improving the port of Cotonou was found to have considerable success in raising operational efficiency, lowering costs, and reducing petty corruption (Millennium Challenge Corporation, 2017). While past reforms of customs have largely failed, more recently progress has been made in the adoption of a new customs code and modern international practices, such as the SAFE Framework of Standards of the World Customs Organization,Footnote ¹⁵ the revised Kyoto Convention, and the Agreement on the Facilitation of World Trade Organization (WTO) Trade (World Bank, 2018).

More broadly, Benin needs to upgrade its institutions to boost investment in productive activities, as discussed throughout this book. A positive agenda for encouraging investment is more promising than cracking down on informal trade with Nigeria. The latter largely depends on Nigeria adopting more sensible policies, while the former is much more within Benin’s own control. In terms of the availability of resources, there is no need to eradicate informal trade with Nigeria for Benin to expand formal production of goods and services. There are plenty of under-employed people who will gladly switch to better-paying and less hazardous formal-sector jobs if these were to be created. The binding constraint is the adverse business climate that deters foreign and domestic investments in productive activities. Improvements in the business climate in turn require better governance. The question then is whether the pervasiveness of informality precludes reforms to the business climate. There is obvious cause for concern in this regard. Despite some significant improvements in trade facilitation, little progress has been made in improving governance and reducing corruption. There are numerous interest groups that benefit from and perpetuate Benin’s high level of corruption who will oppose efforts to create a more inclusive and transparent business climate. It remains to be seen if President Talon has the vision and leadership skills to catalyse reforms of the business environment that support formal investment. His background as a successful entrepreneur in the cotton sector is promising. An important symbolic step would be for Benin to join ACFTA.

Benin–Nigeria relations are based on close ties reinforced by the disparities created by historical, geographical, and colonial factors. These disparities were amplified by the discovery of oil in Nigeria in the 1950s and the spread of oil revenue in neighbouring countries. For Benin, the result was the adoption of a re-exporting policy introduced in 1973 by the revolutionary government, to take better advantage of Nigeria’s oil revenue. This re-exporting system, which turned the country into an ‘entrepôt state’, has remained in force to this day, despite the various upheavals the country has gone through.

Benin–Nigeria relations also play an important and specific role in the Beninese economy. As such, they have long been the subject of comprehensive studies by various authors, particularly within the Regional Analysis and Social Expertise Laboratory (LARES). From this perspective, the study presented by Golub and Mbaye is interesting because of the specific approach they take; that is, analysing the institutional constraints. Rather than discussing, refining, or adding to some of the points they raise, the discussion here will primarily focus on the future prospects of Benin–Nigeria relations, based on the current situation of the Benin economy. Section I will cover the difficulties facing the Beninese economy following the economic slowdown in Nigeria, and Section II will cover the strategies to be developed for the future.

I The Impact of Benin–nigeria Trade Relations on Benin’s Economic Sector

Despite the enormous benefits of Benin–Nigeria trade relations for the population and public revenues, they constitute serious obstacles to vital sectors of the economy. For the public, re-exporting and imports from Nigeria are the main activities, both in cities and in the border regions. As regards public revenues, the activities of customs authorities, and even the tax department, largely depend on these relations. As for the vital sectors of the economy, the competitiveness of the Nigerian market compared to the Beninese market paralyses industrial activity. Various economic sectors are the victim of the trade relations between Benin and Nigeria. The most affected are industry, distribution, and transport. In the industrial sector, the most affected sectors are manufacturers of reinforced concrete and the food industries, including Société Béninoise de Brasseries (SOBEBRA), the Beninese brewing company. Still in the food sector, fish farmers, such as the company Cossi et Fils, which specialises in breeding catfish, have seen a significant slowdown in their activities, as there are fewer and fewer Nigerian customers, the main buyers of these catfish. On top of these difficulties, sellers of imported fabrics, such as Indian merchants located along Avenue Delorme, who sell lace and printed fabrics from China, no longer see large numbers of Nigerian buyers in their shops. Even Walkden, which specialises in selling wax fabric, is no longer immune. These leading merchants from the Dantopka market no longer sell in the quantities they used to.

But the main difficulty for industry arising from the Nigerian financial crisis of recent years is that borne by the cement sector, which faces stiff competition from cement from Nigeria, which is sold along the border at CFA Francs 50,000 per tonne, versus CFA Francs 65,000 per tonne for cement produced in Beninese factories. Given the importance of having your own home in Benin, this trade in cement is likely to lead to the same result as occurred in the trade in Kpayo petrol: it will destroy the cement factories in Benin.

All these crisis situations and collapsing sales weigh heavily on public revenues and people’s living standards. In terms of public revenues, these are measured by customs revenues and the taxation of re-exporting activities, as well as the level of taxes paid by private companies. These revenues form the basis of the state’s resources.

As regards the consequences of Benin–Nigeria trade relations for the public, these can be assessed in two ways. On the one hand, there are the negative consequences of the state’s inability to ensure the vital needs of the population, which are partially met by the extraordinary development of the informal sector. On the other hand, these consequences can also be analysed positively in relation to the competitiveness of the Nigerian market, which is very popular with the Beninese public. Nigerian goods are cheaper, thereby enhancing the purchasing power of the Beninese. The markets for Kpayo petrol, beverages, and building materials imported from Benin’s eastern neighbour also work in the same way. These products are less expensive, allowing Beninese to save money.

II The Future of Benin–nigeria Trade Relations

The future of Benin–Nigeria trade relations depends on the envisaged strategies for improving trade relations with Nigeria and preserving the competitiveness of the Beninese economy vis-à-vis its neighbour to the east. These strategies concern both the administrative authorities and the economic actors themselves.