Computerising customs at Colombia’s major ports boosted trade, reduced corruption, improved firm performance, and increased tax collections.
Inefficiency and corruption at customs remain global barriers to trade and growth
For many countries, especially in the developing world, customs inefficiencies are silent barriers to trade, acting like a tax on economic activity. Manual processes at ports not only slow down trade but also create opportunities for corruption, undermining transparency and economic growth. In the early 2000s, Colombia digitised much of its customs procedures, in an attempt to address concerns about excessive bureaucracy, unpredictable delays and rent-seeking behaviour by customs officials, that made trade costly for businesses. The global policy debate increasingly points to technology as a tool to tackle these challenges. Colombia’s phased computerisation of customs offers a valuable case study in using digital reforms to reduce inefficiencies, combat corruption, and foster firm growth.
Computerising customs at Colombia’s major ports to curb discretion
Between 2000 and 2005, Colombia implemented a sweeping digitisation of customs processes at its 26 major ports. The reform replaced manual in-person declarations with an online platform. This allowed importers to digitally file declarations, process payments, and complete clearance procedures. A key feature of the reform was automating decisions, such as inspections, through algorithms based on risk profiles. This innovation limited the discretionary power of customs agents, a primary source of delays and corruption. The staggered rollout of the system created a natural experiment to evaluate the reform’s effects on trade, governance, and firm-level outcomes. Although they still impose important costs to importers and exporters, Colombia’s customs reduced that gap significantly with this reform.
The effects of computerisation on trade, corruption and firm performance
1. Boosting trade volumes and compliance
The reform increased declared imports and tax revenues by about 70% at computerised ports relative to non-computerised ones. Three factors play a major role in explaining these changes: actual increases in imports due to the reduction of transaction costs, reduced underreporting and smuggling, and a shift of trade from ports with manual procedures to those where digitisation had already been implemented.
2. Curbing corruption
Several indicators suggest reduced corruption at customs:
- Discrepancies between declared imports in Colombia and exporters’ records at the country of origin shrank by 12.9%. Such discrepancies are a sign of tax evasion (Fisman and Wei 2004).
- Predictability of the time to go through customs improved, suggesting that there was effectively less time for discretion by customs officials.
- Prosecuted customs-related corruption cases fell.
- Increased transportation costs towards reformed ports reveals a preference for reformed ports (at the cost of greater transportation), which could be due to the reduction in bureaucracy but also to a reduction in rent-seeking behaviour by officials at those ports. The willingness to undergo greater transport costs to reach less corrupt customs suggests that in this context, corruption is more coercive than collusive (Sequeira and Djankov 2014)
3. Improving firm performance
The benefits extended beyond trade, cascading into firm growth. Importers in municipalities near computerised ports saw sales grow by 5.2% relative to those whose nearest port was still not covered by the reform. Non-importers experienced a 3.9% decline, likely due to increased competition. Small and medium-sized firms benefitted most, which we interpret as indicating that they were previously the most constrained by bureaucratic barriers.
Important lessons learned from the computerisation of customs
1. A win-win: increasing economic growth and tax revenue
Unlike tariff reductions, that sacrifice tax revenue to reduce barriers to trade, improving the efficacy of customs in Colombia boosted trade and economic growth while also increasing tax collections. By lowering bureaucratic barriers, the system simultaneously encouraged trade and improved tax compliance, showcasing a rare win-win in trade policy.
2. Leveraging technology to reduce discretion
A central feature of the reform was its ability to identify and address bottlenecks where discretion was most prone to abuse. By automating decisions such as inspections and payment verification, the system cut opportunities for corruption while enhancing efficiency. This approach offers a blueprint for other governance reforms beyond customs.
3. Impacting productivity and firm growth
The effects of this reform reached far beyond trade. Lower import costs translated into increased productivity and firm growth, especially for smaller firms, which are typically more affected by bureaucratic inefficiencies. This underscores the transformative power of reducing administrative burdens on private sector development.
4. A high benefit-to-cost reform.
For customs processes that still have important discretionary and/or manual procedures, the message is clear: digital reforms can unlock substantial economic and governance improvements which can largely exceed their costs.
The case for modernising port processes
Colombia’s imports digitisation process demonstrates the transformative potential of targeted digital reforms. By addressing inefficiencies and reducing discretion in critical areas, the reform not only streamlined trade but also improved governance and spurred firm growth. As global trade faces new challenges, this case serves as a reminder that well-designed reforms can simultaneously enhance efficiency, equity, and economic development. For policymakers in developing and least-developed countries, it offers a roadmap for leveraging technology to foster inclusive growth. Yet computerisation is not a magic bullet. Colombia’s customs are still perceived as imposing major obstacles for both exporters and importers, underscoring the importance of continuously streamlining the overall import/export process. Moreover, Fernandes et al. (2023) find that a customs reform in Madagascar randomising inspector assignments inadvertently led to new forms of gaming the system, rejuvenating systemic corruption. These lessons underscore the importance to find the right balance between technology, appropriation, and real intention to improve institutions.
References:
Laajaj, R, M Eslava, and T Kinda (2023), “The costs of bureaucracy and corruption at customs: Evidence from the computerization of imports in Colombia,” Journal of Public Economics.
Fisman, R, and S Wei (2004), “Tax rates and tax evasion: Evidence from 'missing imports' in China,” Journal of Political Economy, 112(2): 471–496.
Sequeira, S, and S Djankov (2014), “Corruption and firm behavior: Evidence from African ports,” Journal of International Economics, 94(2): 277–294.
Fernandes, A M, P K Schott, and S Stolper (2023), “Corruption in customs,” Quarterly Journal of Economics, 138(1): 575–625.