The evolution of customs valuation in the developing world: From Deregulation to Developing State Capacity

An accurate assessment of the value of imported goods by customs is an essential precondition of an accurate determination of an importer's tax liability. However, customs authorities in many developing countries experience considerable difficulty in discharging this function. Poor compliance of importers, weak administrative capacity in customs, and pervasive corruption are often identified as the major problems. Beginning in the 1980's neo-liberal approaches to customs modernization encouraged states to adopt "market solutions" to customs problems. As a result, core customs functions including revenue determination were contracted out to private inspection companies with the support of international financial institutions. These companies proposed to examine documents and carry out physical inspection of consignments (in exporting countries) and to provide information on quantity, quality, value, and tariff classification of the goods for the benefit of the importing jurisdiction before the actual shipment of the goods. Today some 30 governments have adopted this partial privatization, called Preshipment Inspection (PSI), to address the weakness of customs. Based on a realization that unregulated privatization did not bring about the expected efficiency enhancements, states have recently moved to re-regulate these private companies. This movement has been observed in assessment discussions held at the WTO and in other forums, as well as in improved contracts with PSI firms. States and international financial institutions have also become more focused on directly enhancing the capacity of customs authorities. The inspection industry has responded to this trend. It has begun to offer services that support the business model of customs, rather than replace customs functions. Case studies of four countries that have adopted the PSI service show that benefits have been mixed in terms of both their ability to enhance revenue and improve the integrity of customs administration. There is little evidence of transfer of skills and technology to customs authorities. In fact, the use of the private sector has often resulted in a long-term dependence on expensive PSI contracts. Only governments that made serious efforts in direct customs reform have demonstrated an ability to improve customs operations and exit from the PSI program.