The Impact of Black Market On Socio-Economic Development of Rwanda. Case study: Kinyinya sector-Gasabo District

The impact of black market on socio-economic development of Rwanda. Case study: Kinyinya sector-Gasabo district

Innocent Muramuzi1 & Raymond Dusabimana2

Department of Public Administration and Good Governance Institut d’Enseignement Superieur de Ruhengeri

P.O.B. 155, Musanze, Rwanda

Email addresses: muramu2001@yahoo.com1; dusraymond7@gmail.com2

Received on 21 July 2017; Accepted on 11 October 2017; Published on 25 October 2017

ABSTRACT

The study sought to examine the impact of black market on socio-economic development of Rwanda, specifically in Kinyinya sector Gasabo district. The study was guided by four specific objectives which were; to determine the main causes of black market; to assess the effects of black market on socio-economic development; to investigate the means through which government handles black market issues and to identify the challenges faced by government when handling the problem of black market in Kinyinya sector. The study employed a quantitative and qualitative methodology; questionnaire and interview guides were used to collect data. The sample size for the study was 44 respondents. The results showed that 95.5% of the respondents confirmed that this kind of underground economy prevails in Kinyinya sector. The results demonstrated that black market activities are caused by overtaxation policy, high rate of unemployment, poverty and prohibition of some goods and services that consumers need. In addition, ignorance was seen as another cause of black market as the people do not know laws regulating business. The study showed that black market activities negatively affect socio-economic development. It was confirmed by 100% that black market activities adversely affect socio-economic development of the country in different ways such reducing government revenues through tax evasion and tax avoidance.

Some suggestions were proposed such as establishing collaboration with local communities, fighting corruption among local leaders, reducing taxes to the lower level business people, mobilizing the members of black market to get loans from banks to invest in legal markets, developing vocational training centres to equip the youth with ability to create legal jobs and establishing strong punitive measures against people involved in black market.

Key words: Black market, socio-economic development, underground economy, taxes 1. Introduction

Nowadays, it is widely believed that market-oriented reforms will foster economic development. But this is not easy to achieve with the existence of black market. Black market also known as underground economy, illegal economy, underground market or illegal market is that part of the economy where goods and services are produced, exchanged or consumed illegally (Lemieux, 2007). Black market activities are a remarkable fact around the world and there are strong indications that they are increasing (Voss, 2006).

Most societies attempt to control these activities through various punitive measures or through education rather than through reform of the tax and social security systems which could improve the dynamics of the official economy. Gathering information about black market activities is difficult because no one engaged in such activities wants to be identified. Obtaining accurate statistics about allocation of a country’s resources in the black market is important for making effective economic policy decisions (Schneider & Enste, 2000).

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While analysing illegal transactions in commodity trade by using the standard two-good trade theoretic model, Marcus (1984) shows that one phenomenon often present in countries with illegal commodity trade is a black market for foreign exchange. The relationship between smuggling and this black market highlights its impact on socio-economic activities but the link between smuggling and the behaviour of this black market has not been officially set out with respect to an explicit theory of smuggling (Marcus, 1984). This means that both black market and smuggling are illegal activities forbidden by the laws of every country (Pitt, 1984). This simple result is very basic in understanding the relationship between smuggling models and the black market for foreign exchange foregone tax revenue resulting from the underground economy is a major and apparently growing problem (Ewerhart, 2002).

It is very hard to obtain accurate statistics on counterfeiting and black market mainly because it is a clandestine underground activity. Socially, illegal markets are important because of the challenge they pose to the moral order of societies in the absence of a stable legal framework and credible enforcement of contracts, long term productive investment becomes impossible (Becker & Wehinger, 2011). Even if the underground economy activities are small, their consequences on public policies are comprehensive and potentially significant and have been much debated on by economists and non-economists.

While discussing the situation of black market, consumers worldwide either unwittingly buy counterfeit or pirated products thinking that they have purchased genuine items or knowingly buy lower-priced counterfeit items. The degree to which consumers knowingly buy counterfeit products depends on the characteristics of the products and need to participate in illegal market (Gabes, 2016). While prohibition effectively prevents trading in forbidden products on the legal market, these products generally continue to be desired, sought and demanded by consumers. The case of alcohol prohibition in the United States in the 1920s stands as a life-size experience of the consequences of this type of prohibition in terms of black market and large-scale contraband activities (Blocker, 2006). While governments in most western countries have given up on total prohibition and this issue has obviously resurfaced in common discussion in the last few years (Valentin, 2013).

The politics of informal markets of crisis in present day Africa, for instance is traditionally explained as the effects of irrational bureaucracies, the failure to properly manage production and finance and the non-capitalist behaviour of producers (Kish, 2006). The crisis is due to wrong policies is a description rather than an explanation of the black market (Brady, 1990). Books in Mauritania have for reasons that are not always clear, been steered from legal distributors into the black market and they have become difficult to find and overpriced. The prices of school books are unbelievable and so are the fluctuation of prices in the black market said Al-Khalid a former director of the Primary Education Department in Mauritania’s Ministry of Education (Omar, 2015).

However, inefficient border administration reduces the price competitiveness of African exports in global market and adds to the cost of imports. The transport and communications infrastructure is far less developed than in other region which also significantly raises the cost of trading particularly for landlocked handling countries economy. The development of African countries also corroborates that access to finance and identifying potential markets and buyers are considered the most important bottlenecks to exporting across Africa. This suggests that further developing in the financial services sector would be beneficial for trade. There is also a need and a demand for accessible business services that could help exporters identify markets and buyers (Pozon, 2011). Illegal market activities mainly are characterized by some form of noncompliant behaviour with an institutional set of rules (Feige, 2012).

If the regulations and rules define the set of goods and services whose production and distribution is prohibited by law, non-compliance with the rules constitutes a black market trade since the transaction itself is illegal.

Many effects of those black market activities are seen in different African countries like destroying of the tax code involving income tax evasion constitutes membership in the unreported economy. The tax evasion or participation in a black market activity is illegal; participants of those activities will attempt to hide their behaviour from the government. The main challenges of risks management and risk sharing concerns attempts to make risks and rewards are commensurate with each other to drive the needed 78

private sector participations (Feige, 2012). These risks include contingent risks when the income is largely dependent on others, political predictability risks, the risk that contracts will not be violated, and the whole raft of technical and market risks that exist in any public private partners and development of black market increased based on those risks (Judge, 1998).

In East Africa, countries lose over USD 500m annually in tax revenue due to counterfeit, black market activities and pirated products finding their way into the market. The East African Business Council observes that the profitability and market share of EAC companies, especially those involved in the manufacture of fast moving consumer goods have been negatively affected by counterfeits and pirated products (Kisaale, 2015). Looking on that figure, the East Africa community countries face different problems on socio-economic development caused by black market activities like counterfeit and pirated products. Governments’ losses in tax evasions not only affect the producers of original items but also involve social costs as the buyers receive poor quality of goods at an excessive price and are sometimes exposed to health and safety dangers.

There is also an increasing concern that counterfeiting is related to other criminal activities such as trade in narcotics, money laundering and terrorism (Kisaale, 2015). The results of the shadow economies for developing countries with the largest shadow economy in Africa and in other developing countries is only to some extent an issue of tax burdens and regulation. The fact is that in the limited local economy, citizens are often unable to earn a living wage in a legitimate manner. The sizes of the shadow economies of African countries are generally high. The urban informal sector and the state are seen as two indissociable elements of a totality, one feeding off the other. Firstly, the national sector consists of individuals who may well have significant interests in black market activities. Secondly, the states often assumes an ambiguous stance towards or even abets this informal sector, allows for taxless importation and are often utilized by outsiders through the informal transfer of rights of access( Hongbo, 2016).

Black market and street vending in Rwanda slowly by slowly are increasingly. Optical disc piracy is part of the much larger informal economy in Rwanda. Illegal goods have been associated with the black market that dot Rwanda towns. Vendors in black market typically operate from fixed stalls that they rent from market owners or managers, selling daily or on weekends, according to the market calendar. Street vending, in contrast, is a much more dispersed and transient practice, vendors congregate around high-traffic intersections, trading in what they can physically carry during the day (DeGeneres, 2016).

Official economic statistics do not fully record trade by the informal sector the black market which constitutes a significant proportion of economic activity in Rwanda and it is particularly significant in regions adjacent to the Democratic Republic of the Congo and Burundi, where Rwanda has an important trade surplus in both goods and services (Dorson, 2003).To overcome those problems Rwanda’s ambitious economic policy goals imply vast investments in economic and social infrastructure, as stipulated in their long-term investment framework and EDPRS II. The government of Rwanda considers education as critical for achieving sustainable economic growth and development.

The informal sector approach does not fit well with the Rwanda case because unlike unlicensed subsistence activities of legal character in other parts of the developing world which are generally tolerated or even promoted by the state, most unlicensed subsistence activities in Rwanda are criminalized and repressed by the state (Vioth, 1999). Import volumes increased by 17.7% while values rose by 8.8%.

This trend was mainly due to the increase in volume recorded by consumer and intermediary goods.

Informal cross-border trade is becoming significant for Rwanda since 2009. Rwanda has been recording a positive cross border trade balance and in 2010 the trade balance increased by 16.9% to US$27.0 million up from US$23.1 million in 2009. This trade is dominated by food crop products and live animals with the main trading partners are being DRC and Uganda (Rodrik, 1997).

Generally, black market in Kinyinya Sector has negative impact on the wellbeing of citizens, even if it is difficult to find statistical records on it, but slowly by slowly it is increasingly in that area. The impact of black market on socio economic development in daily life of people in Kinyinya sector retards 79

development, progress policy and attainment of future goals; it affects welfare negatively as well as wealth of this area. Consequently black market reduces revenues to the government, increases conflict between buyers and sellers due to unreal prices and loss of trust, policy makers also meet obstacles from this issue lastly business sector performance contracts fail to be achieved.

Although the Rwandan government has made a lot of effort to educate and train many citizens, they are not equipped with the skills that could enable them to either meet or to create their own jobs. This is the main cause of having many people who are involved in black market activities. Even if the illegal economy activities are small; their impact on public policies are comprehensive and potentially significant. This problem severely affects the economy of the country. According to Mugabo (2014), underground economy relates to its usual association with tax evasion and therefore reduces government revenues, which leads to either a decrease in public services or an increase in taxes imposed to other taxpayers in order to make up for the lost revenues (Lemieux, 2007). In addition, the street market is more risky for the people involved in it as it is clandestine as it is outlawed. In the line of the above mentioned problem posed by black market economy, this study was carried out in Kinyinya sector to examine the impact of black market on socio- economic development of Rwanda.

This study was guided by the following specific objectives, to determine the main causes of black market in Kinyinya sector, to assess the effects of black market on the socio- economic development of Kinyinya sector, to investigate the means through which government handles black market issues in Kinyinya sector and to identify the challenges faced by government when handling the problem of black market in Kinyinya sector.

2. Methodology

A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure (Shabana, 2014). In fact, the research design is the conceptual structure within which research is conducted; it constitutes the blueprint for the collection, measurement and analysis of data (Kothari, 2004). This study used both quantitative and qualitative study designs. A questionnaire was used to collect views from respondents while an interview guide was used to collect information from key informants of the study to corroborate the data from the questionnaire.

Due to large sizes of populations, researchers often cannot test every individual in the population because it is too expensive and time consuming. The population under study for this case comprised of people who are involved in black market in Kinyinya sector equivalent to 44 people. The size of a sample should neither be excessively large nor too small (Naik, 2015). Concerning this study, the sample drawn from the whole population was 44. In order to determine the sample size, (Yamane, 1967) formula was used. The formulae assumes a 95% confidence level and the maximum variance (P=0.5). The formula is n = N / (1+N (e2) Where

n = 50/ (1+50 (0.052) = 50/ (1+50 (0.0025)= 50/ (1+0.125)= 50/1.125= 44 respondents

n=sample size, N=population size

e=Error tolerance

3. Results and discussion

The following were the responses from the respondents on the questions put to them on the questionnaire.

On the question of the awareness of black market, the following views were given. The study examined respondents’ views on the awareness of black markets in Kinyinya sector. All the respondents of the study agreed that they knew about black market in Kinyinya sector (Table 1). This implies that the results were reliable because the respondents were aware of this kind of black market in Kinyinya sector (Asendorpf, 2011).

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Table 1: Respondents views on the awareness of black market in Kinyinya sector Respondents views

Frequency

Percentage

Yes 44

100

No 0

0

TOTAL

44

100

After acknowledging that they knew black market, the respondents were further asked if they have ever witnessed such business in Kinyinya sector. The table 2 shows the details about the respondents’ views on the existence of black market in Kinyinya sector. A great number of the respondents (95.5%) agreed that they see black markets activities in the sector. This means that such kind of business is clearly visible and dominant as the majority of the respondents have witnessed it. Therefore, this gives evidence that respondents were able to comment on how this underground economy affects socio-economic development in Kinyinya Sector. This view was supported by the Executive Secretary of Kinyinya sector who said that there is black market in the sector (Interview held with respondent on 9/8/2016).

Table 2: Respondents’ views on the occurrence of black market activities in Kinyinya sector Respondents views

Frequency

Percentage

Yes 42

95.5

No 2

4.5

TOTAL 44

100

On the question of the main causes of black market in Kinyinya sector, the findings showed that Unemployment, poverty and ignorance topped the list. Findings in this regard were provided by respondents as summarized in the table 3.

Table 3: Respondents’ views on the causes of black market activities in Kinyinya

Respondent views

Frequency

Percentages

Poverty 11

25.0%

Unemployment 20

45.4%

Ignorance 8

18.2%

Prohibition of some goods and services

5

11.4%

Total

44 100.0%

Indeed, 45.4% confirmed that unemployment is the major cause of black market activities in Kinyinya sector. Unemployment largely pushes jobless youth to wonder around towns committing black market activities (Schneider & Enste, 2000). On the other hand 25% of the respondents confirmed that poverty was also seen to be among the major causes of the people’s involvement in black market due to their inability to join formal economy which requires enough capital and technical expertise. As far as the study was concerned, results showed that 11.4% of the respondents said that prohibition of some goods and services is one of the causes of black markets (Sibhat, 2014). Finally, 18.2% of the respondents confirmed ignorance is another cause of the black markets as the people do not know laws regulating business and trading industry due to ignorance. Citizens are not able to join formal economy and therefore resolve to pursue the underground economy. In an interview with the executive secretary of Kinyinya sector, he confirmed that there are major causes of this black market in this sector as the poor mindset of the population, ignorance and poverty among others. He also noted that many local locals in the town are not willing to pay taxes and try to maximise their profit without thinking on how to develop the country in general (Interview held with respondent on 9/8/2016).

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The study has also examined the cause of black market on socio-economic development in Kinyinya sector. The results showed that 97.7% of the respondents agreed that over taxation is one of the causes of black market activities in Kinyinya sector (Table 4). This is caused by the fact that people especially those who have low level of capital are not able to pay the necessary taxes. Therefore, taxes are seen as a burden to some people and try to avoid them by going to the black market (Antonenko, 2014).

Table 4: Respondents views on the effect of over taxation on black market activities Respondents views

Frequency

Percentage

Yes

43

97.7

No

1

2.3

TOTAL

44

100

On the question of the effect of black market on socio-economic development in Kinyinya sector, the section below shows the details. The study firstly examined if the respondents knew that black market has adverse effects on the socio-economic development of their area. The table 5 shows details about the respondents views. The results that the respondents unanimously showed that black market is detrimental to the socio-economic development of the country. This was confirmed by 100% of the respondents. This lends credence to their views as being genuine and accurate in terms of how black market is harmful to socio-economic development as shown in the section below (Sibhat, 2014).

Table 5: Respondents’ knowledge on the effect of black market on socio-economic development Respondents views

Frequency

Percentage

Yes

44

100

No

0

0

TOTAL

44

100

The study further examined how black market is harmful to socio-economic development in Kinyinya sector and the table 6 shows the details. A total of 31.8% of the respondents agreed that black market reduces tax revenue to the government which therefore slows down socio-economic development.

Secondly, 18.2% of the respondents said that black market causes the government to impose high taxes on the legal business people as the great number involved in black market do not contribute to paying taxes (Gregory, 2007). The effect of black market also slows down the government ability to develop infrastructure and provision of basic services as the taxes are not duly paid. Finally, black market is harmful to the lives of the population because the majority of black market products are those which are prohibited due to their lack of quality standards such as drugs, stolen products or other illegal goods. In an interview with the executive secretary of Kinyinya sector it was also revealed that the sector authorities are aware of the effect of this underground economy. The executive secretary also said that black market activities cause chaos in business and does not contribute to the development of the country due to tax evasion (Interview held with respondent on 9/8/2016).

Table 6: Respondents views on black market is harmful to socio-economic development Respondent views

Frequency

Percentage

Less tax revenues

14

31.8

High tax imposition to legal business people

8 18.2

Slow down infrastructure development and

9 20.5

provision of basic services

Lack of stable economy

6

13.6

Harmful to the lives of the population

7

15.9

TOTAL

44

100

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The study has also examined the effect of black market on the legal markets. The study showed that black market has a negative effect on the legal markets (Table 7). It was seen that 36.4 % answered that such kind of economy reduces the client base for the legal markets and therefore causes loss to the people involved in the legal goods of the same use. In addition, due to black market 29.5% of the respondents agreed that there is price fluctuation due to this uncontrolled economy (Bourdieu, 1992). As black marketers do not pay taxes and do not have high marketing expenses, they downscale the prices and then this negatively affects the legal markets as the clients are attracted by the lower prices. Finally, 15.9% of the respondents agreed that black market limits practitioners of legal markets to gain from their business and fail to be able to pay the tax duties (Mark, 2013).

Table 7: Respondents views on the effect of black markets on legal markets Respondents views

Frequency

Percentage

Reduction of client base

16

36.4

Price fluctuation

13

29.5

Inability to pay taxes

7

15.9

Increasing illegal goods and services

8

18.2

TOTAL 44

100

The study also showed that black market has a negative effect on the people involved in them. 43.2% of the respondents agreed that black market has a negative impact on the people who are involved in them such as losing their goods to the police or other responsible officials (Table 8). Similar findings were reported by Hawks (1968). Secondly, 15.9% of the respondents also said that people involved in black market activities are sometimes punished. The results also showed that people involved in black market activities do not have stability and therefore always have low business capacity.

Table 8: Respondent’ views on the effect of black market activities on people involved in them Respondents’ views Frequency

Percentage

Loss of their goods

19

43.2

Punishments

7

15.9

Low business capacity

5

11.4

Lack of stability

13

29.5

TOTAL

44

100

The study examined the challenges which affect the government in handling challenges related to black market in Kinyinya sector. The table 9 shows the details. The results showed that 100% of the respondents agreed that there are challenges in dealing with black market in Kinyinya sector. This means that its complexity is visible to everyone since the tall the respondents realized these challenges. The study also went on examine those challenges one at a time (Julie, 2015).

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Table 9: Respondents views on the existence of challenges in handling black market activities Respondents views

Frequency

Percentage

Yes

44

100

No

0

0

TOTAL

44

100

It was necessary in this study to highlight the major challenges that hinder the eradication of black markets in this sector. Table 10 shows details. The results showed that the respondents agreed there are challenges in the following ways. As the table illustrates, 86.4% of the respondents agreed that poverty is the biggest challenge that slows the efforts of fighting against black market activities. This is so because poor people are not able to join legal economy as there are not able to pay taxes and afford formal economy businesses. Secondly, 93% of the respondents agreed that lack of community support is another challenge that limits the ability to eradicate the black market activities. The community does involve in the initiatives to combat black markets is therefore reserved for government efforts. Furthermore, 100%

of the respondents agreed that lack of information about the people who commit this business is among the challenges that limit the eradication of this underground economy. In addition, 61.4% % of the respondents agreed that inadequate punitive measures are the base of expansion of black market activities is clearly seen when these activities are identified, they are not adequately punished. Finally, corruption, among local government officials, and high rate of unemployment are also among the challenges faced in the fight against black market (Alexander, 1999). On this point, the executive secretary of Kinyinya sector confirmed that they are such challenges especially poor mindset of the population about business and the role of taxes in the development of the country (Interview held with respondent on 9/8/2016).

Table 10: Respondents’ views on challenges faced while combating black market in Kinyinya sector No

Respondent views

Agree

Disagree

Not sure

F % F % F %

1

Poverty among population

38

86.4

6

13.6

0

0

2

Lack of community involvement

41

93

3

6.8

0

0

3

Lack of information

44

100

0

0

0

0

4 Inadequate

punitive

measures

27 61.4 15

2

5

Corruption among local government authorities

34

77.3 10 22.7 0

0

6

High rate of unemployment

42

95.4

2

4.6

0

0

The study examined if there are possible solutions to the challenges that affect the government of Rwanda while handling the issue of black market activities in Kinyinya sector (Table 11). The results showed that respondents provided their thoughts on the solutions to the challenges that government faces while combating the issue of black market in Kinyinya sector. As the table indicates, 95.5% of the respondents agreed that reducing taxes to the lower level business people may reduce incidences of black market because most of the people who are involved in this underground economy do it because they do not want to pay taxes. Therefore, taxes for people who do not have stable business may seem to be one of the major reasons that push may people to choose black market and fear to join formal markets.

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Table 11: Respondents’ views on solutions to the challenges of black market in Kinyinya sector

No Respondents views

Agree

Disagree

Not sure

F % F % F

%

1

Reduce tax burden to low income business makers 42

95.4

0

0

2

4.5

2

Mobilize the members of black market to ask loans 40 90.9 4 9 0 0

from the bank

3

Develop vocation training centres to equip the youth 44 100 0 0 0 0

with ability to create legal jobs

4

Eradicate corruption among local leaders

39

88.6

5

11.4

0

0

5

Establishing strong punitive measures against the 44 100 0 0 0 0

black market practitioners

6

Involving local communities in fighting against 44 100 0 0 0 0

black markets by reporting black marketers to local government authorities and security organs

The results also showed that 90.9% of the respondents agreed that mobilizing the members of black market to apply for loans from the banks can be one of the solutions to help these people invest in the formal economy and therefore get ability to develop further. As it was seen, most people that indulge in the black market are due to low level of financial capacity to invest in other economy (Souzane, 2016).

The results also showed that 100% of the respondents said that developing vocational training centres to equip the youth with ability to create their own jobs will be one of the solutions that best fit to eradicate the incidence of black market because people involved in this trade are the majority unemployed youth.

The results also showed that 88.6 % of the respondents said that eradication of corruption among local leaders can also contribute to the solutions on the issue of black market in Kinyinya sector. This is because sometimes, the local leaders are reluctant to report this illegal trade because they are corrupt.

Moreover, 100% of the respondents confirmed that establishing strong punitive measures against people involved in black market is another solution to end this business and finally 100% of the respondents suggested that involving local communities in fighting against black market by reporting black marketers to local government authorities and security organs may serve as a strategy to combat this kind of business. Similarly, in an interview with the executive secretary of Kinyinya sector, he argued that that they plan to build markets and workshops which will host the lower income people who are not able to join the current market situation (Interview held with the respondent on 9.8.2016).

4. Conclusion and recommendations

The study discussed the impact of black market on socio-economic development in Rwanda particularly in Kinyinya sector as the case study. The results showed that this kind of underground economy prevails in Kinyinya sector. The black market activities are caused by overtaxation policy, high rate of unemployment, poverty and prohibition of some goods and services that the consumers need. In addition, ignorance was seen as another cause of the black markets as the people do not know laws regulating business and trading industry in areas and due to the ignorance. The study showed black market activities negatively affect socio-economic development as 100% of the respondents confirmed that black market activities adversely affect socio-economic development of the country in different ways such reducing government revenues through tax avoidance and evasion.

The government of Rwanda should assist people who participate in black market activities by helping them to invest in legal markets by giving them incentives such as start-up capital and education required to the labour market. It should revisit its taxation policy in order to help low level business people survive in their business, increase efforts infighting against corruption among local leaders, and promote the entrepreneurship spirit among the population especially the youth. The local population of Kinyinya sector must know that the black market is illegal.

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They should know that taxes are the basis of the economy of the country and therefore strive to pay them regularly without attempting to avoid them intentionally. They should collaborate with the local leaders to fight against this illegal trade by providing information about the people who commit such illegal business.

Acknowledgment

The authors thank the management of INES Ruhengeri REFERENCES

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