The role of customs administration in the economic transformation of a developing country: a case study of Saudi Arabia

Abstract

The primary objective of the proposed study is to assess the role of customs administration on the economic transformation of developing countries. Preliminary assessments indicate that customs administration holds the potential to facilitate trade as well as improve revenue collection. As such, this proposal hypothesizes that customs administration can transform the economic position of a developing nation by improving cross-border trade processes, revenue collection, and creating an environment for business growth. Based on these possibilities, the World Trade Organization has recommended reforms that should occur in customs management to achieve the outlined possible outcomes. However, the existing literature is not contextualized, thus making it difficult to generalize or apply the findings in the context of specific developing countries. This limitation presents the opportunity to investigate the relationship further. Therefore, the study will employ a mixed study design to pursue the outlined objectives. Data collection methods will include critical analysis of contextual material and literature review. 

 Introduction

Custom administration is responsible for the implementation of custom law, some of which concern the payment or exemption from the payment of duties imposed on imported goods (Uzzaman and Yusuf 2011, p. 29). As such, it dives into the heart of a country’s development process by improving its economic competitiveness in different ways. Firstly, customs administration improves customs procedures to cut transaction costs for firms (Uzzaman and Yusuf 2011, p. 29). According to the World Trade Organization’s perspective, an improvement in customs procedures in the context of trade implies the harmonization and simplification of trade processes at the international level (Widdowson 2007, p. 31). These procedures include all the processes that meet the minimum legal requirements that warrant the cross-border movement of goods and services. Secondly, and more directly, customs administration improves a country's revenue collection (Llanto 2013, p. 2). The duties imposed on imported goods contribute to a country's revenues. These revenues improve the capacity of the government to ensure economic stability, proper education, and reliable health services to its population. Correspondingly, imported goods also facilitate trade processes in a country. For instance, it improves a range of products in the market, thus driving customer satisfaction. In a different perspective, customs administration contributes to national security by implementing laws that prevent the inflow of potentially dangerous items. Based on this preliminary assessment, this paper hypothesizes that customs administration can transform the economic position of a developing nation by improving cross-border trade processes, revenue collection, and creating an environment for business growth.

The rationale of the Study

One of the significant recommendations proposed by the World Trade Organization (WTO) is to improve cross border management practices and procedures to eliminate or reduce the frustrations that most organizations tend to experience when attempting to move products across the border (Grainger 2014, p. 1169). In this case, the term facilitation is used to imply the elimination of red tapes that hinder the movement of products and services across the borders of many countries.  According to the World Bank and Economic Cooperation and Development (OECD), trade facilitation would increase the global trade of manufactured products by approximately US$377 billion per year (Grainger 2014, p. 1168). Correspondingly, a reduction in the cost of trading by about a dollar would translate into approximately $40 billion worldwide (Grainer 2014, p. 1168). Therefore, the WTO discussed many recommendations for facilitating trade. One of such proposals is the adoption of implementation of effective customs administration to reduce red tapes such as high transaction costs and delays in meeting legal requirements among others (Llanto 2013, p. 2). However, the potential relationship between customs administration and economic progression of developing countries is scarcely studied primarily despite this understanding.

In the past, most studies discussed the traditional ways of improving the economic positions of countries, especially developing countries. Some forums recommended the improvement of the agricultural sector to supplement the sources of revenues for such states while others suggested the optimization of the trade sector by improving the business environment. From preliminary assessments, customs administration is as much feasible as any of these recommendations in improving the economic positions of developing nations. Based on the hypothesis of this study, customs administration can facilitate economic progress in two broad ways: it enhances trade processes and revenue collection (Aoyama 2008, p. 95). Therefore, customs administration creates an environment for business growth and development.

Therefore, not only will this study improve the literature on the relevance of customs administration to the economic growth of developing nations, but also offers information that can underpin trade-related policy formation. Therefore, governments can make critical decisions regarding the integration of customs administration on the strategies that seek to improve the economic positions of their countries. In the sustainable development perspective, customs administration optimizes revenue collection from its imports and maximizes business opportunities for firms, thus reducing the need to over-exploit natural resources such as oil and gas. It also reduces over-production which leads to the depletion of natural resources and emission of greenhouse gasses because countries share products at the international stage. It also discourages inappropriate agricultural practices as seen in the case of Khat farming in Yemen.

Based on the preliminary assessment, this proposal hypothesizes that customs administration can transform the economic position of a developing nation by improving cross-border trade processes, revenue collection, and creating an environment for business growth. Based on the previous assessment and the hypothesis, the proposed research will pursue the following questions. 

I. What is the state of customs administration in Saudi Arabia, and how does it compare to the developing nations?

II. How has customs administration facilitated trade in Saudi Arabia?

III. How has customs administration improved revenue collection in Saudi Arabia?

Research Objectives

I. To understand the major aspects of customs administration in developing countries

II. To understand how Saudi Arabia’s customs administration has changed

III. To understand the relationship between custom administration and trade facilitation

IV. To understand the relevance of customs administration in revenue collection of developing countries

Literature Review

Research Concept

Saudi Arabia’s vision 2030 focuses on stimulating and diversifying its economy by facilitating inward investments. The objective of this vision is to transform the Kingdom into an economic hub that connects Africa, Asia, and Europe (Saudi Arabia-Transport and logistics 2018, n/p). To achieve this objective, the government has prioritized the improvement of the transportation and logistics sector.  This score means that Saudi Arabia can handle the investment-related demands and create opportunities for the growth and expansion of companies. According to Logistics Performance Index 2012-2018, Saudi Arabia scored ranked 52nd globally with a score of 3.08 (Arvis et al. 2018, p. x). This score was impressive for a developing country.  These improvements stimulated changes in the country’s customs administration. So far, the improvement of customs administration, as exemplified by enhanced predictability and reliability of the related processes such as the clearing process, has facilitated trade in the country. The customs department now clears about 40% of declarations in seaport within 24 hours (Saudi Arabia-Transport and logistics 2018, n/p). Improved infrastructure and logistics tend to facilitate a faster delivery of products to and from ports, airports, and border stations. Ports, hubs, and border stations now operate round the clock to facilitate trade between Saudi Arabia and other countries. These efforts have turned Saudi Arabia into a high income country. Subsequently, it has facilitated the growth of the nation’s economy.  Based on this assessment, it can be hypothesized that customs administration can transform the economic position of a developing nation by improving cross-border trade processes, revenue collection, and creating an environment for business growth.

Customs Administration and Trade Processes

Various studies have attempted to underscore the relevance of customs administration in the context of its ability to facilitate trade. Milner, Morrissey, and Zgovu (2008, p. 1) conducted such a study while examining trade facilitation reforms that can address the problems in customs administration such as excessive documentation, bureaucratic processes, and more extended periods of customs clearance. This study was motivated by the understanding that expanding trade offers the opportunity for developing countries to advance from globalization and expand economically. These outcomes are critical success factors in the improvement of the economic position of a nation. Through an extensive literature review, the researchers established evidence that supports the importance of sound customs administration in trade processes. One of the findings of this study argues that optimized custom administration tends to reduce transaction costs at the border. These costs tend to arise from the administrative requirements of importing goods from other countries (Miler, Morrissey, and Zgovu 2008, p. 5). The argument is that cross-border transactions will be shorter than before, thus reducing the cost-related requirements of importing goods. Secondly, optimized custom administration will increase the volume of items that a country imports in a given period. Shorter transaction periods can create opportunities for the government to import more products than before. However, this research relied on secondary data, thus compromising the reliability of the presented information. As such, further investigations are critical to advance understanding before recommendations can be passed.

Similarly, Persson (2013, p. 1) assessed the implication of trade facilitation in the contexts of transaction costs for business partners at the international level. The researchers argued most studies focused on the impact of trade facilitation on the volume while ignoring its potential implications on transaction costs. As such, the research focused on testing the effects of trade facilitation on extensive margin. The methodology involved counting 8-digit products that flowed from developing states to European Union countries. This study indicated that a reduction in export costs by 1% the number of differentiated and homogenous products exported to European Union countries would rise by 0.7% and 0.4% respectively. Based on economic simulations, an improvement in trade facilitation in all states would translate into a 64% and 29% increase in exported or imported differentiated and homogenous goods respectively. These outcomes reiterate two facts as examined in the previous study. Firstly, it outlines that effective customs administration can facilitate trade at the border of a given country. Secondly, it supports that it reduces the cost of transaction thus leading to the export or import of significant amounts of differentiated and homogenous products. However, this study relied on secondary data, thus making it difficult to generalize the outcomes in different contexts.

In a different study, Djankov, Freund, and Pham (2010, p. 1) investigated the impact of time delay on international trade. This study is different because it shifts from the relationship between customs administration and cost efficiency and to the relationship between customs administration and time efficiency, and examines how it impacts trade processes in a given country. Based on a difference gravity equation, the researchers obtained information that can describe the relationship between time and trade in specific countries. The study outlined that each day is equivalent to a 70-kilometer distance between a nation and its trading partners in a day. The study also reported that delays led to the loss of perishable goods port-harvesting, thus reducing the revenues that a country can earn from its exports. These results offer a platform for conceptualizing the benefits of effective customs administration on trade facilitation. It can be argued that customs administration provides realistic solutions to time-related challenges, thus improving the rate of importation and exportation. These improvements facilitate trade processes between countries. Like its predecessors, this study failed to contextualize its findings. Instead, it relied on secondary information and suppositions. Therefore, its recommendations can be applied in specific contexts without further investigations.

Li and Wilson (2009 p. 1) take a radical approach to the matter by investigating the impact of trade facilitation on Small and Medium Enterprises' trading capabilities. Preliminary assessment of this topic reveals that empirical studies examine the aggregate benefits of trade facilitation because of data scarcity. Basing on the outcomes of the World Bank Survey on the problem, the researchers sought to fill this information gap and improve future decision-making processes. This study pointed out that an increase in trade facilitation will enhance the probability of small and medium enterprises becoming exporters and importers. Notably, the research outlined that improving policy predictability and the integration of information technology in customs administration will expand the trade opportunities of small and medium enterprises. This study is oriented towards policy reforms. It states explicitly that trade facilitation can expand the trade opportunities of small and medium enterprises. This study takes a simple approach and discusses the relevance of trade facilitation in the context of the growth and development of small and medium enterprises. Therefore, its arguments support the observation that customs administration facilitates trade, thus improving the probability of small and medium enterprises to expand their opportunities. However, the study relies on secondary data and fails to contextualize its findings in a geographical region. Therefore, further investigations are necessary for understanding how customs administration can increase the potentials of small and medium enterprises

Lastly, Hendy and Zaki (2013, p. 1) examined the impacts of red tape costs on the export capacity of firms. The researchers pursued this objective in the context of Egypt. The secondary goal was to understand how red tape costs affect the economic positions of developing countries such as Egypt. As such, the researchers examined the trade relationship between Egypt and Saudi Arabia, and the United States among others. Therefore, the methodology of the study involved the use of a gravity model that focused on data from firms in Egypt. The study indicated that red tape costs tend to compromise the ability of Egyptian firms' exportation and importation capacities. This outcome tends to affect the value of imports and the rate of exporting goods to other countries. The researchers identified the red tapes as bureaucracy, delays, and high costs.  These outcomes create a context for understanding how custom administration would be relevant in improving trade in Egypt. It can be deduced that proper custom administration would reduce these red tapes, thus offering opportunities for firms to maximize trade. This article contextualizes its findings in the case of Egypt, thus making it possible to generalize recommendations in other settings. 

Customs Administration and Revenue Collection

Customs does not decide how a government uses its public funds. However, it facilitates the collection of financial resources that the government can use to pay for public services, thus contributing to a stable, healthy, and educated society. The discussions advanced by Djohan, Hasid, and Setyadi (2016, p. 148) enhances the understanding of the relationship between customs administration and revenue collection. The primary objective of the study was to determine the impacts of variations in government expenditures on income levels and economic growth in different places in Indonesia. The study outlined that a healthy community translates into financial stability (Djohan, Hasid, and Setyadi 2016, p. 149). It increases the number of working people in a given country while reducing household expenditure on healthcare. Families can invest their surplus financial resources in various business opportunities. Correspondingly, education expands people’s capacity to generate income through creative business opportunities and innovation, as well as the ability to obtain employment (Djohan, Hasid, and Setyadi 2016, p. 150). These outcomes improve the number of working people in a nation, thus boosting a country's revenue collection. A stable economy offers an environment for existing enterprises to grow and expand, thus providing employment opportunities to people as well as boosting the government's revenue collection through taxes. As such, customs administration can improve a country's revenue collection by providing the initial financial resources that the government needs to support its public services. These public services will create an environment for enhanced economic activities as analyzed in this paragraph. This study offers a theoretical conceptualization of the relevance of customs administration on revenue collection.

In a similar study, Morini, de Sá Porto, and Inácio (2017 p. 23) studied the relationship between customs administration and revenue collection as conceptualized in this study. The study examined two relationships: the relationship between trade facilitation and loss of border control as well as trade facilitation and the level of revenue collection in a country. Using surveys, the researchers obtained information from 60 representatives of 40 countries who attended a customs trade conference in Baku, Azerbaijan in 2014. The study outlined that trade facilitation does not weaken customs controls or affect revenue collection. Instead, trade facilitation requires various administrative functions such as the implementation of laws, elimination of bureaucratic processes, and integration of technology to improve the related processes. From the assessment of this study, it can be deduced that robust customs administration enhances trade facilitation, thus leading to enhanced customs control and revenue or sustained level of revenue generation. This study relied on primary data to achieve its objectives. This aspect improves the reliability and applicability of data to different countries.
 

In an attempt to outline reforms in the customs administration, Peterson (2017, p. 1) captured the relevance of proper administration in the collection of revenues for any country. The researcher outlined some of the reforms that have occurred in some customs practices. These changes sought to respond to globalization, total quality management, and just-in-time production as production in most firms. Reforms that have occurred have target cost and time-efficiency to ensure that companies can move products across the border. The recommendations of the WTO agreements influenced these adjustments. Based on the preliminary assessment of the relevance of customs administration, Peterson (2017, p. 2) argued that customs performed secondary functions such as the collection of duties on imported products in the past. As minor as it is, the revenues collected by the Bureau of Customs and Border Protection were significant to the United States. Therefore, transforming customs to a strategic department through improved administration would play even a more substantial role in any country's revenue collection compared to the past. 

In a different study, Michael (2012, p. 2) took an unorthodox approach towards assessing the relevance of customs administration on a country’s revenue collection. In this case, the researcher examined how trade facilitation can cut corruption at the border. Based on the World Customs Organization (WCO), countries affiliated to the organization tend to lose approximately $2 billion each year through custom-related corruptions. Based on an extensive literature review, the researcher outlines the kind of customs administration reforms that should occur. Specifically, the collaboration between the customs department and anti-corruption departments can reduce corruption, thus improving the rate of revenue collection in a country. As such, the study reiterates that improved customs administration can enhance the level of revenue collection in a state by preventing or reducing corruption.
 

Makunike (2017, p. 47) also adopts a different approach in the study of the relevance of facilitated trade on the revenue collection of a country among other benefits. Specifically, the researcher studied the role of improved information communication technology in trade facilitation in East and Southern Africa. Using a mixed research design, the researcher used surveys to obtain data for the research. The study indicated that information communication technology was critical in the achievement of specific administrative roles such as documentation, communication, and information sharing among others. As such, information communication technology has reduced transaction periods, thus cutting the related costs. These outcomes have resulted in the movement of large volumes of goods across the border. The flow of large quantities of products tends to translate into increased revenue collection among others.

These studies offer substantial information that underscore the relevance of customer administration in facilitating trade in developing nations. In most cases, inferences are made through objective interpretation of results and understanding of customs administration. The theoretical context of some studies asserts that customs administration includes processes whose outcome can facilitate trade. Trade facilitation occurs in the context of a reduction in the cost of transactions, improvement in time efficiency, and the elimination of bureaucracy among other red tapes. However, the majority of these studies relied on secondary data and failed to contextualize their results, thus making it difficult to generalize their recommendations to specific countries. As such, it is imperative that further research is conducted to contextualize discussions, findings, and recommendations. 

Research Methodology

Research Design

The demands of the research question invite the use of a mixed research design to achieve the related objective. As such, the study will use both qualitative and quantitative models to pursue the proposed research. This approach is practical because it promotes the collection of comprehensive data, including statistics, words, numbers, and pictures among others (Labaree 2009, n/p). Therefore, it improves the depth and breadth of information that can be used to achieve the objectives of the research. Secondly, and importantly to this research, a mixed design allows the researcher to answer various questions (Labaree 2009, n/p). This aspect is critical to this study because the hypothesis outlines two relationships: customs administration and trade facilitation, as well as customs administration and revenue collection. Lastly, the strengths of one design will cancel the weakness of the other, thus promoting objectivity and reliability. 

Procedure and Type of Data

These studies will be two research types that belong to both qualitative and quantitative design. Specifically, the qualitative research type will be case study while the quantitative research type will be correlation study (Salvador 2016, p. 109). Case studies allow the researcher to explain a problem or expand an understanding of an event based on the case of another event. In this case, Saudi Arabia's customs practices and their outcomes shall be used to examine the relevance of custom administration on the economic development of developing nations. Correlation study will focus on determining the legitimacy of the relationships between the variables (Salvador 2016, p. 109). These procedures will yield both qualitative and quantitative data. 

Data Collection Procedure

Based on the mixed research design, this study will use two data collection approaches. Under qualitative design, the data collection procedure will include a critical analysis of the contextual text that corresponds to the chosen case study. As for qualitative design, the researcher will use content analysis to obtain information that is relevant to the proposed research. Both data collection approaches are easy to implement and are less costly compared to others such as surveys and interviews. Secondly, they have low ethical ramifications because they will not require the recruitment of participants. Lastly, they would be faster to implement than other data collection approaches.

Data Analysis

The preferred data analysis method for the collected data is coding. In this approach, information is categorized according to various informational codes to facilitate analysis (Erlingsson and Brysiewicz 2017, p. 95). The grouping process involves the assessment of theories, concepts, texts, and numerical data among others to define the two outlined relationships within the hypothesis. Following this categorization, data can then be analyzed using computer programs or assessed manually to obtain specific patterns that approve or disapprove the connections in the hypothesis.

Costs and Funding

The methodology of this study is simple to implement. The data collection method does not involve the interaction with human participants, thus reducing cost, time, and ethical implications. As such, the implementation of the proposed study will not require substantial resources. It will be sponsored and implemented by the researcher.

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