Can preshipment inspection offset noncompetitive pricing of development countries'imports? The evidence from Madagascar

Many developing countries use preshipment inspection (PSI) firms to counter the adverse effects on their foreign trade of certain pricing and business practices. These firms may also perform some national customs functions, but their key responsibility is normally to verify that imports (and sometimes exports) meet quality and quantity standards and that prices are within established norms. Developing countries make substantial payments for PSI - charges appear to average about 1 percent of the value of the goods inspected - but have undertaken no comprehensive cost-benefit studies of PSI. Using data from Madagascar's experience, the author analyzes the impact of PSI on Madagascar's relative import prices. The results suggest that Madagascar paid considerably higher prices than other developing and industrial countries both before and after PSI was adopted. In other words, preshipment inspection failed to reduce Madagascar's import prices to the level of those paid by other importers. Extreme prices occur for all types of goods imported by Madagascar but are clustered in chemicals and basic manufactures. Evidence suggests that collaborative false invoicing by Madagascar importers and industrial country exports is one reason for the excessive prices both before and after adoption of PSI.