even if the information from the PSI company were used and Customs officers were able to more easily identify evaders, the effect of this would be to simply discourage Importers from going through Customs in the first place. Any discussion of PSI should take this possibility of smuggling into account.

Given the widely differing institutional structures surrounding the introduction of PSI in these countries, it would be extremely difficult to do good empirical work comparing the performance of different PSI contracts across countries without some model to guide us. While there have been no attempts to do this in the literature there does seem to be something of a consensus concerning under what conditions PSI should be used and what should be required from the parties to the PSI contract.

The first widely held belief is that PSI should be used in countries with “weak” institutions where comprehensive customs reform would be too costly. It is not entirely clear what is meant by most authors when they refer to "weak" institutions. Thus, for example, a paper prepared by the Latin American Economic Research Foundation on PSI notes that, “Experience and literature on the subject [PSI] advices [ _sic_ ] the introduction of PSI mechanisms for countries that have a poor Customs performance (in general, countries of relatively lower development).”<sup>12</sup> One of the benefits of developing a model in Section 2 will be that it will allow us to be more specific about what might be meant by "weak" institutions.

In addition to the belief that PSI should be used in countries with weak institutions that are unable to engage in more comprehensive reforms, several studies have also identified what they consider to be the “proximate” causes for the performance of PSI.<sup>13</sup> In particular, Patrick Low singles out at least three conditions which must obtain for the success of PSI related reform. First, and most importantly, that an ex-post reconciliation should be carried out. Second, that the PSI company should send a copy of the Report of Findings to both the Ministry of Finance and the Customs Agency. Third, that there should be a judicial mechanism for complaints against PSI companies and Customs Agencies by the Importer. To these three conditions should probably be added a fourth, that in order for there to be any chance of success, the customs service must have some measure of physical control over their customs territory.

There is a deeper question, however, above and beyond that of proximate causes. In particular, given the difficulties in identifying, empirically, what the effect of PSI is on 12 Latin American Economic Research Foundation, “Customs Control in an Open Economy: The Case on the Preshipment Inspection Program in Argentina,” (1999), p.22.

13 Although, it is worth noting that there is hardly ever explicit mention of what type of reforms accompany the introduction of a PSI contract. Discussion is usually limited to the PSI contract itself (e.g. “Great emphasis was placed in the contract on ex-post reconciliation”). One of the points of this paper will hopefully be to shift more emphasis towards concentrating on the reforms which _accompany_ the PSI contract (and interact with it) but which don’t necessarily have to do directly with the PSI company or the information which comes from the PSI company (i.e. how are customs agents compensated, what are the incentives of importers given a certain level of punishment).

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