Introduction

The last decades have seen a remarkable opening of international barriers to trade, led in large part by the preceding trade rounds establishing the WTO as well as significant improvements in maritime transportation, freight containerization, and ICT that have helped reduce the time and cost of international commercial exchanges. At the same time, international trade has been widely recognized as one of the most important drivers of economic development, as seen by the experiences of the newly industrialized countries of Asia, specifically the People's Republic of China (PRC), in increasing economic output achieved in large part through export-led growth strategies. Correspondingly, countries searching to expand their markets through increased bilateral trade agreements have also begun to look within their regions. More than a third of world trade occurs within the 32 regional trading blocs currently ratified by the WTO—most countries are members of at least one of these blocs (WB 2009b). In many cases, deeper regional integration has not only increased the bargaining power of developing countries at the global level but has also created opportunities to exploit intra-regional trade and the positive links between trade and economic growth.

Recognizing the potential benefits of increased trade liberalization, countries in LAC have embarked on a transformational process to reduce their trade barriers, increase bilateral trade agreements, and deepen their integration process. Since the mid-1980s, the region reduced its average tariffs from around 40% to 9.7% in 2007 while its export share of gross domestic product increased from 13% in 1980 to 23% in 2008 (WB 2009b). For the same time period, the region increased its exports by an average growth rate of 6%, with manufacturing goods representing 16% of exports at the beginning of the period and 54% by 2007 (WB 2009b). Since 1990, 31 south-south and 26 north-south bilateral and multilateral trade agreements have been signed and ratified, while a further 17 are currently under negotiation (WTO 2008).

Despite these achievements, the region continues to lag behind most industrialized countries and many developing regions in its efforts to secure the benefits from increased trade liberalization and deeper regional integration.

The region's reduction in average applied tariffs on manufacturing remained over the world average (8.9%) for 2007 as well as over that of middle-income developing countries (8.7%) and considerably higher than high-income OECD countries (2.9%, with the United States (US) having an average tariff of 2.7% and the EU-27 1.6%).³

Despite efforts toward increased regional integration, intra-regional trade within the largest trading blocs represented only 13% of total merchandise exports, compared with 25% for the Association of Southeast Asian Nations (ASEAN), 51% for the signatory countries of the North American Free Trade Agreement (NAFTA), and 74% for the European Union (EU-27) in 2007. The region has been unable to maintain its share of world merchandise exports and has seen its participation drop from 11.3% in 1948 to 3.7% in 2007, while Asia increased its share from 14% to 28% in the same time period (WTO 2008).⁴ In 2008 the Union of South American Nations (UNASUR), modeled on the EU-27, was ratified by the 12 countries of South America as an intergovernmental union integrating the regional agreements in the region (the Common Market for the South (MERCOSUR) and the Andean Community of Nations (CAN)), as part of a continuing process of South American integration.

Figure 1: Regional Trade Agreements Notified to General Agreement on Tariffs and Trade/WTO (1948–2008), Including Inactive Agreements, by Year of Entry into Force⁵ [ PDF 23.3KB | 1 page ]

Table 1: Intraregional Exports of Major Trading Blocs (percentage of merchandise exports, (1990–2007) [ PDF 23.3KB | 1 page ]

One explanation for why LAC countries have lagged in their integration into the world trading system is their inability to cope with a globalization process that is inherently transport-intensive and where supply chains are now being organized on a global scale. Technological innovations driven by transport technology developments have changed the economic landscape of the world, allowing countries to exploit economies of scale in both the transport and the production of manufactured goods. However, the region does not invest enough in infrastructure and logistics to benefit from these economies of scale, particularly since their investment is outpaced by investments into infrastructure and logistics in other regions.

During the past two decades, infrastructure investment in LAC has been shaped by drastic fiscal adjustment measures arising from macroeconomic crises, by incorporation of private investment in infrastructure that has not increased enough to cover the substantial decline in public financing, and by a concentration of financing in a limited number of countries and sectors.⁶ In 1980, the region's coverage of productive infrastructure, including roads, electricity, and telecommunications networks was higher than in the newly industrialized countries of Asia. Today, they lead LAC by a factor of three to two. While LAC spent on average less than 2% of gross domestic product (GDP) in 2005 on infrastructure, down from 3.7% from 1980–85 (WB 2005), Asian countries invested 7% (ADB 2005).

An array of logistic performance indicators shows the region lagging behind most industrialized countries and several developing regions. The 2009 ETI shows LAC achieving an overall score of 3.76 out of 6, with the global average 4.27. Similarly, the Logistics Performance Index overall ranking positions LAC countries behind those of the Middle East and Northern Africa as well as the industrialized countries of Asia, with its lowest scores in customs performance (2.37 out of 5) and infrastructure (2.38). Poor logistics performance has also led to higher transportation costs for the region relative to its counterparts—currently, logistics costs in LAC range between 18 and 34% of product value, while the OECD benchmark is 9% (Guasch and Kogan 2006).

Increasingly, the infrastructure and freight logistics gap between LAC and other regions is being analyzed as one of the root causes of the limited potential output gains from economic and trade related policies. Calderón and Serven (2004) suggest that if LAC countries caught up to the region's leader in terms of infrastructure quantity and quality, their long-term per capita growth gains would range between 1.1 and 4.8% per annum. Furthermore, if they caught up to the East Asian median country (Republic of Korea), the potential growth rate gains would range from 3.2 to 6.3%. This scenario requires the region to have an uninterrupted infrastructure investment rate between 5 and 7% of GDP for 20 years to maintain current infrastructure and to further expand the network. However, achieving this requires substantial investment and sound policies, strong and robust institutions, and sensible investment planning.

As a result of underinvestment in infrastructure and poor performance in freight logistics, the LAC region is pressed to rethink its trade facilitation agenda to incorporate physical integration projects, transport services, and specialized logistic infrastructure in an effort to reduce non-traditional trade costs. Djankov, Freund, and Pham (2006) show that each additional day that a product is delayed prior to being shipped reduces trade by more than 1%—equivalent to a country distancing itself from its trading partners by about 70 kilometers.

Without a renewed focus on trade facilitation measures—including physical infrastructure and overall land use, planning for logistic corridors and multimodal transport services, and regulatory frameworks to simplify international trade procedures—the region will continue to be left out of self-reinforcing production and trade networks while transport and logistics costs will make it more difficult to compete globally.

This paper is organized as follows. The first section focuses on the historical process of regional integration experienced by LAC countries, highlighting future concerns for deeper integration. The second section highlights recent developments in the global economy and its effects on international trade with and within LAC countries. The third and fourth sections look at the increasing importance of trade logistics and transport costs in the global economy. The fifth section analyzes the region's performance in terms of logistics and physical integration. The sixth section looks at existing regional initiatives to advance the physical integration of the region. The final section examines the future of trade logistics in LAC and the agenda to deepen regional integration, with particular emphasis placed on the actual and potential role of the IDB.

2.1 Trade agreements and regional integration in LAC

The postwar period has been marked by two important phenomena in the political economy of trade relations. First, globalization has changed the economic geography of the world, with increased population density, larger concentrations of populations in urban spaces, and far better and more complex transport networks. These have led to cost reductions and just-in-time production methods. Second, regionalism has marked developments in the global trading system, driven by the same forces as globalization and by the democratization of political power and the search for stability in once-volatile areas of the world. Currently there are over 200 regional trade agreements, 90% of which have been notified to the WTO since 1990 (WTO 2009a).

These phenomena are in large part a result of successive efforts to establish a rules-based world trading system. Multilateral negotiations through the General Agreement on Tariffs and Trade in 1947 led to the establishment of the WTO in 1995, whose membership is growing (153 countries to date). The reduction in tariffs across the world has significantly expanded opportunities for countries to participate in the world economy. LAC have been active participants in these transformational processes which deepened considerably since the 1990s, with unilateral opening of economies and increased regional trade agreements.

Latin America has had a long tradition of regional cooperation and integration strengthened in the 1960s through the rise of import-substituting industrialization (ISI) development strategies and the creation of the Latin American Free Trade Association (LAFTA) in South America and the Central American Common Market (CACM).⁷ Briefly, ISI strategies focused on promoting infant industries through high levels of external protection, state participation, and investment regulation, with the promise of achieving export-led growth and decreased dependence on industrial countries. Regional integration provided an opportunity to deepen the potential of ISI through a larger market. This allowed the infant industries to grow in size and create production efficiencies until they were able to compete. Consequently, LAFTA and CACM became the first formal attempts to harmonize trade flows and increase regional integration in Latin America.

However, ISI policies did not establish macroeconomic stability and economic growth; the first attempt at regional integration was unsuccessful due to a complicated political and economic climate. Among many factors, the region had an intrinsic tendency for national protectionism marked by tension between the state and private sector. Trade negotiations did not provide sufficient incentives to create a rule-based system whereby the benefits accrued from increased exchange would be evenly distributed to member countries. Finally, the development of national and regional infrastructure, coupled with low levels of investment and maintenance as well as poor transport services, limited gains from increased regional cooperation.

Caribbean states had a remarkably different history of economic integration, given the late independence of many of the islands from primarily Anglo-Saxon colonial rule, which stymied the first attempts at economic integration (the West Indies Federation was established in 1958 under British dictate but collapsed with the withdrawal of Jamaica in 1962).

With independence, the Caribbean Free Trade Association was established in 1968 (modeled on the European Free Trade Association) to promote liberalized trade between its members, although few efforts were made to establish extra-regional trade relations. As a result of this, as well as of the uneven benefits accrued by its member nations, the free trade agreement was dropped in favor of the Caribbean Community (CARICOM), which was established in 1973.

In the 1990s, following what is now commonly referred to as the debt crisis and the structural reforms promoting trade and financial liberalization that ensued, LAC entered into a period of revived regionalism still present today. The policy framework established during this period set the stage for unilateral measures to reduce traditional barriers to trade while promoting open and competitive economies (see Devlin and Estevadeordal 2001). Furthermore, it encouraged a development strategy based on recognition of the economic and political benefits of increased cooperation and trade by securing reform through institutional and rules-based arrangements.

This cooperation initially led to an increasing number of North-South reciprocal trade agreements, followed by a rethinking of traditional approaches to integration in the region. Since 1960, a total of 37 south-south and 26 north-south bilateral and multilateral trade agreements have been notified to the WTO and a further 17 are currently under negotiation (WTO 2009a). Simultaneously, average tariffs in the region have declined from over 40% in the mid-1980s to about 10% in 2008.

Importantly, sub-regional initiatives, including MERCOSUR, CAN, and CARICOM, did not limit their agreements to trade but incorporated structural aspects to reform their institutional environment and build longer-term strategic policies to compete in the world trading system. These included agreements in standards, transport, customs cooperation, services, investment, dispute settlement, labor (except for MERCOSUR), and competition, while none included agreements concerning intellectual property rights—a clause included in all North-South trade agreements with Latin America except for the Canada-Chile agreement signed in 1997 (WB 2005). Through these agreements, countries sought to enforce internal regulatory measures as well as capture the benefits of increased opportunities for export diversification, foreign direct investment, greater specialization, product differentiation, and intra-industry trade resulting from increased market access and a clear regulatory framework.

Table 2: Major Regional Trading Blocs in the World [ PDF 93.3KB | 2 pages ]

Table 3: Trade Agreements in LAC, South–South Agreements [ PDF 15.5KB | 1 page ]

Table 4: Trade Agreements in LAC, North–South Agreements [ PDF 21.8KB | 1 page ]

More recently, initiatives aimed at establishing a hemispheric cross-continental market, namely the Free Trade Area of the Americas (FTAA), have met with less success. These highlight the political limitations the region faces in moving forward on a common agenda for deeper integration (Estevadeordal et al. 2003). Equally important to note are some of the potential costs of increased regional commercial integration, such as trade and investment diversion away from other world markets, conflicts arising from asymmetric development impacts of regional integration, and, perhaps most important, the administrative and institutional strain caused by a web of different trade arrangements.⁸

Only four of the 39 countries in LAC are not part of any regional trade agreement, while the average number of regional trade agreements per country is eight (WTO 2009a). Complex trade agreements can increase trade costs through customs procedures, technical standards, and complex rules of origin that undermine efforts to facilitate trade between countries. A recent study by Estevadeordal and Robertson (2009) finds significant evidence of an increasing tariff effect that is consistent with trade diversion as a result of the proliferation of bilateral agreements in LAC that has coincided with declining enthusiasm for further multilateral liberalization, in particular, the FTAA. These findings present a challenge to policy makers to develop a framework where trade agreement costs are minimized and productivity gains from increased trade and regional cooperation are better distributed.

Among the most important challenges the region faces for the future of integration is the development of regional infrastructure. Given the size, complex geographical limitations, and environmentally sensitive areas of rainforest and valuable biodiversity, the region has consistently lacked quality infrastructure for regional integration. Traditional urban settlement principles that clustered along valleys and “internal regions” have prevented countries from effectively pursuing a more systematic approach to infrastructure development and long distance land-based transport networks.

As a result of encroaching development principles and a lack of combined land and territorial planning, the region underperforms in a series of indicators. This reflects a chronic underinvestment in new infrastructure and maintenance of existing projects, especially in terms of the road network, efficiency and capacity of ports, and readiness of airport infrastructure. In both the Logistic Performance Index (LPI) and the ETI, LAC ranks below the world average in terms of transport and communications infrastructure and related national and international transport shipment services. Furthermore, according to a 2007 ranking of ports, only eight out of 125 ports by total cargo volume were located in LAC while 11 made the ranking in terms of container traffic (Lloyds 2009).

Recent developments in the global economy shed light on international trade trends in LAC and the role that the PRC and India will play in driving the demand for commodities. In 2008, the global economy entered the most severe economic recession in the post-war period. The gross world product contracted by 6.25% (annualized) in the fourth quarter of 2008 (representing a remarkable turn of events, given the 4% growth a year earlier) and global activity was projected to decline by 1.3% in 2009 (IMF 2009). Even countries with largely diversified export sectors and trading partners are being adversely affected by the contraction. Global production and supply chains are by and large more integrated than in the past, which has been an added shock for productive forces. In addition, given the nature of the present crisis and its roots in financial markets, the availability and affordability of trade finance, which has been substantially reduced, has further weakened prospects of recovery, although coordination from international institutions and financial centers is ongoing and could alleviate the need for long-term financing.

While LAC countries are not as reliant on foreign trade as other regions, they have not been exempt from the severity of the global economic recession, despite the fact that exports as a percentage of GDP represent only 23% for the region, 10% below the world average and far from the Euro area (41%) and East Asia (35%) (WB 2009b). Commodity prices reached record peaks, expected to drop by over 33% compared with 2008 and recover only 3% in 2010. For Central American and Caribbean countries, which are net commodity importers, the overall effect of declining commodity prices on their terms of trade has been positive, enabling them to maintain healthy balances in their international reserves from the low cost of fuel imports. Their external financial linkages are generally limited and the impact of the crisis was not as significant as in other areas of the region. Net commodity exporters with inflation-targeting regimes (Brazil, Chile, Colombia, Mexico, and Peru) have been adversely affected by declining commodity prices, causing their terms of trade to shift.

As a consequence of the crisis, a rise in protectionist measures threatens recovery of world trade growth to its pre-crisis levels. In 2008, anti-dumping investigations increased by 28% from the year before (WTO 2009b). Many countries have adopted policies to maintain production and consumption within their national borders—usually through non-tariff trade barriers, which are easier to disguise and more difficult to sanction, and contingency measures, including increased anti-dumping measures. Although these have proved in most cases to be transitory measures and closely linked to falling economic activity, their widespread use reduces the possibility of negotiating international arrangements and limits the rapidity and depth of substantial recovery in international trade flows. The Doha round⁹ of trade talks, will be difficult to revive in such an environment.

Developing countries—led by Brazil, India, the PRC, and Russia—are feeling empowered to take a leading role in negotiations concerning the international financial architecture and world trading system after this most recent crisis. Most important, and spearheaded by Brazil, Chile, and Peru in the region, Asia has risen as a new player with growing importance for future trade relations with LAC. Trade along the Pacific Rim is growing, with important contributions of the Asia-Pacific Economic Cooperation, which has deepened the process of integrating emerging markets in Asia and LAC. South American commodity exporters see this mostly as a new market, lifting export volumes and world prices, while Mexico and Caribbean countries perceive these linkages as an increased source of competition, especially from the PRC and its ability to attract foreign direct investment flows.

The importance of India and the PRC as a destination for LAC exports has increased fourfold since 1990. Trade with the PRC has grown at an annual rate of 40% since 2003, the same year that the nation became Brazil's largest trading partner (The Economist 2009). Lederman, Olarreaga, and Soloaga (2007) show that, overall, the growth of the PRC and India in world markets is an opportunity for LAC exporters and importers—accounting for up to 8% of LAC exports in 2004, mainly driven by the PRC. Furthermore, they study concluded there is no robust evidence of substitution between the PRC's trade flows and LAC exports to third markets (Lederman, Olarreaga, and Soloaga 2007). As trade relations grow and the PRC continues to play an ever more important role in the world economy, and in LAC in particular (becoming a member of the IDB in 2008), economic cooperation with the PRC will be a source of increased value to trade relations through knowledge-sharing and technology transfers (Devlin, Estevadeordal, and Rodríguez-Clare 2006).

Nonetheless, these opportunities have yet to be fully exploited, given the size of the markets served. In order to do so, the region needs to address deficiencies in the quality of infrastructure together with rigid regulatory frameworks and weak freight logistics.

2.2 Transport and Logistics Costs in International Trade and Logistic Performance in LAC

World trade patterns are constantly changing due to advances in technology, including those in the area of logistics services and transport. As technologies for manufactured production have become more available, trade in intermediate and final goods has increased, creating greater opportunities for countries to reap benefits from specialization. In 2006, intra-industry trade accounted for 27% of all trade; however, it is highly concentrated in North America, Europe, and Australia (accounting for half of all intra-regional trade) as well as Southeast Asia (roughly 35%), while the figure for LAC is closer to 15% (Brülhart 2008).

Figure 2: Grubel-Lloyd Index of Intra-industry Trade by Region [ PDF 18.9KB | 1 page ]

As countries increase their trade in manufactured goods and as supply chains become vertically integrated in a global production process,, international trade patterns reflect increased commerce with neighboring markets with similar production and consumption capabilities. In 2009, more than 24% of world trade will occur between bordering countries; this accounts for 21% of all trade in LAC, while North America tops the list with 52% and Western Europe, 40% (WB 2009b). In the latter countries, the benefits of a well-developed integration infrastructure and development mechanisms along the borders of each country are key to trade and freight logistic development. Another factor influencing trade patterns through technological innovations in transport is the significant rise in intermodal transport—mainly in high capacity and more efficient modes such as maritime, waterway, and railway transport—and the integration of separate transport systems through the use of at least two different modes of transportation. This has shifted the freight logistic components to the entire supply chain, as these processes are increasingly seen as whole rather than as a series of sequences, each with its particular documentation and cost structure.

From the regulation of infrastructure and the provision of well-developed transport services, a robust and strategic approach is needed to enable better infrastructure quality and transport services. For international trade, a more efficient, reliable, and secure interaction between different transport modes is of paramount importance, given the geographic space and volume the global economy now occupies. These trends further support the view that globalization has been transport-intensive, as economies of scale have affected not only production but also transport costs, further reinforcing trade in a virtuous and mutually enforcing cycle.

Over time, the main reductions in transportation costs, due to higher investments in transportation infrastructure, technological innovation, transportation reform, and lower overall trade barriers, have been in road and air transport, while maritime transport was revolutionized by containerization. In particular, innovations in air and maritime transport, the two modes of transport that have most influenced the growth of international trade and globalization, have been of particular importance. For instance, advances in technologies for air shipping—which accounts for about 40% of the value of international trade—have caused the average revenue per ton-kilometer shipped to drop by a factor of 10 between 1955 and 2004 (Hummels 2007; Rodrigue 2007). Similarly, ocean shipping, which constitutes 99% of world trade by weight, has seen its costs consistently decline during the last 20 years in large part through containerization—with estimates showing that using containers can lower shipping costs by 3–13% (Hummels 2007)—and the advent of larger than post-Panamax vessels (the largest ships that can pass through the Panama Canal). Lower vehicle costs and the deregulation of the trucking industry have pushed road transport costs down by almost 40% during the past three decades (WB 2009c).

Nonetheless, transport and trade costs have traditionally been hard to measure due to limited information of varying quality.¹⁰ Over the past three decades transport costs have fluctuated due to changes in the price of fuels, the uneven regulatory frameworks in which many of these industries develop, and rising concerns about security costs. Air transport has been characterized by technological developments, monopoly power of large state operators, and fluctuations in price depending on the commodity being shipped. For maritime freight operations, costs have been reduced in large part through containerization, the rise of large maritime vessels, and the advent of fewer freight lines, together with efficiency gains in port operation and infrastructure that allow for reduced direct port costs from greater storage capacity. Competition for transshipment services has also contributed to reducing the cost of international shipping while sometimes negatively affecting internal trade with higher tariffs than those offered to international freight.

Since the transport sector is generally characterized by high entry and maintenance costs, owning physical infrastructure consolidates economic power. In 2003, some 20% of the world's carriers owned or controlled close to 60% of global port slot capacity (WB 2009c). Maritime markets have had limited competition in part due to the high entry costs into the market, compounded by the indivisibility of infrastructure facilities when providing transport services. As a result, markets for these services are rarely competitive and are usually owned by the state (in the case of seaport and airport infrastructure) or by large international companies (for transport services).

At a more aggregated level, the lack of well-regulated markets creates disincentives for investments to provide spatial transformation in ICT, in transport infrastructure, and in the development of new transport services—all essential for output and productivity growth. Although at early stages market concentration is more likely, given the high fixed costs associated with transport projects, as spatial economies deepen incentives for competitive forces to enter the market become more apparent. Without public policy focusing on the appropriate possibilities for exploiting these links, the ability of developing countries in LAC to compete globally will remain compromised.

Another phenomenon in the globalized economy is the falling cost of communications due in large part to innovations in ICT and the sophistication of the Internet. The reduced costs in communication have minimized search costs associated with finding potential customers and trading partners as well as variable costs, which tend to be more important for intra-industry trade, from interactions regarding product quality and specifications. Importantly, falling communication and transport costs have led to a fragmentation of production processes, the globalization of the supply chain, and the outsourcing of intermediate production and certain services across countries. Initially, these processes were driven by low wage costs, but mutually reinforcing international transportation services and shorter production cycles are beginning to outweigh wage savings, causing further relocation. The notion of a mutual interdependence between trade and transport is fundamental to the freight logistics and trade facilitation conundrum, “for as long as there has been trade, transportation activities have been there to support it” (Rodrigue 2007: 1).

Finally, it is important to recognize the development costs associated with improvements in transportation, freight logistics, and trade over the past decades. The challenge to public policy is to find ways of creating incentives for the transport industry to internalize these development costs and of increasing fuel efficiency and safety standards. Several estimates, including the Stern Review on the economics of climate change (Stern 2006), have placed the current cost of internalizing emissions well within historical variations in fuel prices. Recently, the UN Climate Change Conference in Copenhagen has shown increased political will from industrial and emerging markets to tackle emissions, with the transport sector representing close to 13.5% of total greenhouse gases. Controlling the development costs derived from transport will play an increasingly important role in the development of future trade logistics and is likely to lead to renewed economies of scale in both transport and production through increased efficiency.

Unfortunately, LAC countries have not fully benefited from positive trends in transport and logistics development. During the 1970s, the region experienced high levels of infrastructure investment relative to other regions, reaching higher coverage of productive infrastructure than East Asia by 1980. But after experiencing a decade of economic adjustments, with substantial gains in transport infrastructure specifically, logistics services only emerged in the 1990s. Today, many of these gains have rapidly reversed. The region continues to spend nearly twice as much as the to import goods, while airfreight costs in 2006 actually rose in relation to their level in 1995—with the Caribbean seeing an increase of as much as 36% (Mesquita Moreira, Volpe, and Blyde 2008). The region's exports, with their reliance on abundant natural resources (including a weight-to-value ratio much higher than many capital-intensive goods) and proximity to the world's largest markets, are much more transport-intensive than competitor exports. Thus LAC countries, whose economies mainly depend on the export of large and bulky raw materials, are more exposed to changes in demand as well as being more sensitive to the quality and quantity of their transport infrastructure.

Figure 3: Total Import Freight Expenditures as a Share of Imports, 2006 (%) [ PDF 35KB | 1 page ]

Overall, about 40% of the difference in shipping prices between the region and the US and Europe can be explained by port and airport efficiencies, while only 17% of these differences are accounted for by higher tariffs (Mesquita Moreira, Volpe, and Blyde 2008). For example, LAC exports to the US pay ocean freight rates that are on average 70% higher than those paid by exports from the Netherlands. As result, for a typical LAC country, improving port efficiency to the US level would lower costs by 20%. Reducing tariff rates and increasing competition to US levels would further reduce transport costs by 9% and 4%, respectively.

Intra-regional exports largely depend on the development of transport infrastructure in general and regional integration transport infrastructure more specifically. In contrast, the same reduction would allow exports to the US to increase by 39% on average compared with less than 2% from a reduction in import tariffs by 10% (Mesquita Moreira, Volpe, and Blyde 2008). Reducing trade costs by 10% would cause an average increase of 60% (with substantial variations with respect to different commodities' weight-to-value ratios) (Mesquita Moreira, Volpe, and Blyde 2008).

Figure 4: Percentage Reductions in Transport Costs from Change in Port Efficiency, Tariff Rates, and Number of Shippers to US Levels, Base Year 2005 [ PDF 14.6KB | 1 page ]

Figure 5: Median Increase in Sectoral Exports to Reductions in Transport Costs and Tariffs [ PDF 15.6KB | 1 page ]

Figure 6: Median Increase in Export Diversification to Reductions in Transport Costs and Tariffs [ PDF 15.6KB | 1 page ]

These findings highlight not only the importance of improved freight logistics and transport infrastructure for the development of national export sectors (with corresponding productivity and output growth) but also how limited transport development has inhibited regional integration. Despite geographical constraints and the long distance between populous urban centers, people in LAC currently live within 25 kilometers of a border (16% in mountainous areas) or a coastline (48% in tropical areas), respectively—figures that increase to 37% and 54% living within 75 kilometers (WB 2009b). Nonetheless, very few urban settlements have been developed along border regions (a contrast when compared to North American cities), and therefore few productive centers are located less than 200 kilometers from borders. Accordingly, since urban settlements house economic activities further from borders, transport costs to and from borders hinder the development of infrastructure.

After the surge of regional initiatives in the early 1990s and the corresponding progressive reduction in non-tariff barriers, the region's new trade agenda needs to focus on more practical issues, centered on measures to reduce transport and logistics costs, which will increase productivity growth and competitiveness internally and externally. Potential gains from spatial economies in remote areas are limited due to the highly complex coordination needed at the regional level. Several efforts are currently under way, including the development of strategic corridors such as the Initiative for the Integration of Regional Infrastructure in South America (IIRSA) and the Mesoamerica Project.

Shorter supply chain processes including just-in-time production and the outsourcing of logistics procedures have set the stage for substantial improvements in the modernization of supply chain and logistics management in sector firms. As a result, the demand for freight transport has changed substantially, incorporating the need to minimize logistics costs in line with inbound and outbound traffic, warehousing, inventory costs at different stages of the production cycle, damaged stock, and other costs associated with the physical flow of goods. Furthermore, as freight logistics technology and its associated costs are consistently present throughout the entire product life cycle, the quality of service and efficiency associated with these is of increasing importance in competitive international markets.

Nonetheless, the development of a comparative metric system and associated measurement for logistic services on international shipments is an increasingly complex process given the nature of the services, the array of procedures involved and their many combinations. As one United Nations Economic Commission for Europe study concludes, the volume of information about the link between logistics and competitiveness is growing however there is a persistent inadequacy of tools and methodologies to effectively asses the transport sector's contribution to competitiveness in the context of transport's role in supply chains (Economic Commission for Europe 2009). As the supply chain uses different modes of transport (maritime, air, rail, and truck) for both international and national trade and deliveries and the fragmentation of production across different countries increases the amount of freight in circulation, measuring logistics performance is neither an easy task nor one safe from controversy.

Correspondingly, logistics performance has been measured in several ways: macro-based approaches based on national accounts and looking at costs relative to a country's balance of payments; micro-based approaches that use firm surveys to measure cost, quality, and productivity relative to sales value; and perception-based approaches, which develop global indicators based on surveys of qualified stakeholders in the logistics industry. One novel approach uses stock estimations as a proxy to determine the relative impact of transport services and freight logistics on companies. LAC countries perform poorly across all indicators and are becoming increasingly less competitive relative to their industrial and developing country counterparts. Overall, these indicators all point to the same conclusion: there is ample room for trade logistics improvement in LAC countries.

Guasch and Kogan (2006) analyzed logistic performance indicators at the macro level as well as inventory stocks for developing countries to assess their impact on countries' growth and competitiveness. Their findings in terms of logistic performance indicators show that countries in LAC spend on average two or three times as much as OECD countries on logistics; inventory stocks show that they are on average 15% of GDP, two to five times larger than OECD averages. As a result, the logistics cost as percentage of product value for LAC countries is twice that of OECD countries and the US. Overall, their results indicate LAC countries' competitiveness suffers from poor transportation services and from the large financial costs required to maintain stock at an efficient level, which affect the ability of companies to streamline internal processes (Guasch and Kogan 2006).

Figure 7: Logistics Costs as Percentage of Product Value for Selected Economies, 2004 [ PDF 18KB | 1 page ]

Table 5: Comparison of Average Inventory Levels, Losses to Markets, and Logistics Costs in Latin America and the OECD, 2004 [ PDF 18KB | 1 page ]

Micro-level indicators developed by Georgia Tech-Cap Gemini-Oracle-DHL and the World Bank in Doing Business show that the outsourcing of logistics services in LAC is generally weaker than in more developed countries. Of the firms surveyed in LAC, 70% outsource their national and international transport and 62% their storage and stock management, while for East Asia and Pacific countries the figures are 92% and 75% respectively (WB 2009a). The indicators also highlight a clear gap between LAC and the OECD in international trade related logistics performance.

The LPI elaborated by the World Bank uses perception-based indicators that point to the negative relative logistic performance of LAC countries. The results cover seven areas: customs performance, infrastructure, international shipments, logistics competence, timeliness, tracking and tracing, and domestic logistics costs. Of the 150 countries ranked, LAC countries occupy positions ranging from 32 (Chile) to 141 (Guyana), showing significant variation in the region.

Another perception-based index is the ETI 2008, elaborated by the World Economic Forum. Similar to the LPI, the ETI is developed in collaboration with international trade experts and leaders from the logistics and transport industry, providing a comprehensive index intended to capture the full range of issues that contribute to impeding trade and ranking nations according to factors that facilitate the free flow of goods across borders.

Recognizing the gap in infrastructure investments by the private sector in LAC, another set of indicators was developed by the World Economic Forum, the Infrastructure Private Investment Attractiveness Index, considering the investment environment for infrastructure in 12 LAC countries. The index assesses the main drivers of private investment in infrastructure projects for ports, airports, roads, and electricity by looking at macroeconomic performance, legal framework, political risk, the track record of private investments in infrastructure, and the willingness of government and society to pay for infrastructure, among other factors. The results are summarized in an overall index of infrastructure and private investment and two sub-indexes covering environmental factors impacting general investment and infrastructure-investment-specific factors ranked on a scale of 1 to 7, with 1 being the “worst possible scenario” and 7 the “best possible scenario” for each set of variables. The overall results show Chile ranking highest in the region, followed by Brazil, Colombia, and Peru while the bottom slots are occupied by Venezuela, Bolivia, and the Dominican Republic.

Finally, an Infrastructure Quality Gap Index analyses the relative needs and deficiencies of infrastructure development in each of the 12 countries covered. The gap is computed with respect to Germany, ranked first in the infrastructure pillar of the Global Competitiveness Report (2006–07), where 0 means that the country has achieved world-class levels of infrastructure development and therefore does not need additional investment in the sector. The results show Bolivia, Peru, and Colombia having the largest gaps, with the most developed infrastructure sectors in LAC occupied by Chile, El Salvador, and Mexico.

Table 6: Trading Across Borders¹¹ [ PDF 17.7KB | 1 page ]

Figure 8: Enabling Trade Index 2008: LAC Compared with Other Regions¹² [ PDF 15.5KB | 1 page ]

Table 7: Most Fragile Components in Trade Facilitation Performance¹³ [ PDF 39.4KB | 1 page ]

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