Regional Agenda to Deepen Integration: The Importance of Freight Logistics in Trade Facilitation

Over the past two decades, multilateral and bilateral trade negotiations have reduced bound tariff rates and, to a lesser extent, softened non-tariff barriers to trade. Increasingly, however, trade transaction costs such as those resulting from poor transport infrastructure have proved to be more costly; Djankov, Freund, and Pham (2006) found that on average each additional day of delay in shipping reduced trade by at least 1%. As a result, developing countries are being forced to rethink their trade policy agenda to take into account trade costs not covered in past rounds of negotiations. Without a renewed focus on non-policy trade costs and the relevance of freight logistics and specialized transport infrastructure to the trade facilitation agenda, developing countries will continue to be left out of self-reinforcing production and trade networks.

The incorporation specific measures oriented toward transportation in trade facilitation has become a key policy initiative to enhance future gains from trade. Activities include both services provided by the state and the flow of freight internally and externally. Clearly, developing countries have much to gain, given the high transaction costs of their trading patterns. Trade facilitation measures focusing on customs procedures and regulatory environments can lead to improved controls, reduced administrative costs, and increased cooperation between the public and private sectors even when applying these measures implies costs (OECD 2005).

For example, Otsuki, Mann, and Wilson (2003 and 2004), using a sample of 75 countries (weighted toward developing economies) found that improving these countries' trade facilitation records to the global average resulted in trade gains equivalent to 377 billion USD, representing an increase of about 9.7% in total trade—with Latin America accruing about 20% of these gains (South Asia got the largest share, 40%). A little over 40% of these gains would come from improved service sector infrastructure, while nearly 20% are due to improvements in the regulatory environment.

Firms in developing countries also witness delays in inventory holdings, an area of particular concern for countries that rely on exports of bulky natural resources with short shelf lives, as is the case for many LAC countries. The implied costs of holding inventories through tied-up capital, increases in unit costs, and diminished competitiveness can be detrimental to the development of export sectors in LAC and increases shipping delays. Guasch and Kogan (2003) found that while US businesses typically hold inventories of around 15% of GDP, inventories in Latin America and other developing regions are often twice that. In addition, if the interest rate for financing holdings is between 15 and 20%, the cost to an economy of additional inventory holdings is more than 2% of GDP. Developing reliable and efficient transport networks, affordable and available transport services, and required logistic services will help to eliminate these excess inventories. Consequently, excessive inventory costs provide a further example of how improvements in trade facilitation and freight logistic measures such as port efficiency, ICT, infrastructure, harmonization standards, and customs procedures can benefit trade through a virtuous circle that allows countries to exploit economies of scale in both transport and production.

Unfortunately, much remains to be done in order to improve the region's weak trade facilitation measures and close both the trade and infrastructure gap it has with other regions. In large part, the region's relatively weak trade performance is aggravated by its infrastructure and income gap relative to other regions; in relation to East Asia, for example, the infrastructure gap could account for as much as one-third of the income gap (Easterly and Servén 2003).

Figure 13: Manufactured Exports by Region (% of merchandise exports)¹⁵ [ PDF 17.8KB | 1 page ]

Overall, a renewed focus on trade facilitation measures has become of increasing importance to the region's trade agenda as traditional trade restrictions have been substantially reduced and trade benefits have not been fully realized. Furthermore, through increased coordination and harmonization of customs and border procedures, trade facilitation supports efforts toward increased regional integration. Similarly, these measures tend to enhance the efficiency of revenue collection agencies and are associated with increased government revenue while at the same time incorporating the private sector into productive activities.

If better provision of transport infrastructure from the public sector and the enabling of more efficient transport services from the private sector are key to spurring national trade, investment in regional physical infrastructure projects is essential to reducing costs of international land-based transport. This is particularly true for landlocked countries and for the development of regions closer to international borders and distant from national ports.

Improving trade logistics through deepened trade facilitation measures has become of increasing importance to LAC's regional integration agenda. Given the substantial decline in tariffs and other traditional barriers to trade, logistics performance and the institutional capacity to provide it seem fundamental to expanding productivity gains and benefiting from existing trade agreements. Reforming the current institutional climate to promote much needed transformations in terms of increased human capital, private-sector development, logistic services, infrastructure quality, and increased investment in transport infrastructure is a costly and sometimes lengthy process. The challenges to public policy in designing, executing, and evaluating a successful strategy that gives priority to key issues and efficiently tackles the many problems intrinsic to the current logistics performance of LAC countries are many. Nonetheless, the future benefits of these processes are more likely to exceed their costs in most aspects of economic and political activity.

What limitations help explain the weak logistics performance in LAC countries? First, the region is underserved by a weak institutional capacity that limits its ability to cope with the demands of accessible and reliable transport infrastructure and the services provided by the state are inadequate to serve a rapidly growing trade facilitation agenda. In particular, scarce human resources, weak ICT infrastructure and regulation, and monitoring and evaluation systems adversely affect the reform agenda needed to expand institutional arrangements. Consequently, the coordination capacity of LAC countries is weak and impedes the necessary development of the logistics agenda.

Second, the region's infrastructure network in general and transport infrastructure in particular have suffered from chronic underinvestment. Estimates of the investment needs of the current infrastructure framework are between 5% and 7% of the region's GDP over 20 years in order to satisfy construction and maintenance requirements, increase coverage, and tap growing demand (WB 2005). Nevertheless, in 2000–2001, the investment rate in the sector was about 4%, with 3% coming from the public sector and 1% from private investments. At the peak of private investments in 1998, the total value of participation only reached 1.7% of GDP (WB 2005). The latest figures show that the region is investing about 3–4% of GDP in infrastructure while East Asian economies are committing 6–10%, with the PRC at 8% and India at 4% (Latin Business Chronicle 2008, 2009). Finally, the infrastructure gap in LAC countries is exacerbated by poor project preparation in the public sector matching a weak private sector adversely affected by chronic shortages of human resources and limited access to technology.

Restrictions of investment capital have also contributed to the underdevelopment of small- and medium-size enterprises (SMEs) as providers of logistics services. Land transportation services, mostly trucking and logistics operators, have had limited expansion and remain relatively weak performers in the logistics chain, with room to improve and modernize the industry. Another limitation on the logistics performance of SMEs is their inability to exploit economies of scale and substantial institutional roadblocks. Finally, performance across countries has remained uneven, with limitations ranging from demand-related obstacles such as freight imbalances and seasonality to a lack of harmonization in the organization of the logistics supply chain across borders. In addition, there is also significant heterogeneity within countries, especially the geographically larger countries of the region that have the highest potential opportunities to exploit scale economies and increase agglomeration. As a consequence of these limitations, the logistics gap is widening, aggravated by weak performance in multiple components of the logistics chain, engendering greater heterogeneity across LAC countries.

In response to the limitations and weak performance of LAC countries as a whole, a rethinking of the current agenda to transform trade logistics requires actions at the national, subnational, and regional level. Specifically, it requires project and program coordination in the areas of transport infrastructure and related transport services, specialized logistic infrastructure, trade policies, and in sectors where agendas converge.

Improvements in trade logistics must focus on the provision of basic infrastructure, particularly in the road network, in order to expand coverage and maintain quality standards. Importantly, regulations that facilitate and encourage private-public partnerships, especially for large regional infrastructure projects such as ports and railroads, need to be improved. Well-functioning specialized logistic infrastructure is also needed to ease freight handling, streamline inspection processes, and provide value-added services in areas closer to ports, airports, and border crossings. Equally important is the establishment of clear guidelines to support logistics management development for SMEs, logistic operators, and intermediaries. At the same time, services delivered by the state, including customs and cross-border crossings and security provisions, need to be substantially improved. Additionally, efforts need to be formalized to implement institutional organizations to promote high quality logistics.

In the area of ICT, there is ample room to capture the benefits of improved routing, packing, and retrieval that could effectively reduce kilometers traveled per vehicle, contributing to reduced carbon dioxide emissions. There is also a transformation in the economic environment in which businesses work when these technologies are incorporated: job transformation (wholesalers, postal operators, and carriers/logisticians) and job creation, such as virtual links in the delivery chain, supply-demand interfacers, and suppliers of complete logistics solutions (EC 1998).

The agenda for physical integration, on the other hand, must facilitate the coordination and harmonization of standards across borders to further reap the benefits of economic agglomeration. Projects of greater potential impact must be given priority, while regional integration of infrastructure projects should be axis-based, with clear development criteria that equitably distribute the costs and benefits of integration among members. In order for this strategy to achieve its full potential impact, it must be accompanied by a significant allocation of resources.

Hence, the region must develop financial mechanisms to provide affordable financial resources for these projects, such as a common fund or earmarked resources for infrastructure integration. In this respect, the experience of the EU-27 is of particular importance: a cohesive policy for transport infrastructure was developed to allow countries to catch up to regional standards and funds were earmarked for integration projects.

Finally, in areas where agendas converge, transport and trade facilitation measures need to be deepened to allow for further coordination and gains from cooperation. Continued emphasis on key processes regarding the development and harmonization of border crossings and the regulation of diverse transport modalities is of particular importance. Furthermore, the agenda for the expansion of productive integration and intra-regional logistics services must support both national and subnational organizations in order to fully achieve the economies of agglomeration necessary to reap the most benefits from these costly reforms.

The European Union's Infrastructure Integration [ PDF 19.5KB | 1 page ]

Here the IDB can support the development of a cohesive regional political and economic architecture by helping to strengthen institutional capacity at the national and subnational levels. Furthermore, the IDB can add value as a knowledge bank of ideas, thereby facilitating the coordination of thematic agendas by calling on regional experts in various fields and disciplines. Private-sector reasoning should influence state-led integration. Deepening regional ties is important to the process, as are the costs of non-trade issues in regional development integration, such as transportation infrastructure. As such, there is huge potential for closing the gap between LAC regional trade and other regions worldwide by sharing experiences, drawing from state modernization and private-sector development initiatives, and developing comprehensive joint approaches which incorporate territorial and transport planning and spatial and scale economies.

The IDB is prepared to spearhead many of these initiatives as an efficient vehicle for policy, projects, and regional cooperation. Importantly, the IDB's agenda has been expanded to support the coordination of national initiatives while emphasizing the harmonization of cross-border interactions. This agenda places emphasis on provision of basic infrastructure, particularly road networks; improvements in services and regulations that facilitate PPPs, like ports and railroads; improved services delivered by the state, like customs management, border crossings, and security; support for logistic management development in SMEs, operators, and intermediaries; implementation of an institutional organization for high-quality logistics; integration of “axis-based” regional infrastructure development criteria, giving priority to projects of greater regional impact; development of financial mechanisms to increase investment in key areas; and commitment to an agenda for productive integration and logistics services, supporting national and subnational organizations. Overall, these initiatives will help the region better cope with a changing international environment and allow it to exploit the positive links between trade, integration, and economic growth.

Download this Paper [ PDF 546.2KB| 43 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.