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NOTE NUMBER 335 view PUBLIC POLICY FOR THE PRIVATE SECTOR Public Disclosure Authorized point Trade Logistics Reforms DECEMBER 2012 Uma Subramanian Linking Business to Global Markets This Note was written Public Disclosure Authorized This Note reviews the literature on the effects of reforms as part of the Investment improving trade logistics systems and services. Three key insights Climate Impact Project, a joint effort of the World emerge. First, trade logistics reforms have a notable effect on the Bank Group’s Investment ability of countries to export and import cost-effectively and to Climate Department, IFC’s Investment Climate become effective players in competitive global and regional markets. Business Line, and the Second, trade facilitation enhances the productivity of firms. And World Bank’s Development Research third, targeted reforms can enable firms to use scarce working capital Group, in collaboration more effectively by allowing leaner inventories, lowering the carrying with IFC’s Development charges in transit and storage, and reducing pilferage and damage. Impact Department, the Public Disclosure Authorized Development Impact Trade drives economic growth. And advances that look at effects of reforms over time. But Evaluation Initiative, the in transport as well as information and com- the existing literature nevertheless shows that FPD Chief Economist’s munication technology have opened up impor- trade logistics reforms offer notable benefits for Office, and the Global tant opportunities for developing countries developing countries. Indicators and Analysis Unit. The project is to participate in global and regional markets, funded by the U.S. Agency offering value added goods and services and Trade challenges in developing countries for International creating new jobs along value chains. But sur- A country’s export performance depends in part Development, the vival in a competitive global economy requires on its ability to produce goods of high quality FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY U.K. Department for lean, rapid, and responsive supply chains. Firms at competitive prices. But it also depends on its International increasingly use global sourcing strategies that ability to deliver these goods into complex global Development, and the demand speedy, flexible, and cost-effective solu- supply chains in a timely and cost-effective fash- World Bank Group’s tions. This demand has motivated governments ion. In Chad it takes firms 75 days on average to Investment Climate to improve trade logistics services and provide export a 20-foot container through the closest Department. simple and efficient import and export policies port; in Bangladesh it takes 26 days (World Bank Public Disclosure Authorized and procedures—with the aim of expanding 2011). Firms that take this long to deliver goods access to world markets. to markets cannot be internationally competi- The literature examining the effect of trade tive. Similarly, for firms in Côte d’Ivoire the cost facilitation is relatively new. Many of the stud- of all export-related transactions for a 20-foot ies rely on cross-country analysis, and it would container, including inland transport from the THE WORLD BANK GROUP be useful to develop in-depth country studies factory gate to ocean vessel, amounts to almost TRADE LOGISTICS REFORMS LINKING BUSINESS TO GLOBAL MARKETS US$2,000 on average. For firms in El Salvador increase in a country’s index of transparency the cost is less than US$900. For those in OECD and impartiality (a composite index defined by countries it is much lower—in Denmark a little the authors) leads to a 5 percent increase in its over US$700, for example, and in Finland only import volume, other things equal. De Groot US$540 (World Bank 2011). and others (2004) examine institutional qual- On the other side of the coin, many developing ity as reflected by such dimensions as effective- countries, particularly in Africa and South Asia, ness of governance, regulatory quality, voice depend heavily on imports. For African coun- and accountability, rule of law, and control of tries, agricultural and staple food imports are corruption. They find a positive and significant 2 dominant. There is much potential for imports link between improved regulatory quality and from surplus African countries to complement increase in bilateral trade. and perhaps replace international imports. But Hoekman and Nicita (2008) find that tariffs a range of nontariff barriers impose significant and nontariff measures remain a significant constraints on seamless intraregional movement source of trade restrictiveness for developing of staples (World Bank 2012). These constraints economies despite preferential access programs. include high transport costs due to fragmented Their research shows that the value of trade pref- transport and logistics services, transport cartels, erences as reflected by a measure of the relative small markets that cannot capture economies preference margin is very low for most country of scale, and road blocks along major intra- pairs. The authors conclude that measures to regional corridors. They also include restric- improve logistics performance and facilitate trade tive rules of origin, poor and uncoordinated are likely to have the greatest positive effects in valuation regimes, lack of clarity on harmonized expanding developing country trade, increasing cross-border standards on key products such as the trade impacts of lowering remaining border fertilizer and seeds, and excessive technical con- barriers by a factor of two or more. trols such as phytosanitary inspections and trade High transactions costs related to trade are licenses and permits. driven by how public policies, regulations, and procedures interact with import and export Effect of better institutional quality supply chains. Indeed, “software” issues—such A fairly well-established body of literature has as processing trade-related documents and ful- found a clear link between the quality of infra- filling clearance requirements by customs and structure and transport costs in international other technical control agencies—account for trade (Limão and Venables 2001; Clark, Dollar, more than 50–60 percent of the total time to and Micco 2004). But inefficient ports and poor export and import in many countries around the transport and logistics services are not the only world. Port and terminal handling and inland impediments for exporting and importing firms transport account for about 40 percent or less in developing countries. These firms also face (World Bank 2011). policy and institutional constraints in the form While infrastructure investments are impor- of complex laws, burdensome regulations, inad- tant for export-led economic growth, reforms of equate enforcement of contracts, poor defini- the legal, regulatory, and (more broadly) insti- tion and enforcement of rules of engagement, tutional framework governing trade facilitation onerous documentation and other procedures clearly are important complements and could causing delays at customs and border crossings, provide significant support to trade competi- pilferage in transit, and highly restrictive pro- tiveness. Portugal-Perez and Wilson (2010) find tocols on movement of cargo (Subramanian that while investments in physical infrastructure 2001). and regulatory reform to improve the business A few researchers have studied the effects environment both enhance trade performance of institutional quality on trade. Anderson and for developing economies, the marginal effect Marcouiller (2002) find that higher transactions of infrastructure investments on exports appears costs associated with poorly enforced commercial to decline with per capita income. But while contracts and lack of transparency and impartial- policy and regulatory reforms are relatively cost- ity in government policies significantly impede effective compared with infrastructure invest- international trade. They find that a 10 percent ments, “software” reforms can sometimes be hard to implement—especially if they involve bilateral that are not. Along the same lines, Hummels or multilateral decision making, as reforms at the (2007) finds that one extra day in transit for time- border often do. sensitive products such as fruit and vegetables is equivalent to lowering their price by 0.9 percent. Effect of time and cost reductions Hummels and Schaur (2012) show that one day Simplifying and harmonizing laws and regula- saved in shipping time is equivalent to a 0.6–2.3 tions, rationalizing clearance and inspection percent reduction in the ad valorem tariff for regimes through the adoption of risk-based manufactured goods. They also find that long approaches, reducing administrative barriers, transit times reduce the probability that a country making broader use of information and com- will export. munication technology to support transparency Hausman, Lee, and Subramanian (2012) as and fewer human interactions—all help enhance well as Djankov, Freund, and Pham (2010) find, the ability of developing economies to trade by in two separate studies, that a 1 percent reduction reducing the time and cost to do so. Several stud- in the time to export increases exports by roughly ies have examined the effect of reducing the time 0.4 percent. Using a multinomial probit model and cost of trade transactions in promoting trade on a cross-section of 98 countries, Subramanian, growth (table 1). Anderson, and Lee (2012) estimate the effect In a cross-country