Trade Costs: Landlocked Developing Countries and Foreign Direct Investment

1
Trade Costs Landlocked Developing Countries
and Foreign Direct Investment
John S. Wilson The World Bank
United Nations New York October 1, 2008
2
Overview

• Why and How Trade Costs Matter
• Landlocked Developing Countries
• What the data show Doing Business
• Do Trade Costs and Regulation Affect FDI?
• An Agenda Ahead

3
Trade Costs and Facilitation

• No standard definition
• Narrow context
• Logistics of moving goods through ports or more
  efficient custom rules.
• Broader context
• Environment in which trade transaction take
  place transparency of regulation, harmonization
  of standards, and infrastructure.

4
Trade Costs Matter

• Distance and Time
• Additional day of delay in shipping reduces trade
  by 1 percent. Equivalent to 70 km.
• Djankov, Freund and Pham (2006)
• Impact of distance on trade has increased over
  time for low income countries (total sample 138
  countries 1962-2006).
• Carrere, De Melo and Wilson (mimeo)

5
Regulation Matters

• Transparency and regulation
• Regulatory convergence a greater payoff than
  reduction in tariffs and NTMs for developing
  countries
• Hoeckman and Nicita (mimeo)
• For Africa, EU regulation harmonized to ISO
  standards are less trade restrictive.
• Czuabla, Shepherd, and Wilson (2007)

6
Landlocked Countries Performance
OECD Coastal Developing Countries LLDCs
LPI (Score) 3.65 2.38 2.13
DB Time to Export (days) 10.7 23.6 48.2
DB Time to Import (days) 11.4 26.7 53.6
DB Import (US) 1132.7 1359.5 3033.9
DB Export (US) 1069.1 1215.2 2483.4
Sources Doing Business 2009 Logistics
Perception Index 2007.
7
Average Time to Export
Based on Doing Business 2009 data
8
Average Price of Crossing a Border
Source Doing Business 2009
9
Doing Business Rankings
Source Doing Business in Landlocked Economies
2009
10
What about Foreign Direct Investment?

• Do trade costs affect foreign investment?
• Gravity model - explore impact of costs of
  exports (Doing Business) on FDI.
• OECD data on FDI from 30 countries to 174 host
  countries.

11
Average Total FDI Inflows
Source Portugal-Perez and Wilson (2008) based on
IMF data reported by World Development Indicators
(World Bank)
12
High export costs Lower FDI
FDI Levels (logarithmic scale) vs Export Costs
Source Portugal-Perez and Wilson (2008) based on
IMF data and Doing Business
13
Lower Ranking Lower GDP
Source Portugal-Perez and Wilson (2008) based on
IMF data and Doing Business
14
Summary

• Lowering trade costs key reform prioritybut
  specific agendas differ by region and country.
• No reform agenda will succeed without rule of
  law, stronger governance, and political will.

15
Summary cont.

• Doing Business data show that trade costs are
  more highly correlated with FDI than other
  barriers.
• World Bank research ahead to extend analysis.
• World Bank trade agenda
• 1.57 billion lending FY07 (trade and
  integration)

16
A Focused Agenda..

• Lower trade costs and de-regulate
• Within each countrys own ability to act.
• Important to attracting investment.
• Shared agenda for regional reform to raise trade
  and income (transit and LLDC)
• Leverage aid for trade facilitation.

17
Thank You

• John S. Wilson
• Lead Economist
• The World Bank
• jswilson_at_worldbank.org
• http//econ.worldbank.org/projects/trade_costs