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

11

Trade Costs: Landlocked Developing Countries and Foreign Direct Investment

United Nations New York

October 1, 2008

John S. WilsonThe World Bank

22

OverviewOverview

Why and How Trade Costs Matter

Landlocked Developing Countries• What the data show – Doing BusinessWhat the data show – Doing Business

Do Trade Costs and Regulation Affect FDI?Do Trade Costs and Regulation Affect FDI?

An Agenda AheadAn Agenda Ahead

33

Trade Costs and FacilitationTrade Costs and Facilitation No standard definitionNo standard definition

Narrow context:Narrow context:• Logistics of moving goods through ports or more Logistics of moving goods through ports or more

efficient custom rules.efficient custom rules.

Broader context:Broader context:• Environment in which trade transaction take Environment in which trade transaction take

place; transparency of regulation, harmonization place; transparency of regulation, harmonization of standards, and infrastructure.of standards, and infrastructure.

44

Trade Costs MatterTrade Costs Matter Distance and TimeDistance and Time

• Additional day of delay in shipping reduces trade Additional day of delay in shipping reduces trade

by 1 percent. Equivalent to 70 km.by 1 percent. Equivalent to 70 km.

Djankov, Freund and Pham (2006)Djankov, Freund and Pham (2006)

• Impact of distance on trade has increased over Impact of distance on trade has increased over

time for low income countries (total sample 138 time for low income countries (total sample 138

countries 1962-2006).countries 1962-2006).

Carrere, De Melo and Wilson (mimeo)Carrere, De Melo and Wilson (mimeo)

55

Regulation MattersRegulation Matters Transparency and regulationTransparency and regulation

• Regulatory convergence a greater payoff than reduction in Regulatory convergence a greater payoff than reduction in

tariffs and NTMs for developing countriestariffs and NTMs for developing countries

Hoeckman and Nicita (mimeo)Hoeckman and Nicita (mimeo)

• For Africa, EU regulation harmonized to ISO standards are For Africa, EU regulation harmonized to ISO standards are

less trade restrictive.less trade restrictive.

Czuabla, Shepherd, and Wilson (2007)Czuabla, Shepherd, and Wilson (2007)

66

Landlocked Countries Landlocked Countries PerformancePerformance

OECDOECDCoastal Coastal

DevelopingDeveloping

CountriesCountriesLLDC’sLLDC’s

LPI LPI

(Score)(Score)3.653.65 2.382.38 2.132.13

DB Time to DB Time to Export (days)Export (days) 10.710.7 23.623.6 48.248.2

DB Time to DB Time to Import (days)Import (days) 11.411.4 26.726.7 53.653.6

DB Import DB Import

(US$)(US$)1132.71132.7 1359.51359.5 3033.93033.9

DB ExportDB Export

(US$)(US$)1069.11069.1 1215.21215.2 2483.42483.4

Sources: Doing Business 2009; Logistics Perception Index 2007.

77

Average Time to ExportAverage Time to Export

29.7

33

34.7

48.2

0 10 20 30 40 50 60

Eastern Europe &Central Asia

South Asia

Sub-SaharanAfrica

LLDC's

Number of Days

Based on Doing Business 2009 data

88

Average Price of Crossing a Border Average Price of Crossing a Border

0

500

1000

1500

2000

2500

3000

3500

LLDC's Eastern Europe &Central Asia

South Asia Sub-Saharan Africa

Cost to Import (US$ per container) Cost to Export (US$ per container)

Source: Doing Business 2009

99

Doing Business RankingsDoing Business Rankings

Source: Doing Business in Landlocked Economies 2009

1010

What about Foreign Direct What about Foreign Direct Investment?Investment?

Do trade costs affect foreign investment? Do trade costs affect foreign investment?

Gravity model - explore impact of costs of Gravity model - explore impact of costs of exports (Doing Business) on FDI.exports (Doing Business) on FDI.

OECD data on FDI from 30 countries to OECD data on FDI from 30 countries to 174 host countries.174 host countries.

1111

Average Total FDI InflowsAverage Total FDI Inflows

02

46

8U

SD

(in

bill

ion

s)

2000 2001 2002 2003 2004 2005 2006

Non-LLDCLLDC Non-LLDCLLDC Non-LLDCLLDC Non-LLDCLLDC Non-LLDCLLDC Non-LLDCLLDC Non-LLDCLLDC

East Asia & PacificForeign Direct Investment

Source: Portugal-Perez and Wilson (2008) based on IMF data reported by World Development Indicators (World Bank)

02

46

US

D (

in b

illio

ns)

2000 2001 2002 2003 2004 2005 2006

Non-LLDCLLDC Non-LLDCLLDC Non-LLDCLLDC Non-LLDCLLDC Non-LLDCLLDC Non-LLDCLLDC Non-LLDCLLDC

Sub-Saharan Africa

Foreign Direct Investment

1212

High export costs = Lower FDIHigh export costs = Lower FDI5

10

15

20

log(F

DI

per

capita

-2006

)

0 1000 2000 3000 4000 5000Export Costs-DB 2007

Non-LLDC LLDC

FDI Levels (logarithmic scale) vs Export Costs

Source: Portugal-Perez and Wilson (2008) based on IMF data and Doing Business

1313

Lower Ranking = Lower GDPLower Ranking = Lower GDP

ARM AZE

BDI

BFA

BOLBTN

BWA

CAF

ETH

KAZ

KGZ LAOLSO

MDA

MKD

MLI

MNG

MWI NERNPL

PRY

RWA

SWZ

TCD

TJKUGA

UZB

ZMB

46

81

01

2lo

g(G

DP

pe

r ca

pita

20

06)

0 50 100 150 200DB-2008: Overall ranking

Non-LLDC LLDC

Source: Portugal-Perez and Wilson (2008) based on IMF data and Doing Business

1414

SummarySummary

Lowering trade costs key reform Lowering trade costs key reform

priority……but specific agendas differ priority……but specific agendas differ

by region and country.by region and country.

No reform agenda will succeed No reform agenda will succeed

without rule of law, stronger without rule of law, stronger

governance, and political will.governance, and political will.

1515

Summary cont.Summary cont.

Doing Business data show that trade costs Doing Business data show that trade costs are more highly correlated with FDI than are more highly correlated with FDI than other barriers.other barriers.

World Bank research ahead to extend World Bank research ahead to extend analysis.analysis.

World Bank trade agendaWorld Bank trade agenda• $1.57 billion lending FY07 (trade and $1.57 billion lending FY07 (trade and

integration)integration)

1616

A Focused Agenda…..A Focused Agenda…..

Lower trade costs and de-regulateLower trade costs and de-regulate• Within each country’s own ability to act.Within each country’s own ability to act.• Important to attracting investment.Important to attracting investment.

Shared agenda for regional reform to Shared agenda for regional reform to raise trade and income (transit and raise trade and income (transit and LLDC)LLDC)

Leverage “aid for trade facilitation.”Leverage “aid for trade facilitation.”

1717

Thank YouThank You

John S. WilsonJohn S. Wilson

Lead EconomistLead Economist

The World BankThe World Bank

[email protected]@worldbank.org

http://econ.worldbank.org/projects/trade_costs