NOTE NUMBER 335 75208 viewpoint PUBLIC POLICY FOR THE PRIVATE SECTOR FINANCIAL AND PRIVATE SECTOR DEVELOPMENT VICE PRESIDENCY DECEMBER 2012 Trade Logistics Reforms Uma Subramanian Linking Business to Global Markets This Note was written This N ote re vi e ws t he lit e r a t ur e o n t he e f f e c t s o f r e f o r m s as part of the Investment Climate Impact Project, imp roving trad e lo g is t ic s s y s t e m s a nd s e r v ic e s . T hr e e k e y i n s i g h t s a joint effort of the World eme rge . First, t r a d e lo g is t ic s r e f o r m s ha v e a no t a b le e f f e c t o n t h e Bank Group’s Investment ab ility of coun t r ie s t o e x p o r t a nd im p o r t c o s t - e f f e c t iv e ly a n d t o Climate Department, IFC’s Investment Climate b ecome ef f e ctiv e p la y e r s in c o m p e t it iv e g lo b a l a nd r e g io na l m a r k e t s . Business Line, and the Se cond , trad e f a c ilit a t io n e nha nc e s t he p r o d uc t iv it y o f f ir ms . A n d World Bank’s Development Research third , targeted r e f o r m s c a n e na b le f ir m s t o us e s c a r c e wo r k i n g c a p i t a l Group, in collaboration more ef f e ctive ly b y a llo wing le a ne r inv e nt o r ie s , lo we r ing t h e c a r r y i n g with IFC’s Development Impact Department, the charge s in trans it a nd s t o r a g e , a nd r e d uc ing p ilf e r a g e a nd d a m a g e . 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 Indicators and Analysis tant opportunities for developing countries developing countries. 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 U.K. Department for lean, rapid, and responsive supply chains. Firms at competitive prices. But it also depends on its THE WORLD BANK GROUP 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 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 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 study of 146 countries of reducing trade transactions time on export Freund and Rocha (2011) find that a one-day growth. They find that the effect varies across reduction in inland transport time leads to a 7 countries, depending on baseline performance percent increase in exports or, in other words, is in trade logistics. Their results show that reducing equivalent to a 1.5 percentage point reduction in the time to export by 1 percent could potentially all importing-country tariffs. This effect is greater increase trade by 0.64 percent on average for for goods that are time sensitive than for those Sub-Saharan African countries, by 0.61 percent Table Effect of trade logistics reform on trade, tariffs and prices, and income 1 Study Reform Effect Trade Subramanian, Anderson, Reduction of 1% in time to Potential increase in bilateral trade ranging and Lee 2012 export through targeted reforms from 0.64% for Sub-Saharan Africa to 0.18% for OECD countries, with increases for other regions falling in between Djankov, Freund, and Reduction in transit time resulting Increase in exports of 0.4% on average Pham 2010 in reduction of 1% in overall time to export Hausman, Lee, and Reduction of 1% in processing Increase in exports of 0.37% Subramanian 2012 time for exports Tariffs and prices Hummels and Schaur 2012 Reduction of 1 day in shipping time Equivalent to ad valorem tariff reduction of 0.6–2.3% Hummels 2007 Increase of 1 day in delivery time For time-sensitive products such as fruit and vegetables, equivalent to lowering price by 0.9% Freund and Rocha 2011 Reduction of 1 day in inland Equivalent to a reduction of 1.5 percentage transport time points in all importing-country tariffs Income APEC 2002 Reduction of 5% in trade costs Increase in GDP of 0.98% over 5 years Walkenhorst and Reduction of 1% in trade costs Increase in GDP of 0.27% for the Middle Yasui 2003 East and North Africa, 0.25% for non-OECD Asia Pacific, and 0.18% for Sub-Saharan Africa for South Asian countries, but by only 0.37 per- customs clearance time for apparel exports to cent for Latin American and Caribbean coun- the average customs clearance time in China tries. More generally, trade logistics reforms have would increase total factor productivity for the greater effects in the poorest countries. apparel industry by 5 percent. In both countries Improving trade logistics not only affects the effects are even more pronounced in interior international trade but also increases intra- locations. regional trade. Using panel data for 18 countries between 1988 and 1999, an APEC study (2004) Potential for lower inventory and other finds that simplifying customs procedures by 10 indirect costs 4 percent could increase imports within APEC by Inventory levels are often taken as indicators 0.5 percent. of sophistication in trade-related institutions and services. Efficient systems support “just in Potential for productivity gains time” production and delivery, allowing firms to Do firms that export have higher productivity streamline their input and output inventories. than firms that do not? A number of studies have Inventory levels may be related to the capacity examined this question (table 2). Mengistae and and quality of transport infrastructure (Shirley Pattillo (2004) find that manufacturing export and Winston 2004), but in developing economies firms in Ethiopia, Ghana, and Kenya have a total they are also related to the regulatory regime for factor productivity premium of 17 percent. Van trade (Guasch and Kogan 2001). Biesebroeck (2005) obtains similar results in a Preliminary field data from ongoing research study of nine Sub-Saharan African countries, by the author suggest that firms in developing finding that exporters are on average 28 per- economies, to offset uncertainties in the supply cent more productive than nonexporters and of imported raw material, hold four to five times have a higher rate of productivity growth. He as much inventory as those in OECD countries. In also shows that firms increase their productivity addition, these firms are forced to maintain high after they start exporting. A study by Bigsten and levels of finished goods inventories in warehouses others (2004), using panel data from four Sub- and in transit, waiting for clearance by technical Saharan African countries, suggests that firms control agencies and for transport. Given the learn by exporting, leading to productivity gains high cost of capital in most developing coun- of 6 percent. tries, these high inventory levels have a significant Using World Bank Enterprise Survey data, effect on the productivity, competitiveness, and Subramanian, Anderson, and Lee (2005) find cost of doing business for these firms. Effective that a one-day reduction in customs clearance regulation, simplified and harmonized proce- time for exports in China would result in an dures, and the development and deregulation increase in total factor productivity of 2 percent of associated markets could significantly reduce for the apparel and leather goods industry and inventory levels (and thus the cost of doing busi- more than 6 percent for the consumer goods ness), especially when accompanied by improve- industry. In Brazil they find that reducing the ments in infrastructure. Table Effect of trade and trade logistics reform on firm productivity 2 Study Finding Mengistae and Pattillo Exporting firms in 3 Sub-Saharan African countries have 17% total factor productivity 2004 premium. Van Biesebroeck 2005 Exporting firms in 9 Sub-Saharan African countries have 28% higher productivity than nonexporting firms. Bigsten and others 2004 Exporting firms in 4 Sub-Saharan African countries have 6% higher productivity than nonexporting firms. Subramanian, Anderson, One-day reduction in customs clearance time for exports in China leads to increase in and Lee 2005 total factor productivity of 2% for apparel and leather goods industry and more than 6% for consumer goods industry. Other indirect costs are incurred when deliv- Investigation.” The Review of Economics and Statistics ery times and reliability are uncompetitive, severely 84 (2): 342–52. affecting a country’s position in highly competi- APEC (Asia-Pacific Economic Cooperation). 2002. tive international markets that demand just-in-time The Benefits of Trade and Investment Liberalization and delivery. The value of products often declines with Facilitation. APEC Economic Committee. Singapore: time while in transit. For perishable products, spoil- APEC. age and waste increase with transit time. These costs ———. 2004. Trade Facilitation and Trade Liberalization: can also reflect lost opportunities, as when critical From Shanghai to Bogor. Singapore: APEC. 5 inputs cannot reach manufacturing plants in time Bigsten, Arne, Paul Collier, Stefan Dercon, Marcel or perishable commodities cannot reach markets Fafchamps, Bernard Gauthier, Jan Willem Gunning, in time—or when production plants must hold Abena Oduro, and others. 2004. “Do African Manu- higher-than-optimal levels of raw material invento- facturing Firms Learn from Exporting?” Journal of ries to cover for logistics delays. Reforms supporting Development Studies 40 (3): 115–41. agile, lean supply chains through seamless trade Clark, Ximena, David Dollar, and Alejandro Micco. facilitation systems and services would bring signifi- 2004. “Port Efficiency, Maritime Transport Costs, cant benefits to firms by allowing leaner inventories and Bilateral Trade.” Journal of Development Economics and reducing damage and waste. 75 (2): 417–50. De Groot, Henri, Gert-Jan Linders, Piet Rietveld, and Conclusion Uma Subramanian. 2004. “The Institutional Determi- The literature on the effect of reforms in trade nants of Bilateral Trade Patterns.” Kyklos 57: 103–24. logistics systems and services provides evidence Djankov, Simeon, Caroline Freund, and Cong S. Pham. that improving the policy, regulatory, and pro- 2010. “Trading on Time.” The Review of Economics and cedural environment for trade supports the Statistics 92 (1): 166–73. development and operation of lean, efficient Freund, Caroline, and Nadia Rocha. 2011. “What Con- supply chains, helps boost the competitiveness strains Africa’s Exports?” World Bank Economic Review of developing economies, and increases export 25 (3): 361–86. potential. To support the existing evidence in Guasch, Jose L., and Joseph Kogan. 2001. “Invento- the literature, selected in-depth country studies ries in Developing Countries: Levels and Deter- are needed to complement what is largely cross- minants—a Red Flag for Competitiveness and section analysis—studies that evaluate the effect Growth.” Policy Research Working Paper 2552, of trade logistics reforms over time. World Bank, Washington, DC. Hausman, Warren H., Hau L. Lee, and Uma Subrama- nian. 2012. “The Impact of Logistics Performance on Trade.” Production and Operations Management Note Journal. First published online January 18. DOI: Uma Subramanian (usubra12@gmail.com) was until 10.1111/j.1937-5956.2011.01312.x. recently a lead private sector development specialist Hoekman, Bernard, and Alessandro Nicita. 2008. and global product leader, trade logistics, in the World “Trade Policy, Trade Costs, and Developing Country Bank Group’s Investment Climate Department. The au- Trade.” Policy Research Working Paper 4797, World thor acknowledges with gratitude Kihoon Lee’s valuable Bank, Washington, DC. research support. This Note also benefited from com- Hummels, David. 2007. “Calculating Tariff Equivalents ments from William Anderson, Najy Benhassine, Paul for Time in Trade.” Nathan Associates for U.S. Brenton, Ana Margarida Fernandes, Graham Ludlow, Agency for International Development, Washington, Gerard McLinden, Marialisa Motta, Christine Zhenwei DC. Qiang, and Massimiliano Santini. Hummels, David, and Georg Schaur. 2012. “Time as a Trade Barrier.” NBER Working Paper 17758, Nation- References al Bureau of Economic Research, Cambridge, MA. Anderson, James E., and Douglas Marcouiller. 2002. Limão, Nuno, and Anthony J. Venables. 2001. “Infra- “Insecurity and the Pattern of Trade: An Empirical structure, Geographical Disadvantage, Transport TRADE LOGISTICS REFORMS LINKING BUSINESS TO GLOBAL MARKETS Costs, and Trade.” World Bank Economic Review 15 China and Brazil.” Policy Research Working Paper (3): 451–79. 3792, World Bank, Washington, DC. Mengistae, Taye, and Catherine Pattillo. 2004. “Export ———. 2012. “Less Time, More Trade: Results from an Orientation and Productivity in Sub-Saharan Af- Export Logistics Model.” Draft, Investment Climate rica.” IMF Staff Papers 51 (2). Department, World Bank Group, Washington, DC. Portugal-Perez, Alberto, and John S. Wilson. 2010. “Ex- Van Biesebroeck, Johannes. 2005. “Exporting Raises viewpoint port Performance and Trade Facilitation Reform: Productivity in Sub-Saharan African Manufactur- Hard and Soft Infrastructure.” Policy Research ing Plants.” Journal of International Economics 67 (2): is an open forum to Working Paper 5261, World Bank, Washington, DC. 373–91. encourage dissemination of Shirley, Chad, and Clifford Winston. 2004. “Firm Walkenhorst, Peter, and Tadashi Yasui. 2003. “Quanti- public policy innovations Inventory Behavior and the Returns from Highway tative Assessment of the Benefits of Trade Facilita- for private sector–led and Infrastructure Investments.” Journal of Urban Econom- tion.” OECD Working Paper 31, Organisation for market-based solutions for ics 55: 398–415. Economic Co-operation and Development, Paris. development. The views Subramanian, Uma. 2001. “Transport, Logistics, and World Bank. 2011. Doing Business 2012: Doing Business published are those of the Trade Facilitation in the South Asia Subregion.” In in a More Transparent World. Washington, DC: World authors and should not be Integration of Transport and Trade Facilitation: Selected Bank. attributed to the World Regional Case Studies, ed. T. R. Lakshmanan and oth- ———. 2012. “Africa Can Help Feed Africa: Removing Bank or any other affiliated ers. Directions in Development. Washington, DC: Barriers to Regional Trade in Food Staples.” Report organizations. Nor do any World Bank. 66500-AFR, World Bank, Washington, DC. of the conclusions represent Subramanian, Uma, William Anderson, and Kihoon official policy of the World Lee. 2005. “Measuring the Impact of the Investment Bank or of its Executive Climate on Total Factor Productivity: The Cases of Directors or the countries they represent. To order additional copies contact Naoki Ogiwara, managing editor, Room F 4P-256B, The World Bank, 1818 H Street, NW, Washington, DC 20433. Telephone: 001 202 473 1871 Email: nogiwara@worldbank.org Produced by Carol Siegel Printed on recycled paper This Note is available online: http://www.worldbank.org/fpd/publicpolicyjournal