Trade Development Briefing Note Issue 2, January 2010 59982 Lao PDR trade facilitation performance An update from the 2010 Logistics Performance Index Key messages Measures of the quality of trade and transport-related infrastructure and New data from the World Bank`s Logistics Performance Index suggests perceptions of the competence and quality of logistics services both saw that the Lao PDR has made modest improvements in connectively to declines during the period 2007 to 2009 (infrastructure falling from 2.00 international markets, particularly in measures of the frequency of which to 1.95, and logistics competence falling from 2.29 to 2.14). This under- international shipments arrive on schedule and the ability of shippers to lines the continuing importance of upgrading facilities and building ca- track and trade consignments. However, performance is still relatively pacity among trade and transport service providers. poor in measures of the quality of trade-related infrastructure, the effi- ciency of border processes and in the quality of logistics services avail- able in country. More importantly, while the Lao PDR compares favora- bly with other landlocked low-income countries, the country lags behind regional competitors. Continued reforms and investments will be needed to strengthen trade facilitation performance and offset the trade- related disadvantages associated with being landlocked. Methodology The Logistics Performance Index (LPI) is a benchmarking tool that pro- vides a means of comparing the overall logistics environment across countries. It is constructed based on a survey of freight forwarders and express carriers on the ground worldwide, providing feedback on the logistics friendliness of the countries in which they operate and those with which they trade. These operators handle the movement of goods across borders, coping with operations from factory to warehouse to port, from port to overland transit, and through one or more borders, to the destination with each link testing a country`s logistics infrastructure The LPI is constructed as a weighted average of scores on numerical assessments of performance in six dimensions of logistics performance that best summarize the current overall logistics environment. These six dimensions cover: 1. Customs--efficiency of the customs clearance process assessed by scoring from very low (1) to very high (5); 2. Infrastructure--quality of trade and transport-related infrastructure rated from very low (1) to very high (5); 3. International shipments--ease of arranging competitively priced shipments marked from very difficult (1) to very easy (5); 4. Logistics competence--competence and quality of logistics ser- vices scored from very low (1) to very high (5); 5. Tracking and tracing--ability to track and trace consignments scored from very low (1) to very high (5), and; 6. Timeliness--frequency with which shipments reach the consignee within the scheduled or expected time rated from hardly ever (1) to nearly always (5). The LPI is therefore created to help countries identify the challenges and opportunities they face in their performance on trade logistics and what they can do to improve. The LPI was first prepared by the World Bank in 2007, and new data for 2009 has just been released. Lao progress since 2007 The overall logistics performance of the Lao PDR, as measured by the 2009 LPI, has seen a modest improvement compared to in 2007 (see Figure 1). The overall performance indicator has improved from 2.25 to 2.45, on a scale of 1 to 5. Improvements have been seen in the ease with which competitively priced international shipments can be arranged (up from 2.40 to 2.70), on the ability to track and trace consignments (up from 1.89 to 2.45), and on the frequency with which shipments reach the consignee within the schedule or expected time (up from 2.83 to 3.23). Source: World Bank 2009 Such improvements may well be accounted for by the increased level of openness in the Lao PDR as the country integrates more closely with Comparing with other countries in the region the regional economy and into cross-border supply chains. Comparisons with regional benchmark countries show mixed results, with the Lao PDR (2.46 overall on the LPI) well behind Thailand (3.29) A more modest improvement was recorded for measures of the effi- and Vietnam (2.96) but performing slightly better than Cambodia (2.37) ciency of the customs and border clearance processes (up from 2.08 to (see Figure 2). Lao PDR also compares favorably with the average for 2.17). Greater improvements in area are likely to be seen as the ASY- landlocked low-income countries. Compared to this grouping, the Lao CUDA system is installed into Lao border posts. A Time Release Survey PDR is better than average on the measures of the efficiency of cus- currently being undertaken by the Lao Customs Department and the toms, international shipments and timeliness, and below average on World Bank will reveal more detailed insights on the efficiency of border measures of infrastructure, logistics competence and (just) tracking and processes. tracing. Table 1: LPI scores for Lao PDR and comparator countries, 2007 and 2009 port costs of a country`s foreign trade by around 50 percent, and re- duces trade volumes by as much as 60 percent. Data collected in 2008 by the World Bank for the Trade and Transit Facilitation for Landlocked Developing Countries study compares the performance of ten transit corridors that link landlocked developing countries to the sea. The results for a twenty-foot container (TEU) using the ten landlocked corridors and their coastal comparators are provided in Table 2. The average cost of shipping a container from Vientiane to Los Angeles is US$ 4,152, compared to just US$ 2,857 for Bangkok to Los Angeles ­ a landlocked premium or cost penalty of 45 percent. This is obviously a challenging disadvantage to offset, although 45 percent is actually slightly better than the LLDC average of a 53 percent cost penalty. Laos performs worse on the time penalty associated with being landlocked. Shipping a container from Vientiane to Los Angeles takes an average of 78.5 days, almost double the time taken to ship from Thailand. This 97 percent time penalty is well above the LLDC Source: LPI average of 32 percent. Combined with the findings from the LPI, this suggests that while the time taken to ship goods into and out of Laos Figure 3 shows a plot of country scores under the LPI against GDP per may be long, the time taken is reasonably consistent. capita for all low-income countries. Lao PDR is located just above the trend line, an encouraging achievement for a landlocked country. In Conclusions contrast Cambodia underperforms against the low income country It is widely recognized that logistics have a major impact on economic group, while Vietnam performs well above the trend (in fact Vietnam`s activity. World Bank estimates suggest that global logistics costs add very strong LPI score places it among upper-middle income countries). up to over 11 percent of global GDP, or some US$ 5 trillion. This en- compasses an array of actions, from transportation, consolidation of cargo, warehousing and border clearance to in-country distribution and payment services. These processes involve a variety of public and private sector agents, and the efficiency and consistency with which the logistics and trade facilitation system in a country functions has a sig- nificant effect on international trade. Research suggests that each addi- tional time delay that occurs within a logistics supply chain reduces trade by one percent, or has the equivalent effect of distancing a coun- try on average by an additional 70km from trading partners. Clearly, while the Lao PDR is moving in the right direction in terms of trade reforms and is performing well compared to other landlocked countries at a similar level of development, much more still needs to ensure that the Lao private sector is able to compete in export markets with re- gional competitors. References Collier, Paul (2007) Africa's Economic Growth: Opportunities and Con- straints. African Development Review Vol. 19 No. 1. African Development Bank, Tunis. Source: LPI and World Development Indicators Djankov, Simeon, Caroline Freund and Cong S. Pham (2008) Trading on Time`, World Bank Policy Research Working Paper No.3909, Washington, Comparing corridors for landlocked countries DC: The World Bank. Research suggests that there are clear economic consequences asso- ciated with being landlocked. Econometric studies comparing the Limão, Nuno and Anthony J. Venables (2001) Infrastructure, Geographical growth experience of large numbers of countries, over several decades Disadvantage, Transport Costs, and Trade. The World Bank Economic Review Vol 15 No. 3. Washington, DC: The World Bank. showed that being landlocked had resulted in significantly lower eco- nomic growth. Analysis of data for 92 low and middle-income countries World Bank (2008) Trade and Transit Facilitation for Landlocked Developing over the period 1980-96 showed that landlocked economies grew more Countries, Washington, DC: The World Bank. slowly than coastal countries, by around 1.5 percentage points per World Bank (2010) Connecting to Compete 2010: Trade Logistics in the year. More recent research covering a higher number of countries and Global Economy ­ The Logistics Performance Index and its Indicators, over the full period from 1960 to 2000, distinguishes between countries Washington, DC: The World Bank. that are rich in natural resources from those that are not. It finds that Logistics Performance Index website: http://www.worldbank.org/lpi resource-scarce landlocked countries outside of Africa averaged 1.5- 2.0 percentage points per year slower growth in income per head than coastal countries. Data on developing country international trade flows and transport costs also shows that being landlocked raises the trans- Table 2: Comparison of transport costs (in US$) and time per export container, selected landlocked and coastal comparator countries Source: World Bank 2008 For further information, please contact: World Bank Office, Vientiane Produced with resources from the Trade Development Facility Poverty Reduction and Economic Management Multi Donor Trust Fund, financed by the European Commis- Patou Xay, Nehru Road sion and the Government of Australia, and administered by the Vientiane, Lao PDR World Bank. Information contained in this briefing note reflects the t: +856 21 414209 views of the authors, and not necessarily those of the f: +856 21 414210 Visit us at http://www.worldbank.org/la World Bank Group. e: laoinfo@worldbank.org