landlockedness, infrastructure and trade new estimates for central asian countries

2007·1.7 MB·English

by  Christopher Grigoriou

WPS4335
Policy Research Working Paper 4335
Landlockedness, Infrastructure andTrade:
NewEstimates for CentralAsian Countries
ChristopherGrigoriou
TheWorldBank
DevelopmentResearchGroup
TradeTeam
August2007
Copyrlghledmalsnal
PolicyResearchWorkingPaper4335
Abstract
Thispaperassessestheimpactofinternalinfrastructure adualpolicyagenda.First,transitcorridorsareregional
andlandlockednessonCentralAsiantradeusingapanel publicgoodsandshouldbemanagedassuchthrough
gravityequationestimatedonalargesampleofcountries internationalcooperation.InternationalFinancial
(167countriesover1992-2004).Thepanelstructureof Institutionscan-anddo-playakeyroleinthisregard
thedatasetmakesitpossibletocontrolforcountry-pair throughassistance,coordinationandpolicydialogue.
specificeffects(asopposedtotheusualimporterand Second,theCentralAsiancountriesshouldactivelyseek
exportereffects)thatwouldotherwisebecapturedbythe diversificationoftheirtransitcorridorstopreventthe
coefficientsoftime-invariantvariablessuchasdistanceor creationormaintenanceofmonopolypositionsintransit
landlockness.Ourfindingshighlighttheneedtopursue andbottleneckpointssuchastrans-shipmentplatforms.
— —
Thispaper aproductoftheTradeTeam,DevelopmentResearchGroup ispartofabroaderprojectontradefacilitation
anddevelopment,supportedbyaTrustFundoftheU.K.DepartmentforInternationalDevelopment(http://econ.
worldbank.org/projects/trade_costs).PolicyResearchWorkingPapersarealsopostedonthewebathttp://econ.worldbank.
[email protected].
ThePolicyResearchWorkingPaperSeriesdissefninatesthefindingsofworkinprogresstoencouragetheexchangeofiideasaboutdevelopment
issues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifithepresentationsarelessthanfiullypolished.Thepaperscarrythe
namesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythose
oftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankand
itsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent.
ProducedbytheResearchSupportTeam
Landlockedness,InfrastructureandTrade:
NewEstimatesforCentralAsianCountries
ChristopherGrigoriou*
CREA Institute, Department of Econometrics and Economy Policy, Lausanne University,
[email protected].
Thefindings,interpretationsandconclusionsexpressedinthispaperareentirelythoseoftheauthors.
TheydonotnecessarilyrepresenttheviewoftheWorldBank,itsExecutiveDirectors,orthecountries
theyrepresent.
SpecialthanksareduetoCelineCarrereandOlivierCadotforhelpfulsupportandcomments.
Thisworkispartofabroaderprojectontradefacilitationanddevelopmentsupportedthrougha
TrustFundoftheU.K.DepartmentforInternationalDevelopment
(http://econ.worldbank.org/projects/trade_costs).
1.Introduction
TheSovietUnion'scollapseinthe1990swasexpectedtoleadtoamajorreorientationofthe
formerbloc'strade,giventhatpolitically-determinedtradelinksundercentralplanninghad
given riseto substantialover-tradingbetweenformerSoviet Union states. Forinstance,
FidrmucandFidrmuc(2003)estimatedthatformerSovietUnioncountriestraded43times
more between them than predicted by GDP and distance. Conversely, Hamilton and
Winters(1992)andBaldwin(1994)calculatedthatpotentialtradebetweenformerSoviet
UnioncountriesandtheEUwasmorethanfourtimestheactualvolume.However,bythe
late1990s,iftradewiththeSovietUnionhadindeedshrunk,reorientationwaslimitedas
tradewithotherregionshadfailedtotakeoff.By1998,forinstance,tradebetweenRussia
and former Soviet Union countries, although reduced, was still 30 times greater than
'normal'(FidrmucandFidrmuc2003).
DesigningpoliciestoassisttheCentralAsianCountries(CACs)^toachievethereorientation
oftheirforeigntradeandintegrateintheglobaleconomyrequiresanunderstandingofthe
natureoftheirhandicapsthatgoesbeyondthemechanicaleffectoflandlockedness.Whatis
neededisanunderstandingof(i)howtheeffectoflandlockednessinteractswiththatof
poor infrastructure in the CACs and in neighboring (transit) countries; and (ii) what
practicalpolicystepscanhelpmitigatingtheeffectoflandlockednessontrade.
TheliteraturesofarexplainshysteresisinformerSovietUniontradebyremotenessand
landlockedness^ (Kaminski,WangandWinters, 1996; Djankovand Freund, 2002; Grafe,
RaiserandSakatsume,2005),pooraccesstomarketsandincompletereforms(Havrylishin
andAl-Atrash,1998),weakinstitutions (Babetskaia-KukharchukandMaurel,2004),poor
productquality(e.g. Bevanetal.,2001), andhysteresisin consumption,productionand
businessnetworks(DjankovandFreund,2002).
BeyondCentralAsia,avoluminousgravity-basedliteraturehasalsoprovidedestimates,
oftenincidental,oftheimpactoflandlockednessontrade.Typically,thesestudiesincluded
adummyvariableequaltooneforlandlockedcountries.Forinstance,Carrere(2006)found
'Throughoutthispaper,byCentralAsianRepublics,wemeanKazakhstan,theKyrgyzRepublic,
Tajikistan,Turkmenistan,andUzbekistan.
2OnlyKazakhstanandTurkmenistanhaveaccesstotheCaspianSea,itselfalandlockedseabordered
onlybyRussia, Azerbaijanand Iran, while Uzbekistanis twice landlocked, i.e. surrounded by
countriesthatarethemselveslandlocked.
2
that, onthebasis ofapanelgravitymodel,ceterisparibusalandlockedcountrytraded
about28% lessthanacoastalone. Estimatesofsimilarmagnitudeswerefoundinother
studies.Clearly,theseestimatescouldexplainonlyasmallpartoftheCACs'under-trading
withtherestoftheworld.Indeed,fewofthosepapersfocusedexplicitlyontheimpactof
landlockedness ontrade. Onenotableexceptionwas Raballand(2003)whoanalyzedthe
effectoflandlockednessontradeinthecaseofCentralAsiancountries.Usingarestricted
sampleof46CIScountries,18ofwhichlandlocked,overaperiodof5years(1995-1999),he
found landlockedness to reduce trade by more than 80%. This very large impact,
substantiallyoutofstepwithusualestimates,wasatleastpartlyduetothefactthathis
landlockednessvariablewasequaltooneonlyforbilateraltradebetweentwolandlocked
countries,whilethelandlockedness variablein otherstudiesusuallymarksthebilateral
tradeoflandlockedcountrieswithalltheirpartners,landlockedornot.
Dummyvariablesinagravityequationareblackboxesthatdonottellusmuchabouthow
landlockednessaffectstrade.Alimitednumberofstudieshaveshedlightonthechannels
throughwhichitsimpactisfelt.InhisstudyofCentralAsiantrade,Raballandintroduced
twoothercomponentsoflandlockedness—shortestdistancetoamajorportfacilityand
numberofborders crossedintransit, andfoundthemtohavesignificanteffects. Using
CIF/FOBdatafromtheIMFfor97developingcountries,17ofwhichlandlocked,Radelet
and Sachs (1999) estimated that transport and insurance costs were twice as high for
landlockedcountriesasforcoastalcountries.Theyconcludedthat"geographicisolationand
higher shippingcosts may makeitmuch more difficult ifnotimpossibleforrelatively
isolateddevelopingcountriestosucceedinpromotingmanufacturedexports".Limaoand
Venables(2001)foundalargeeffectofinfrastructurequalityontradecosts,inparticularfor
landlockedcountries,onthebasisofacrosssectionofcountrieswithcontrolsforthequality
of transit-country infrastructure. Poor infrastructure accounted for 40% of predicted
transportcostsforcoastalcountriesandupto60%forlandlockedcountries.Thehighimpact
ofremotenessandinfrastructureontradecostswasalsoevidencedbyBrunetal. (2005).
UsingIMFestimationsoffreightpaymentsasapercentageofimports.Stone(2001)founda
comparabletransportcostburden.Thetransportcostswerelowerintransitstatesthanin
landlocked countries in 75% of the cases, from the 64 possible comparisons between
landlockedcountriesandtransitcountries.
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Copyrlghledmalerial
Inthispaper,werevisittheevidenceusingalargepanel ofbilateraltradeflowsbetween
167 countries over 13 years spanning 1992-2004. Particular attention is given to the
econometric specification of the gravity model in order to eliminate sources of biases
commoninconventionalgravitymodels.Inparticular,wetakeadvantageofthesample's
panelstructureto includecountry-pairspecificeffectsinsteadoftheusualexporterand
importer effects (makingthe identification oftime-invariant country characteristics like
landlockedness possible) and treat carefully the potential endogeneity of some of the
explanatoryvariables. Usingthiscarefulspecification,weassesstheimpact ofdomestic
infrastructureandlandlockednessonCentralAsiantradeandprovideadecompositionof
landlockness'impactontransportcostsintoseveralcomponents,suchasoverlanddistance
toportortransit-countryinfrastructure.
OurempiricalresultsshowthatanimprovementintheowninfrastructureofCentralAsian
countriesfromthelevelofthemedianCentralAsiancountrytothatofthetop25*percentile
amongotherlandlockedcountrieswouldraiseexports(imports)byamodest6.5%(8.6%).3
Animprovementininfrastructurequalitytothelevelofthemediancoastalcountrywould
raise exports (imports) by 14.5% (19.6%). Thus, the impact of domestic infrastructure
appearslimited.*Bycontrast,animprovementintransit-countryinfrastructuretothelevel
ofthebest25''^percentileamongstotherlandlockedcountrieswouldraisetherepresentative
CAC'sexportsby awhopping52%. Otherdimensions oflandlockedness arealso great
impedimentstothetradeofCentralAsiancountries.Hence,diminishingtheextraoverland
costs(proxiedbythedistancetothenearestport)orenhancingtheabihtyofalandlocked
countrytonegotiateseaaccesscomparedtootherslandlockedcountrieswouldsignificantly
increaseCentralAsiantrade,"transitmonopolies"(singletransitcorridors)reducingtrade
significantly.
Althoughtheseestimatesaresubjecttotheusualcaveats,theirpolicymessageisclear.First,
transitinfrastructureisaregionalpublicgoodandshouldbemanagedassuch.Facilitating
regionalcooperationbetweenlandlockedandtransitcountriesfortheupgradingoftransit
infrastructureshouldthusremainaclearpolicypriorityfortheIFIs.Second,monopoliesin
transit corridors are costly. Short of an often doomed quest for transit corridor
^MaintainingallothervariablesattheleveloftherepresentativeCentralAsiancountry(median
value).
Andnotspecifictolandlockedcountriesastheassociatedcoefficientisthesameforallcountriesin
thesample.
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diversification (in a region where many potential routes to seashores are marred by
instabilityandconflict)theIFIs'recentemphasisonimprovingthebusinessenvironmentfor
transitservicesisvindicated,asapolicypriority,byourestimates.
Thepaperisorganizedasfollows.Section2presentssomestylizedfactsoninfrastructure
andgeographicaldisadvantagesofCentralAsia.Section3developstheassessmentmethod
oftheimpactofinfrastructureandlandlockednessontheCentralAsiantrade.Section4
detailstheresults.Section5providessomeconcludingremarksandsuggestssomeinduced
policyrecommendations.
2.StylizedfactsoninfrastructureandGeographicaldisadvantagesofCentral
Asia
High transportcosts arecertainly oneofthemainimpedimentstothereorientation of
Central Asian trade. The distance of Central Asian countries from the main economic
marketsisofcourseonlypartofthestorys.Thedensityandqualityofinternalinfrastructure
arealsodeterminingfactorsofCentralAsiantradecosts,thoughperhapsmoreimportantin
termsoftradepolicy.LimaoandVenables(2001)emphasizedthatdistanceexplainsonly
10% ofchangesintransportcosts.Poorroadinfrastructurerepresents40% ofthetransport
costspredictedforcoastalcountriesand60%forlandlockedcountries.Weshallshowthat
thisisparticularlyrelevantforCentralAsiancountries.
However,distanceandinfrastructurealonedonotexplainwhyCentralAsiancountriesare
atadisadvantageevencomparedtocountrieswithsimilarinfrastructureendowmentsor
whicharesimilarlyremotebutwhichhaveseaaccess.Oncelowincomes,apoorinternal
infrastructure network, distance and remoteness are controlled for statistically,
landlockednessstillhasanegativeandhighlysignificantimpactontrade(seeLimaoand
Venables 2001, Raballand 2003 or Carrere 2006). There are many reasons for this. For
instance,overlanddistancesaremorepenalizingthanseadistancesbecauseoftheirhigher
costspermile.Moreover,landlockedcountriesaredependentonsovereigntransitcountries
fortheirtrade,adependencythatmayonlyservetocompoundexistingproblems.
^SeeFigure1inAppendixAl foranillustrationofthemainroutecorridorsand distancesfor
internationalfreightmovementstoandfromthemaintradecentersoftheregion.ThefiveCentral
Asiancountriesareclearlyremotefromthemainglobalmarkets.
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WepresentdirectestimatesoftransportcostsforCentralAsiainSection2.1.. Theinternal
infrastructureofCentralAsiancountriesisanalyzedinSection2.2.,whilethespecificcosts
oflandlockednessarediscussedinSection2.3.
2.1 DirectestimatesofCentralAsiantransportcosts
Directestimates oftransport costs havebeen gatheredfroma survey oftransportfirm
managersalongvariousrouteslinkingEuropeandCentralAsia(seeRaballandetal.,2005).
Theyshowthatthecostoftransportinga40'containerbyroadrisesbyandlargelinearly
withthedistance;aslightlyhigherderivativewasrecordedfortheCentralEuropeanlegof
the journey (between Warsaw and Moscow). However, the cost of transporting a 20'
containerbyrailriseslessthanproportionatelywiththedistanceaftertheMoscowleg.
AlthoughRaballandetal.donotofferanyreasonswhythisisthecase,itislikelythatthese
costdifferencesreflectthepoliticallymotivatedsubsidizationoffreightratesintheformer
C1S.6
The same picture emerges for transport times. Unlike costs, time rises more than
proportionatelywithdistanceaftertheMoscowleg,whichreflectsmoredifficultconditions
forboth rail and road cargo. Similar observationshave beenmadeforthetrade route
betweentheUSandCentralAsia.''Asidefromachangeintransportcostsandtimeper
kilometer,itisworthnotingthatlongdistancesproduceextremelyhightransportcosts
(USD6,000fora40'containerfromParistoTashkent,aprohibitivelevelformosttypesof
cargo).
2.2Internalinfrastructure:acommoncomponentoftransportcostsacrossallcountries
The relation between infrastructure and trade are supported by both theoretical (e.g.
Bougheas, Demetriades and Morgenroth, 1999) and empirical evidence (see Limao and
Venables, 2001). Limao andVenables (2001),usingacombination ofshipping dataand
*Itshouldbenoted,however,thatfreightratesonroutesbetweenMoscowandCentralAsiancapitals
aredifferentiatedintermsofcargo,withlowratesapplyingtoprimaryproductshipments(e.g.
cottonfromUzbekistan)fromCentralAsiatoRussia.WearegratefultoEskenderTrushinfromthe
TashkentBureauoftheWorldBankforpointingthisout.
^Forinstance,Stone(2001)notesthatfreightratespermilearetwiceashighforacontainershipped
toBishkek(Kyrgyzstan)thanforoneshippedtoAnkara.
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CIF/FOBratios,haveshownthatadeteriorationintheinfrastructurefromthemediantothe
25*percentileraisedtransportcostsby12percentagepointsandreducedtradevolumesby
28percent.TheissueofinadequateinfrastructureisofparticularrelevanceforCentralAsia.
Density
EstacheandGoicoechea(2005)haveshownthatCentralAsiahaslowlevelsoftransportand
communications'infrastructure.Forinstance,railwaydensityisonaverage5.4rail-kmper
1,000km^,i.e.one-thirdoftheaveragerailwaydensityoflow-andmiddle-incomecountries.
Thisisaparticularcauseforconcerngiventhatapproximately90%oftotalfreighttransport
inCentralAsiancountriesduring2000wasbyrail(seeRaballandetal.2005).Itistherefore
fairtosaythatlowinfrastructurelevelsarelikelytoaffectCentralAsiantrade,andthatthe
lackofinvestmentinexistinginfrastructureincreasestransportcosts.
Moreover,itcanbeshown (seeAppendix2)thatevenaftercontrollingforlowincome
levels,thedensityofinfrastructureinCentralAsiaremainsseverelylacking.
Maintenanceandservices
Lownetworkdensityisonlypartoftheproblem,whichiscompoundedfurtherbythepoor
quality of the transport infrastructure. The Asian Bank of Development Bank (2006)
documentedatrendofdeterioratingmaterialandinfrastructure,primarilyastheresultof
inadequatemaintenance(notablyforrailwayinfrastructure).AccordingtoPomfret(2005),
the insufficient funding earmarked for infrastructure maintenance is a phenomenon
commontoallformerSovietcountries,wherenationalnetworksoftentakeprecedenceover
regionalnetworks.Insomeinstances,governmentsevenoptedtosetupalternativeroadsor
railwaylinestoavoidcrossingneighboringcountries(largelyforpoliticalreasons)despite
theexistenceofregionallines.Consequently,existinginfrastructurewerelefttodeteriorate
progressively.
Inadequateroadmaintenancehasfar-reachingimplicationsfortradeandtransactioncosts.
As amply demonstrated in Sub-Saharan African contexts, bad roads result in damaged
trucksandincreasedtimespentonmaintenance,therebyreducingtheproductivecapital
rateofreturn.Inturn,thishamperstheabilityofintermediariestolinkisolatedproducers
(especiallyfarmers)tomarkets.Inextremecases,marketsmaysuffertotalcollapse,leading
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Copyrlghleamalerial
totheformationofisolatedpocketsofsubsistence.Theseautarkicsub-economiesareusually
characterized byextremepoverty (Cadot, Dutoit and de Melo 2005; Cadot, Dutoit and
Olarreaga2005). SuchtrendshavebeenobservedinKazakhstan,whereRaballandetal.
(2005)documentedtheevolutionoftrafficdensityintheKyzyl-Ordaregion.Theregionhas
thelowestroaddensityinKazakhstan(11.4kmper1,000km^),mainlyduetothelackof
maintenancetoruralroads.Thetruckingfleetworsenedandshrunkfrom2,456unitsin1990
to601in2000(SatubaldingandZhandaulet,2002;pp.67-68).
Tradecostsnotonlydependonthequalityofthe"hard"infrastructure(roads,railroads,
airports,etc.)butalsoonthe"soft"aspectsofthetransitsector'sbusinessenvironment.A
recent reportby the Asian Development Bank (2006) on regional cooperation in trade,
transportandtransit,outlinestheresultsofa"logisticsfriendliness"survey(basedondata
providedbyapproximatelytencompaniesinvolvedininternationaltransportandtradein
CentralAsia).CentralAsiancountriesweresurveyedduringlate2004-early2005withthe
aimofassessingtheaffordabihty,speedandreliabilityoftheirlogistics'services.According
tothesurveyresults.CentralAsianrepublicsranklowerthanRussiainallthreedimensions.
Kazakhstan andtheKyrgyzRepublic rankbestintheregion, whereasTajikistan ranks
worst.^Moreover,reliabilityconsistentlyappearsasthemosttroublesomeissue,suggesting
the presence of severe managerial problems that could potentially be tackled through
capacity-buildingprograms. ^
Networkstructure
Finally,CentralAsiahasinheritedanetworkstructurethatwasdesignedfortheneedsof
theSovietUnion,butisnotnecessarilyoptimaloncemarketforceshaverealignedtrade
flowsaccordingtotheprincipleofcomparativeadvantage.Theproblemisinherentinany
geographicalareaundergoingeconomicchangeandindustrialrelocation.ForformerSoviet-
bloc countries, however, ithas been all themore severe as tradeflows and industrial
locationweretheresultofcentralplanning,whichinvolvedhighlydistortedprices(alsofor
transportservices)andpaidscantattentiontoeconomicefficiency.Moreover,independence
*TheseresultsarebroadlyconsistentwiththeresultsofasimilarsurveyreportedinOjala,Naulaand
Queiroz(2004).
'Giventhelackofavailabledataonroadandrailsmaintenanceforsuchadatabase,weusethe
indicatorfromLimaoandVenables(2001).Itiscommonlyusedsinceintheliteraturetoassessthe
infrastructure level in international trade studies, evenifitfocuses onquantitative aspects of
infrastructreratherthanonqualitativeones.
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