Wednesday, January 12, 2011

Trade facilitation & exports: Hard & soft infrastructures

Trade facilitation—which basically is aimed at reducing export and import costs—measures such as investment in physical infrastructure and regulatory reform to improve the business environment improve the export performance of developing countries, shows a paper by Portugal-Perez & Wilson (2010). The authors compute illustrative exports growth for developing countries and ad-valorem equivalents of improving each indicator halfway to the level of the top perform in the region. For instance, they compare if improving quality of infrastructure or cutting tariffs faced by exporters would increase exports the most.

The authors construct four new aggregate indicators related to trade facilitation from 20 indicators of different sources: Doing Business (DB), World Economic Forum (WEF), World Development Indicators (WDI) and Transparency International (TI). Here is their trade facilitation indicators dataset (unfortunately, they don’t have figures for Nepal).The database contains four new indicators related to trade facilitation covering 112 countries over 2004-2007. The indicators are scaled on a range of 0 (lowest performer) to 1 (top performer) and are obtained using factor analysis (PCA), a statistical modeling technique that explains the correlation among a set of observed variables through an unobserved “common factor”. It circumvents multicolinearity to reduce the dimension of data by aggregating highly correlated indicators into a single indicator.

They group trade facilitation indicators in two broad dimensions: (i) hard infrastructure (physical infrastructure-- the level of development and quality of ports, airports, roads, and rail infrastructure; and ICT—the extent to which an economy uses information and communications technology to improve efficiency, and productivity as well as to reduce transaction costs. It contains indicators on the availability, use, absorption, and government prioritization of ICT.); (ii) soft infrastructure (Border and transport efficiency—quantification of the level of efficiency of customs and domestic transport that is reflected in the time, cost, and number of documents necessary for export and import procedures; and Business and regulatory environment—the level of development of regulations and transparency. It is built on indicators of irregular payments, favoritism, government transparency, and measures to combat corruption.). They assess the impact of different aspects related to trade facilitation on export performance by estimating a gravity model.

Among others, the results show that:

South Asia appears to receive better returns to investment in the business environment. The results show that Bangladesh, the country with the lowest value for the business environment index, would experience the highest export growth after improvement in this indicator halfway to that of India. The increase in trade (38.4 percent) due to improvement in the business environment would be equivalent to a 26.3 percent reduction in the value of current tariffs on goods from Bangladesh.

If Bangladesh were to improve its level of infrastructure quality to half the level of India, exports would increase by 17.6 percent. This increase in exports would be equivalent to a reduction of 12.1 percent in the value of import tariffs.

Overall, they show that improvement in infrastructure quality would bring the greatest benefits in terms of export growth. Furthermore, among the four indicators, physical infrastructure has the greatest impact on exports in almost all specifications and samples. The impact of physical infrastructure decreases with the income level, but the richer the country, the greater its marginal impact on export performance from ICT. So, least developed countries (LDCs) are relatively better off focusing on physical infrastructure to promote trade. That said, due to the large costs associated with physical infrastructure, developing countries are also better off improving soft infrastructure such as border and transport efficiency.

Meanwhile, here is a paper by Vela, Aadot, and Wilson (2010), who find that private inspection of international shipments positively and significantly affect trade facilitation, with a rise in import volumes for countries using them by approx 2-10 percent.