Thursday, January 12, 2012

Landlocked countries’ comparative advantage and services trade

In a new policy working paper, Borchert et al. argue that protection of services sector (telecommunications and air transport) by landlocked countries is not a smart policy because it is the one of the few sectors in which they have comparative advantage.

They find that even moderate liberalization in these sectors could lead to an increase of cellular subscriptions by 7 percentage points and a 20 percent increase in the number of flights. Specifically, liberalizing policies from the level of the median country (STRI = 50) to the level of first quartile (STRI = 25) would on average result in an increase of cellular subscriptions by 7 percentage points and an increase in mainlines by 4 percentage points. And, in the air transport sector, a reform of aviation policies with similar impact, such that the STRI score would fall from 50 to 25, is estimated to be associated with a 20 percent increase in the number of flights. Countries with highly restrictive aviation policies have on average 39 percent fewer flights per airline than liberal countries.

They argue that poor policies lead to more concentrated market structures and more limited access to services than landlocked countries would otherwise have. They suggest increasing the maximum foreign capital participation limit from a minority to a majority stake.

Two suggestions:

  • First, international assistance for transport and telecommunications infrastructure needs to be complemented by policy reform.
  • Second, in transport services, there is a strong case for multilateral negotiations because there are limits to what unilateral reform can achieve. We address each aspect in turn.

Here is the abstract of the paper:


A new cross-country database on services policy reveals a perverse pattern: many landlocked countries restrict trade in the very services that connect them with the rest of the world. On average, telecommunications and air-transport policies are significantly more restrictive in landlocked countries than elsewhere. The phenomenon is most starkly visible in Sub-Saharan Africa and is associated with lower levels of political accountability. This paper finds evidence that these policies lead to more concentrated market structures and more limited access to services than these countries would otherwise have, even after taking into account the influence of geography and incomes, and the possibility that policy is endogenous. Even moderate liberalization in these sectors could lead to an increase of cellular subscriptions by 7 percentage points and a 20 percent increase in the number of flights. Policies in other countries, industrial and developing alike, also limit competition in international transport services. Hence, "trade-facilitating" investments under various "aid-for-trade" initiatives are likely to earn a low return unless they are accompanied by meaningful reform in these services sectors.


They provide examples of Laos, Nepal and Zambia. In their analysis they control for the adverse influences of geography and low incomes, the two most likely determinants of poor performance. Also, they take policy to be endogenously determined because policies are influenced by lobbying for protection by interest groups or industries.

They argue that “aid for trade” to landlocked countries to improve their ports, airports and customs might not  yield expected results in the absence of the liberalization of air transport services (or limited competition among service providers) that would greatly enhance the impact of AfT.


About Nepal, the report has the following info:

  • Nepal Airlines, plagued by poor management and political interference, has seen its financial situation weakened and its fleet shrunk to two Boeing 757s and four twin otters. By virtue of being the designated airline, it occupies crucial space in BASAs, which it is incapable of exploiting. One of the key hubs is Delhi, where the number of seats is limited to 6000 per week for each side, but Nepal Airlines uses only 1,300 seats of the Nepali quota. Japan has refused to grant fifth freedom rights on the Kathmandu-Shanghai-Osaka route, and China may be restricting flights on the Kathmandu-Lhasa route.
  • Nepal granted exclusive licenses in the fixed line segment until 2009 to United Telecommunications Limited (with majority Indian Government ownership) and in mobile to Spice Telecom (with majority Kazakh ownership), effectively creating duopolies in each segment between these firms and the state-owned firm. [Update is needed in the paper: Spice Telecom is Ncell now and there are other three telecom operators, which means it is not a duopoly. It is at best monopolistic competition.]

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