1 Trade Costs: Landlocked Developing Countries and Foreign Direct Investment United Nations New York October 1, 2008 John S. Wilson The World Bank

2 Overview Why and How Trade Costs Matter Landlocked Developing Countries What the data show – Doing BusinessWhat the data show – Doing Business Do Trade Costs and Regulation Affect FDI? Do Trade Costs and Regulation Affect FDI? An Agenda Ahead An Agenda Ahead

3 Trade Costs and Facilitation No standard definition No standard definition Narrow context: Narrow context: Logistics of moving goods through ports or more efficient custom rules.Logistics of moving goods through ports or more efficient custom rules. Broader context: Broader context: Environment in which trade transaction take place; transparency of regulation, harmonization of standards, and infrastructure.Environment in which trade transaction take place; transparency of regulation, harmonization of standards, and infrastructure.

4 Trade Costs Matter Distance and Time Distance and Time Additional day of delay in shipping reduces trade by 1 percent. Equivalent to 70 km.Additional day of delay in shipping reduces trade by 1 percent. Equivalent to 70 km. Djankov, Freund and Pham (2006) Impact of distance on trade has increased over time for low income countries (total sample 138 countries ).Impact of distance on trade has increased over time for low income countries (total sample 138 countries ). Carrere, De Melo and Wilson (mimeo)

5 Regulation Matters Transparency and regulation Transparency and regulation Regulatory convergence a greater payoff than reduction in tariffs and NTMs for developing countriesRegulatory convergence a greater payoff than reduction in tariffs and NTMs for developing countries Hoeckman and Nicita (mimeo) For Africa, EU regulation harmonized to ISO standards are less trade restrictive.For Africa, EU regulation harmonized to ISO standards are less trade restrictive. Czuabla, Shepherd, and Wilson (2007)

6 Landlocked Countries Performance OECD Coastal Developing CountriesLLDCs LPI(Score) DB Time to Export (days) DB Time to Import (days) DB Import (US$) DB Export (US$) Sources: Doing Business 2009; Logistics Perception Index 2007.

7 Average Time to Export Based on Doing Business 2009 data

8 Average Price of Crossing a Border Source: Doing Business 2009

9 Doing Business Rankings Source: Doing Business in Landlocked Economies 2009

10 What about Foreign Direct Investment? Do trade costs affect foreign investment? Do trade costs affect foreign investment? Gravity model - explore impact of costs of exports (Doing Business) on FDI. Gravity model - explore impact of costs of exports (Doing Business) on FDI. OECD data on FDI from 30 countries to 174 host countries. OECD data on FDI from 30 countries to 174 host countries.

11 Average Total FDI Inflows Source: Portugal-Perez and Wilson (2008) based on IMF data reported by World Development Indicators (World Bank) USD (in billions) Non-LLDCLLDCNon-LLDCLLDCNon-LLDCLLDCNon-LLDCLLDCNon-LLDCLLDCNon-LLDCLLDCNon-LLDCLLDC Sub-Saharan Africa Foreign Direct Investment

12 High export costs = Lower FDI FDI Levels (logarithmic scale) vs Export Costs Source: Portugal-Perez and Wilson (2008) based on IMF data and Doing Business

13 Lower Ranking = Lower GDP Source: Portugal-Perez and Wilson (2008) based on IMF data and Doing Business

14 Summary Lowering trade costs key reform priority……but specific agendas differ by region and country. Lowering trade costs key reform priority……but specific agendas differ by region and country. No reform agenda will succeed without rule of law, stronger governance, and political will. No reform agenda will succeed without rule of law, stronger governance, and political will.

15 Summary cont. Doing Business data show that trade costs are more highly correlated with FDI than other barriers. Doing Business data show that trade costs are more highly correlated with FDI than other barriers. World Bank research ahead to extend analysis. World Bank research ahead to extend analysis. World Bank trade agenda World Bank trade agenda $1.57 billion lending FY07 (trade and integration)$1.57 billion lending FY07 (trade and integration)

16 A Focused Agenda….. Lower trade costs and de-regulate Lower trade costs and de-regulate Within each countrys own ability to act.Within each countrys own ability to act. Important to attracting investment.Important to attracting investment. Shared agenda for regional reform to raise trade and income (transit and LLDC) Shared agenda for regional reform to raise trade and income (transit and LLDC) Leverage aid for trade facilitation. Leverage aid for trade facilitation.

17 Thank You John S. Wilson Lead Economist The World Bank The World