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Trade Costs: Landlocked Developing Countries and Foreign Direct Investment

Trade Costs: Landlocked Developing Countries and Foreign Direct Investment. John S. Wilson The World Bank. United Nations New York October 1, 2008. Overview. Why and How Trade Costs Matter Landlocked Developing Countries What the data show – Doing Business

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Trade Costs: Landlocked Developing Countries and Foreign Direct Investment

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

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

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

  4. Trade Costs Matter • Distance and Time • 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 1962-2006). Carrere, De Melo and Wilson (mimeo)

  5. Regulation Matters • Transparency and regulation • Regulatory 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. Czuabla, Shepherd, and Wilson (2007)

  6. Landlocked Countries Performance 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? • Gravity model - explore impact of costs of exports (Doing Business) on FDI. • OECD data on FDI from 30 countries to 174 host countries.

  11. Foreign Direct Investment Sub-Saharan Africa 6 4 USD (in billions) 2 0 Non-LLDC LLDC Non-LLDC LLDC Non-LLDC LLDC Non-LLDC LLDC Non-LLDC LLDC Non-LLDC LLDC Non-LLDC LLDC 2000 2001 2002 2003 2004 2005 2006 Average Total FDI Inflows Source: Portugal-Perez and Wilson (2008) based on IMF data reported by World Development Indicators (World Bank)

  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. • 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. • World Bank research ahead to extend analysis. • World Bank trade agenda • $1.57 billion lending FY07 (trade and integration)

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

  17. Thank You John S. Wilson Lead Economist The World Bank jswilson@worldbank.org http://econ.worldbank.org/projects/trade_costs

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