In a report released today, Connecting to Compete 2014: Trade Logistics in the Global Economy, we summarize the results of the Logistics Performance Index (LPI), and examine some of the factors behind different countries’ performance. The index and report, which have been produced about every two years since 2007, rank countries on a number of dimensions of trade, including customs performance, infrastructure quality, and timeliness of shipments.
Nowadays the importance of efficient supply chains for trade integration is recognized globally. Most sources of friction in the global economy—trade costs—are attributable to logistics bottlenecks. These might be physical deficiencies, red tape, especially at borders, or a lack of quality services. The LPI has greatly helped the realization that policy does matter for efficient logistics, and is widely referred to as a guide by policy-makers, including in rich countries such as those in the EU. It has contributed to creating a dynamic of reforms in many developing countries where the Bank has logistics-oriented programs. We are just back from Georgia and Indonesia, and our team is currently in Rabat, Morocco, where we are promoting projects to integrate supply chains of the Maghreb.
Since the first LPI in 2007, we have seen a trend of improvement, globally. Developing countries are improving a bit faster than developed countries. This is testimony to the dynamics set in motion by logistics policies. But the fact that convergence between poor and wealthy countries has slowed also indicates that there are now fewer “quick-fixes,” or easy solutions, to the problems that developing countries face.
Countries, and those of us in the Bank working on competitive supply chain issues, increasingly face this issue of complexity. Of course, the strategies a country takes will have to be tailored to its specific environment, and the LPI is not a comprehensive diagnostic. On the other hand, there are some commonalities: the challenges and priorities tend to correlate, although imperfectly, across countries with similar structures.
In low-income countries, the biggest gains typically come from improvements to infrastructure, such as roads, bridges, or rail lines, and basic border management, including port reform. But we should caution that this is even more difficult than it sounds. Border management should not stop with reforming a customs agency, as customs agencies often get better marks from our survey respondents than other agencies at the border. Indeed, effective border management reform often requires improving efficiency in other agencies, including those responsible for sanitary and phyto-sanitary controls, and improving coordination between customs and those other agencies.
In addition, low-income countries hoping to improve their logistics performance will need to tackle the problems from multiple angles. Filling potholes and building bridges will not make a supply chain work better if an important border is still slow in processing goods in transit. Increasingly, governments in developing countries are facing a need to execute complicated, multi-pronged projects with varied interest groups and stakeholders.
Middle-income countries, by contrast, usually have fairly well-functioning infrastructure and border control. The biggest gains in these countries often come from increasing the sophistication, specialization, and competitive environment of their logistics services. This might mean increasing the amount of outsourcing in specialized functions, such as transportation, freight-forwarding, and warehousing.
In high-income countries, where logistics services operate in a mature market with high levels of outsourcing, consumer awareness of the environment has come into play. Evident in our data is a growing awareness of—and a demand for—“green logistics,” or logistics services that are environmentally friendly. In 2014, about 37 percent of LPI survey respondents shipping to OECD countries recognized a demand for environmentally friendly logistics solutions, compared with just 10 percent of those shipping to low-income destinations. If this trend continues, more and more logistics-providers will need to take steps to meet this demand to be competitive. Bank projects in the area will have to adapt to the new and actual demand to include sustainable logistics concepts such as green or urban logistics (as discussed at a recent workshop organized by our colleague Jordan Schwartz and the Dutch Government).
In summary, countries hoping to improve their logistics performance along the dimensions measured by the LPI will have to be smart and strategic. While each country’s self-evaluation will be an individual, unique exercise, the process can start with the LPI, a basic structure that puts their performance in perspective. The Bank and the community of colleagues working across a number of practices (including trade, transport, agriculture, and governance) supporting this dynamic will have to be creative and agile as well. When inventing the concept of logistics two hundred years ago, General Jomini suggested it was as much art as science. That hasn’t changed.