How does infrastructure support international trade?

The Infra4Dev Conference, jointly organized by the World Bank and the International Growth Centre on March 3-4, 2022, brought together the academic and policy-making community to exchange knowledge and insights regarding the roles that infrastructure can play in catalyzing development. The Lightning Talk Sessions showcased emerging research on jobs, trade, and sustainable growth.

Global trade has contributed to growth and poverty reduction in the past three decades but gains from trade can be more inclusive. Spreading the benefits of trade more widely, within and between countries, can play a key role as the world seeks to recover from the COVID-19 pandemic, which has reversed years of poverty reduction. High transport and border costs partly explain why some countries and regions remain poorly integrated. Large-scale transport infrastructure investments involve major changes in the transport network connecting regions and countries. They can reduce transport costs both within countries and to other countries, increasing internal as well as external trade integration.

The recent Infra4Dev Conference showcased some of the most exciting emerging research on infrastructure and trade linkages.  In case you missed the conference, this blog will give you a brief round-up of some of the most interesting highlights from the Lightning Talks on Infrastructure as a Facilitator of Trade and other key papers presented:

• Entrepôt: Hubs, Scale, and Trade Costs by Woan Foong Wong, University of Oregon

Patterns of shipping, transshipping, and distribution mean that trade depends not only on the quality of infrastructure in the two trading countries, but also of that in key third party countries on the trading network. Such activities are concentrated at entrepôts, trading hubs which goods travel through. It turns out that the majority of trade is shipped indirectly, and this indirectness is concentrated in a small number of hubs (Egypt, Singapore, Netherlands, and China Hong Kong SAR). Using general equilibrium modeling of trade with entrepôts, the paper shows that welfare impacts of infrastructure investment at these critical hubs are on average ten times higher than at other regular ports. This underscores the strategic importance of ensuring that entrepots function as effectively as possible, due to their knock-on effects across the trading network.

• Trucking Costs and Margins of Internal Trade: Evidence from Trucking Portal in India by Forhad Shilpi, World Bank

Relatively little is known about transport costs and how they vary spatially according to different route characteristics. A key question is how inter-regional trade responds to changes in transport costs in developing countries, and the extent to which they increase volumes by existing traders or induce additional traders to enter the market. Both transport infrastructure, as well as characteristics of the markets for transport services, affect the final transport prices. This paper utilizes a unique dataset consisting of half a million actual truck level shipment data from a trucking platform in India. It estimates that a 1% increase in trucking unit cost reduces trade flow by 4.5%. Such a high elasticity of trade to unit trucking costs highlights the importance of action to bring down the cost of road freight in developing countries, by addressing restrictive regulations and introducing greater competition.

• Market Integration and Cost of Borders in Africa by Ryu Matsuura, Northwestern University

Intra-African trade continues to remain low and constrained by poor transportation links and high border delays. Thick borders also affect the location of infrastructure investments and lower the gains from trade. The paper uses a quantitative model to compare the existing infrastructure investments with the optimal investments in case there was no border frictions. The findings are that the current road network is similar to the optimal one without border frictions in West Africa, but significantly different in East Africa. This suggests that more roads investments are needed to support cross-border trade in East Africa, especially along the North-South corridor from South Sudan to Uganda, than in West Africa.

• Indirect Network Effects and Vehicle Choice in LICs by Felix Forster, Ofcom

Many African countries rely heavily on imported vehicles. One of the barriers to importing newer vintages is that the local availability of spare parts reflects historic ownership patterns, creating some inertia in the vehicle stock. The paper presents a structural model that incorporates the spare part market equilibrium into the consumer choice over vehicles and estimates this model using rich data from administrative records, online platforms, and an original survey of spare parts traders in Uganda. It shows that the existing vehicle stock is directly impacted by the availability of parts suppliers in the country, and that this channel contributes to the prominence of old vintages among vehicle imports. While international trade in principle provides access to many goods that are not produced in LICs, frictions in the spare part markets render new cars effectively unavailable to large parts of the population. The implication is that efforts to modernize vehicle fleets and participate in the global shift towards more environmentally friendly vehicle technology also need to focus on complementary policies to improve the availability of spare parts that condition the purchase of newer vehicles.

• Value of Infrastructure and Market Integration: Evidence from Renewable Expansion in Chile by Koichiro Ito, University of Chicago

Decarbonization of electricity supply calls for expansion of renewable energy sources often located far away from load centers, and even from the transmission grid. Chile is an extreme case where the national grid developed as three isolated systems, with a heavy concentration of solar resources on the northern grid, while the main source of demand in the capital city was on the central grid. The paper uses a structural model to show that the physical integration of these isolated grid in the Chilean electricity market in 2017 resulted in price convergence across regions,  a 37% increase in solar generation, and a 10% reduction in electricity generation cost per megawatt hour during the day. Market integration also incentivized new entry of renewables plants. These results highlight the importance of investments in transmission infrastructure to ensure that domestic power markets are fully integrated.

• Volatility and the Gains from Trade by Treb Allen, Dartmouth College

Expansions of the Indian highway network have reduced trade costs and therefore increased the integration of Indian farmers with global markets. Using a rich dataset containing the annual price, yield, and area planted for 15 major crops across 311 districts and 40 years, the paper shows that trade integration has increased farmers’ average returns through specialization of production, but also increased the volatility of these returns. Local agricultural prices become less responsive to local rainfall, but more affected by prices elsewhere. Using a model, the paper estimates that, between the 1970s and 2000s, the expansion of the Indian highways resulted in the mean real income of farmers increasing by 2.2%. Expanding rural bank access to mitigate the risks from higher price volatility would increase real income by an additional 27%.

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