A truck in a port in Mauritius.
Nadia runs a clothing manufacturing business that produces shirts and trousers for European and North American fast fashion brands. Her factory, located around 200 kilometers from Chattogram, Bangladesh’s main port, should be well-positioned to efficiently deliver its goods to market. Yet despite the relatively short distance, the journey to the port takes six hours—twice as long as it might take in Canada or Germany. To make matters worse, prices for trucking services are at least twice as high as they are in Australia and the United States. Once the goods reach Chattogram, delays at the port—ranked 334th out of 405 ports on the World Bank’s Container Port Performance Index—add to Nadia’s logistical headaches. These inefficiencies not only inflate her export costs, they also make it impossible for her to guarantee delivery times, causing her to lose business.
Mousa oversees the delivery of much-needed food to people who are suffering from hunger or lack reliable access to food in Mali. He faces similar struggles. Poor road conditions, illegal roadblocks, conflict, and limited competition in trucking services make transporting food across the country feel like transporting it across a continent. Moussa pays five times as much per ton-km than his colleagues in Uganda or Colombia.
The high cost of moving goods in developing countries
The challenges Nadia and Mousa face are common across developing countries. They show that what matters is not the physical distance but the economic distance—that is, the cost and time associated with moving goods to markets. A recently released World Bank report, Shrinking Economic Distance, presents new evidence showing the extent to which transport prices and times are higher in developing countries and identifies the frictions keeping them high.
On average, the cost of exporting the same goods to the United States across the same distance is 57 percent higher for low-income countries than for high-income ones. Within-country transport costs in low-income countries are roughly twice those in high-income countries, and some developing countries face domestic trading costs that are 3–14 times higher than those in the United States. In poorer countries, intercity travel is about half as fast as it is in the wealthiest countries, leading to longer shipping times and, consequently, higher costs.
Port workers at The Gambia.
What can be done to reduce economic distance in developing countries?
Reducing transport costs in developing countries is challenging but achievable, through targeted efforts in three areas:
1. Deregulating and increasing competition in the transport sector
In many developing countries, markets for trucking services are not competitive, because of price regulation, formal and informal barriers to market entry, and collusion. For example, 31 of 94 developing countries do not allow trucks from neighboring countries to deliver cargo, forcing shippers to unload their shipments and then reload them onto domestic trucks.
Ports also play a crucial role. Evidence shows that private operation of ports increases efficiency and reduces costs. Container ports managed by the private sector are 7 percent more efficient, leading to 4 percent lower shipping costs. Encouraging competition between ports and between operators at the same port can further improve performance and reduce costs.
Trucks waiting in the border between Bangladesh and India.
2. Reducing empty trucks and cargo vessels
Empty trips are a hidden but significant cost in transport. The problem is widespread, with 42 percent of bulk-carrying vessels traveling empty and trucks running empty for 15–45 percent of their travel distances.
Being able to find a return cargo has a significant impact on prices. Trucking prices to destinations with high economic activity, where it is more likely to find a return load, are about 14 percent lower than prices to less active areas.
Removing restrictions that prevent backhauling (picking up return cargo) and improving the matching of supply and demand across the transport industry can reduce empty trips, saving shippers money and time and making traded goods less expensive.
Trade ships at a port.
3. Investing in high-quality infrastructure and improving its operation
High-quality infrastructure is essential for reducing the frictions of distance and topography. Shorter, more direct routes lower the cost of moving goods. For example, cutting just 100 kilometers from the median shipment distance in low- and middle-income countries can reduce transport prices by 20 percent. Traveling on highways rather than lower-quality roads cuts average transport prices by 19 percent.
External factors such as weather compound the impact of poor infrastructure. Shipments during rainy seasons cost 6 percent more on average than shipments during other seasons—and the differences are even greater in countries in which road networks are substandard.
The availability of good-quality and efficiently operated multimodal infrastructure can also increase competition across modes and hence lower transport prices. In India, for example, trucking prices are lower on routes for which a more direct rail alternative is available.
Improving port performance also offers massive potential gains. Exporting the same shipment from a high-performing port (one ranked among the top 25 percent of ports in terms of time-related performance) costs 37 percent less on average than exporting it from a low-performing port (one ranked in the bottom 25 percent).
Workers load the harvest into a truck.
Creating efficient markets and developing efficient places
Reducing economic distance is no small feat, but the rewards are substantial. The priorities for developing countries are to create efficient markets and develop efficient places.
Creating efficient markets involves addressing market failures and frictions along the transport supply chain. To do so, governments must remove unnecessary regulations, promote competition, and allow the private sector to flourish. Freeing up market forces will lead to more competitive pricing and better service quality.
Developing efficient places involves ensuring that all places in the transport network—from road, rail, and water links to the ports and border posts—are properly planned and function in a way that allows the seamless movement of goods. Robust public investment management, adequate funding, and private sector investment and operation of infrastructure, such as ports, will lead to high-quality and well-functioning infrastructure.
Creating efficient markets should be a top priority, because without efficient markets, the full benefits of measures to improve infrastructure will not be realized.
All countries are different. Shrinking Economic Distance presents detailed policy actions for creating efficient markets and developing efficient places that policy makers can tailor to reflect the sources of frictions, institutional and socio-political characteristics, and government capacity in their countries.
Conclusion
Shrinking economic distance can unlock vast opportunities for developing countries, enabling them to participate more fully in global trade, reduce geographic inequalities and increase opportunities in lagging regions, and improve the quality of life for millions of people. The road to economic integration may be long, but with the right actions, it is one worth traveling.
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