What is holding back African exports?

Caroline Freund, Nadia Rocha 11 December 2009

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What is the binding constraint on Africa's trade? Africa’s weak exports are partly due to poor trade infrastructure. Hummels (2001) and Djankov, Freund, and Pham (2010) show that trade delays reduce exports, and that the effect is larger than tariffs. This effect is especially strong in Africa where trade facilitation – the speed of trade – is slowest (Portugal-Perez and Wilson 2009).

Africa’s exporters face many delays

In recent research (Freund and Rocha 2009), we build on these findings and ask what are the key causes of these trade delays?

We use detailed data from the World Bank’s 'Doing Business' report, which provides information on the average time it takes for an exporter to complete a series of procedures when moving their goods from the principal city to the port of exit. Each procedure is classified into one of three main categories: documentation, inland transportation, and customs and ports (see Figure 1).

Figure 1. Exports times

It is clear that getting a product from factory to border control is far longer for Sub-Saharan Africa. Across regions, documentation procedures are the most time consuming. But within Sub-Saharan Africa, documentation procedures take nearly four times longer than developed countries, while customs and ports procedures and inland transit take three times longer.

New insight: Inland transit is the most important delay

As the backbone of our investigation, we use the gravity equation (this describes aggregate bilateral trade as a function of the size of two countries and the distance between them). After controlling for “gravity” these and other standard determinants of trade, we include our variables of interest: documentation, inland transit, and customs and ports delays.

A concern with this approach is that the volume of trade may directly affect trade costs. The marginal value of investment in trade facilitation is higher when the trade volume is large since cost savings are passed on to a larger quantity of goods. Thus, while more efficient trade facilitation stimulates trade, trade is also likely to generate improved trade facilitation.

To control for this possibility of reverse causality, we investigate the effects that documentation, inland transport, and customs and ports times have on the exports of new products in the years 2005 to 2007. The intuition is that trade in new goods cannot affect the quality of trade facilitation infrastructure or the bureaucracy that is in place for exporting.

As a further robustness check, we use an instrumental variables approach to examine the effect of time-trade costs in transit countries on the exports of landlocked countries.

Finally, we estimate a “difference-in-difference” regression on a sub-sample of agricultural products to show how inland transit costs affect exports of time-sensitive goods – ranging from perishable products where time is most critical relative to preserved goods such as tinned food where timeliness is much less of an issue.

While all types of delays and foreign tariffs reduce exports; inland-transit delays have the largest negative impact on new products’ export values. We estimate that a one day decrease in the inland-transit time:

  • Increases exports of new products by 7%.
  • Is equivalent to about a 2% increase in all importing tariffs.

Why does transit matter more?

One explanation for the dominance of transit time is that it is highly variable in African countries, and there is little that can be done to mitigate the uncertainty.

Following up on this point, we investigate the impact of uncertainty related with each component of export delays. In particular, we look at whether they can explain why inland-transit delays are more important than waiting times in documentation procedures, or customs and ports procedures.

Specifically, we define “time uncertainty” as the difference between the maximum time and the average time it takes to conclude each of the different phases representing the total time to export.

Our results show that only uncertainty in road transport has a negative and significant effect on exports. Uncertainty in documentation times may be less important because in many cases documents can be prepared in advance. In addition, while exporters may be able to pay at the port to get things out more quickly when necessary, nothing can be done on the road.

Is it all about geography?

One possible interpretation of this finding is that transit time is picking up geography. It might be that trade is simply lower when economic centres are far from ports, in which case there is little a country can do to improve things.

We estimate the effect of inland transit on exports, controlling for the distance in kilometres from the principal city to the port of export as well as for total travel times.

The results of this exercise show that geography is not the primary reason for long delays in transit times. There are other factors that are more important – such as the quality of the roads, quality of the vehicles, likelihood of accidents, theft, competition in trucking, road blocks, and waiting times at borders.

Policy implications: The right road to success

Our results have important policy implications. We argue that a focus on foreign trade policy is misguided. The tariffs that African exporters face are already at a very low level and many African countries actually have preferential access to markets such as the US and the EU. As a result, the benefits from a further decrease in tariffs among trading partners is small on average, and may even be negative for countries facing preference erosion.

Our results instead point to improvements in inland transit as key to stimulating Africa’s exports. In particular, the focus should be on Sub-Saharan Africa's road systems – especially the infrastructure aspects, the security aspects, and policies that improve competition in trucking.

While improvements in ports and customs and less bureaucracy will help exporters, the impact of improved inland transit is roughly five times greater.

References

Djankov, Simeon, Caroline Freund and Cong S Pham (2010), "Trading on Time", forthcoming Review of Economics and Statistics.

Freund, Caroline and Nadia Rocha (2009), “What Constrains Africa’s Exports?”, forthcoming as a World Bank Working Paper.

Hummels, David (2001), "Time as a Trade Barrier", GTAP Working Papers 1152, Centre for Global Trade Analysis, Department of Agricultural Economics, Purdue University.

Portugal-Perez, Alberto and John Wilson (2008), “Trade costs in Africa: barriers and opportunities for reform”, World Bank Policy research working paper N. 4719.

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Topics:  International trade

Tags:  trade policy, Africa, trade

Lead Economist, International Trade Team of the Development Research Group at the World Bank

Nadia Rocha

Economic Affairs Officer at the Economic Research and Statistics Division of the World Trade Organization