Landlocked or policy-locked?

Ingo Borchert, Batshur Gootiiz, Arti Grover Goswami, Aaditya Mattoo 29 November 2012

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We are used to thinking of landlocked countries as victims of geography. We worry that Ethiopia, Laos, Mali, Nepal, Rwanda and Zimbabwe, among others, cannot benefit fully from flows of trade, tourism and knowledge. For example, the Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and the Small Island Developing States notes that the “lack of territorial access to the sea, remoteness and isolation from world markets and high transit costs continue to impose serious constraints on the overall socioeconomic development of landlocked developing countries” (UN-OHRLLS website). Limao and Venables (2001) have highlighted the effect of poor infrastructure and geographical disadvantage on landlocked countries’ trade costs and trade flows.

But do landlocked countries use policies to improve connectivity and offset the handicap of location? Earlier case studies on road transportation in Africa have found that market-access restrictions and freight-sharing schemes maintained by countries hinder competitiveness and raise trade costs especially for landlocked countries of Africa, suggesting that investments in roads alone would not reduce the cost of transportation (Raballand and Macchi 2009). Lall et al. (2009) demonstrate that not just infrastructure but also market structure, arguably linked to policies, contributes to regional differences in transport costs in Malawi.

Now a new services policy database shows that a perverse pattern of policies holds across a broad range of countries. Landlocked countries tend to restrict trade in key 'linking' services like transport and telecommunications more than other countries. The phenomenon is most starkly visible in sub-Saharan Africa. Zambia, for example, bravely liquidated its national airline in 1994, but it still denies 'fifth freedom rights' to Ethiopia to fly the Addis Ababa-Lusaka-Johannesburg route, and to Kenya to fly the Nairobi-Lusaka-Harare route. In fact, the restrictive policies of many African countries make a mockery of the decade-old Yamoussoukro Decision (and a subsequent COMESA agreement) to liberalise air transport. In telecommunications, the dramatic benefits of existing liberalisation obscure the persistence of protection. Ethiopia and Zimbabwe are among those who still protect state-owned incumbents. And even other countries that have abandoned state monopolies still maintain stringent restrictions on entry and ownership.

Figure 1 reveals that services trade policies in both the telecommunications and the air transport sector are more restrictive in landlocked countries than in coastal countries. Figure 2 provides examples of the specific dimensions of policy along which landlocked countries are more restrictive. Importantly from a market-access point of view, 43% of all landlocked countries limit the number of licences granted in the fixed-line telecom market, in contrast to only 4% of all coastal countries maintaining such restrictions. Moreover, landlocked countries tend to be less transparent in making licensing criteria publicly available. Landlocked countries impose more stringent limits on foreign ownership in telecommunications firms, and are also less likely to have instituted a regulatory authority that is independent from the sector ministry.

Figure 1. Services trade restrictiveness indices for air transport and basic telecommunications in coastal and landlocked countries

Figure 2. Policy measures in the fixed-line telecommunications sector

Why do landlocked countries choose more restrictive policies even though they have a big stake in improving international connectivity? A standard political economy model suggests that the explanation could be related to both weak political institutions and adverse location.

First, landlocked countries have on average weaker political institutions and thus less effective checks on policymakers’ tendency to favour vested interests at the expense of public welfare. The left-hand side of Figure 3 compares how landlocked and coastal countries, respectively, fare in terms of popular democracy indicators. For example, on the Polity IV Project’s 'democracy indicator' – which ranges from 0 to 10, with higher scores reflecting greater opportunities available to citizens to express their preferences over alternative policies and the existence of stronger institutionalised constraints on the exercise of power by the executive branch – the average score for landlocked countries is substantially lower than the score for coastal countries. A similar wedge obtains when looking at the Economist Intelligence Unit’s (EIU) democracy indicator.

Figure 3. Strength of political institutions in landlocked and coastal countries

Second, landlockedness implies that consumers have fewer choices, especially in transport services. The absence of maritime transport as an option could be expected to render the demand for air transport services, for example, less elastic. In general, consumers with inelastic demand are more vulnerable to being exploited by producers with market power.

Our empirical findings (Borchert et al. 2012) confirm that in both telecommunications and air transport services, higher protection is significantly related to a measure of government accountability, which happens to be lower in landlocked countries as we saw above. However, the interaction between landlockedness per se and weak governance is insignificant and thus does not confirm the prediction of the political economy model that lower elasticity of demand (because of fewer alternatives) magnifies the impact of weak governance.

Do these restrictive policies matter? They do, leading to more concentrated market structures and more limited access to services than these countries would otherwise have, even taking into account the constraining influences of geography and low incomes. We find that even moderate liberalisation in these sectors could lead, for instance, to an increase of cellular subscriptions by seven percentage points. Anecdotal evidence also supports these findings. According to Darlington Mwape, Zambia’s Ambassador to the WTO, when they finally privatised the long-standing telecom monopoly, Zamtel, and reduced the international gateway license fee from a prohibitive $12 million to $350,000, international and local call charges fell by more than 50%!

Restrictive policy choices matter in the air transport sector as well. Figure 4 shows how, in a cross-section of 100 countries, the presence of restrictive policies in the air passenger transport sector leads to fewer international flights being offered to this country. Specifically, we find that this result is driven by a significantly lower number of flights per airline, conditional on the number of airlines serving a country1. As a result, we estimate that a moderate liberalisation could lead to a 20% increase in the total number of flights.

Figure 4. Number of flights per airline and restrictive air transport policies

The policies of landlocked countries are not the only problem. In international transport, it takes two to liberalise. Arvis et al. (2010) argue that not only the trucking regulations in landlocked countries but also the corresponding regulations in transit countries are essential to reducing the cost of trade. Zambia cannot unilaterally introduce greater competition on the Lusaka-London or Lusaka-Johannesburg air routes. Both the UK and South Africa also need to agree to allow entry by third country airlines on each route. Our database shows that industrial and developing countries also use restrictive bilateral air service agreements to fragment the international market into a series of route-specific duopolies. The WTO would have been a natural platform to negotiate liberalisation but powerful members have ensured that air traffic rights are excluded from its scope.

Today, industrial countries provide 'aid for trade' to landlocked countries to improve their ports, airports, and telecommunications infrastructure. But they avoid the liberalisation that would let service providers compete to use these facilities. Their taxpayers and the development community need to push for services reform. Otherwise these 'trade-facilitating' investments will earn a poor return.

References

Arvis, Jean-Francois, Gaël Raballand and Jean-Francois Marteau (2010), “The Cost of Being Landlocked: Logistics Costs and Supply Chain Reliability”, Directions in Development – Trade, 55837, Washington DC: The World Bank.

Borchert, Ingo, Batshur Gootiiz, Arti Grover and Aaditya Mattoo (2012), “Landlocked or Policy Locked? How Services Trade Protection Deepens Economic Isolation”, World Bank Policy Research Working Paper 5942.

Lall, Somik V, Hyoung Wang and Thomas Munthali (2009), “Explaining High Transport Costs within Malawi,” World Bank Policy Research Working Paper 5133.

Limao, Nuno and Anthony J Venables (2001), “Infrastructure, Geographical Disadvantage, Transport Costs and Trade”, World Bank Economic Review 15, pp. 451-479.

Raballand, Gaël and Patricia Macchi (2009), “Transport Prices and Costs: The Need to Revisit Donors’ Policies in Transport in Africa”, BREAD Working Paper 190, Bureau for Research and Economic Analysis of Development.


1 Figure 3 is a ‘partial regression graph’ that displays the partial association of the policy variable with the average number of flights per airline, conditional on a set of other covariates that include GDP, GDP per capita, the percentage of urban population, population density, the attractiveness as a tourist destination, the number of airports with paved runways, and dummy variables for landlockedness and for being an African country.

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Topics:  Development International trade

Tags:  Africa, landlocked, Services trade