Thursday, January 12, 2012

Landlocked or policy locked ? how services trade protection deepens economic isolation

A new cross-country database on services policy reveals a perverse pattern: many landlocked countries restrict trade in the very services that connect them with the rest of the world. On average, telecommunications and air-transport policies are significantly more restrictive in landlocked countries than elsewhere. The phenomenon is most starkly visible in Sub-Saharan Africa and is associated with lower levels of political accountability. 

This paper finds evidence that these policies lead to more concentrated market structures and more limited access to services than these countries would otherwise have, even after taking into account the influence of geography and incomes, and the possibility that policy is endogenous. Even moderate liberalization in these sectors could lead to an increase of cellular subscriptions by 7 percentage points and a 20-percent increase in the number of flights. Policies in other countries, industrial and developing alike, also limit competition in international transport services. Hence, "trade-facilitating" investments under various "aid-for-trade" initiatives are likely to earn a low return unless they are accompanied by meaningful reform in these services sectors.

Landlocked countries are seen as victims of geography, insulated from beneficial flows of trade, tourism and knowledge. But are these countries choosing policies to offset the handicap of location and improve connectivity with the rest of the world? Surprisingly, many are not. Drawing upon a new services policy database, we show that the policies of landlocked countries in key “linking” services like transport and telecommunications are on average significantly more restrictive than elsewhere. We also show that these policies lead 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, and the possibility that policies are endogenous.

To motivate the analysis, consider three landlocked countries, Laos, Nepal and Zambia, on which we provide more detailed information in Section 2. In terms of policy, each country has at least until recently stifled competition in telecommunications – primarily by restricting the conditions for new entry – and in air transport – primarily by negotiating restrictive BASAs on key routes. In terms of access and quality of services, each of the three countries fairs poorly. In, Nepal the number of telephone mainlines per 100 people is 2.5, half the regional average for South Asia; in Laos 1.5, one-seventh the regional average for East Asia; and in Zambia 0.75, one-fourth of the regional average for Sub-Saharan Africa. In mobile telephony, the gaps are slightly less stark but still significant; for example, Nepal had a mobile teledensity (subscriptions per 100 people) of 12, which is about one-third of the South Asian regional average. In terms of lead time to import and export, in all three countries goods move slowly compared to their respective regional averages. For example, in Laos, shipments take twice as long for the average East Asian country (50 vs 25 days). The World Bank’s logistics performance index for the quality of logistics services is also below the regional average in all three countries.

Can concentrated markets and poor performance be attributed to poor policy? Or are they primarily attributable to other disadvantages? It is not easy to provide a convincing answer to these questions because the policy information we have collected is only for a single time period, making it difficult to control for all the possible sources of heterogeneous performance across countries. Nevertheless, we are able to control for the most likely determinants of poor performance: the adverse influences of geography and low incomes. We also address the possibility that policy itself is endogenously determined – e.g. through successful lobbying for protection by concentrated industries – by using an instrumental variable strategy that relies on the association between poor policy and weak governance. Using these strategies, we show that there is evidence that poor policies lead to more concentrated market structures and more limited access to services than these countries would otherwise have. At this stage, we seek primarily to document the unexpected patterns of policy, and demonstrate, to the limited extent allowed by available data, that these patterns matter.

World Bank. Author: Borchert, Ingo; Gootiiz, Batshur ; Grover, Arti; Mattoo, Aaditya. Document Date: 2012/01/01. Document Type: Policy Research Working Paper. Report Number: WPS5942 


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