Economic Growth through Faster and Cheaper Transportation

“If you wish to achieve economic progress, start building roads. If you wish to achieve fast economic growth, start building highways” – Chinese Proverb

Various studies on achieving economic growth through international trade highlight the importance of efficient and inexpensive transport and logistics services. Where transport costs are high, exporters of both manufactured goods and primary products will see reduced profits, leading to a reduction in the overall level of exports, and a slower rate of growth. In addition, the added transport costs will cause imports of raw materials and intermediate goods to be more expensive, and will further erode profitability of the domestic industries that use them. Because of this reduced profitability, countries with higher transport costs will be less attractive as a destination for foreign investors looking to build factories and production centers.

The average transport costs of a landlocked country are 50% higher than for coastal economies. This additional amount comes from increased time, increased direct costs like fuel, and fees inherent in customs and other border procedures. Because these transport costs become part of the overall cost of the product, landlocked countries must focus on reducing as many elements of these additional costs as possible in order to ensure their products can be competitive in international markets.

Unfortunately, Tajikistan is a landlocked country with difficult terrain. Thus, creating efficient and inexpensive transport and logistics services will be a difficult task, but one that must be done. However, Tajikistan is also located in the cross-roads of central Asia, and has certain advantages like cheap labor, access to raw materials, and good electricity supply. Thus, the goal is to keep transport costs as low as possible, while creating first-rate business and logistical conditions for transporting goods through Tajikistan so as to compensate for its geography.

The World Bank tracks transport shipment efficiency through the Logistics Performance Index (LPI). The LPI reflects the perceptions of country’s logistic ability based on the quality of transport and trade related infrastructure, the efficiency of customs clearance process, the ease of arranging competitively priced shipments the competence and quality of logistics services, the ability to track and trace shipments and the timeliness of delivery times. On this index Tajikistan has improved over the last four years, climbing from 136 to 114,[1] but it must continue to improve.

Infrastructure improvements are an effective method for reducing transport costs and improving the LPI score. Research has shown that significant infrastructure improvements can reduce transport costs by an amount equivalent to a reduction of 6500 sea km or 1000 km of overland travel.[2] This is one area where Tajikistan is devoting significant attention. According to the 2011 State Transport Development Program of Tajikistan, the Government intends to invest heavily in reconstruction and rehabilitation of 734 km of internationally significant roads at a cost of 160 million USD, starting in 2014 and lasting until 2019. Overall road transportation investments will represent about 680 million USD to 2020.[3] This will help reduce some transport costs, and will send a positive signal to foreign investors that Tajikistan is serious about accommodating business needs.

But good roads are not enough; Tajikistan must also maximize its efforts to reduce nonphysical barriers to international transportation of goods. Tajikistan should focus on the following as key strategies to reduce transport costs: 1.) Tajikistan must form cooperative alliances with neighboring countries to exchange information and to operate joint customs controls; 2). It must identify and implement methods to increase the competitiveness of local shipment and logistic companies; and 3). It must reform customs procedures, incorporating modern information technology tools where possible.

Regional cooperation is an effective tool to reduce transit costs. For example, in 2005, Honduras and Nicaragua worked together to cut the waiting time at their border in half. They did this by allowing just one inspection (conducted by either country) to satisfy both countries’ customs laws. Tajikistan is making efforts here and is actively negotiating to join the Pakistan Afghanistan Tajikistan Transit Trade Agreement (PATTTA). It is expected that by the end of 2014 all the governments will come up with the final agreed draft. So far, the major problem is in the financial transit guarantee and guarantee of safe transit through Afghanistan. To maximize the effectiveness, Tajikistan should make sure that the final agreement includes elements of integrated border management and mutual recognition of customs regulations.

Liberalizing and reducing the regulations on transport services will also help to reduce transport costs. For example, Rwanda, a landlocked country in Africa liberalized the trucking services sector in the 1990’s and saw a 75% decrease in shipping costs. Zambia (another landlocked country) has also seen decreases in shipping costs due to recent liberalization of its trucking and logistics sector. As a result of these and other reforms, both countries have seen increased foreign investment and are improved LPI. The idea is for the government to create conditions where companies compete for the business of transporting goods into and out of Tajikistan.

Over the course the next five years Tajikistan will be implementing the World Trade Organization Trade Facilitation Agreement (TFA). The TFA contains a number of provisions to facilitate the transit of goods, such as new rules relating to transit formalities, documentation requirements and the treatment of traffic in transit. Although Tajikistan may not be able to immediately implement all aspects of the TFA, certain aspects can be implemented relatively quickly, with technical assistance from international donors. For example, the “single window” policy, where all border documentation is submitted in one setting and on one standardized form. This can be implemented through paper documentation, but the goal is to eventually create a system where there is electronic submission of the standardized document. Pakistan implemented this type of system, and in two years went from only 4% of shipments cleared within a day, to having 93% cleared within one day. When it comes to reducing transport costs and attracting investors, saving time is like earning money.

It is estimated that implementation of the TFA could increase world trade by between $33 billion and $100 billion in global exports per year and $67 billion in global GDP. If Tajikistan can be a leader in the region in implementing the TFA, it should be able to capture a larger percentage of the increases and attract more foreign investors.

Although we cannot move Tajikistan to the ocean, with a coordinated effort between the private sector and the government, we can increase the efficiency with which goods move throughout Tajikistan.

[1] World Bank, LPI, www.worldbank.org.

[2] Nuno Limao and Anthony J. Venables, Infrastructure, Geographical Disadvantage and Transport Costs. Policy

Research Working Paper No.2257 (Washington DC: World Bank, 1999).

[3] Shokhboz Asadov, “Tajikistan’s Transit Corridors and their Potential for Developing Regional Trade,” University of Central Asia Working Paper 2012.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s