Monday, 27 October 2008

Infrastructure, Transport Costs and Trade: A New Approach

  • Year: 2008
  • Organisation: TIPS
  • Author(s): Lawrence Edwards;Martin Odendaal
  • Countries and Regions: South Africa

This paper investigates the impact of the quality of infrastructure on exports, with a specific focus on Sub-Sahara Africa. Improving the quality of infrastructure has a positive effect on exports by lowering the transport costs faced by the exporter. This paper provides a new specification on how to model transport costs in the gravity model. Specifically, minimum and maximum infrastructure variables are included in the model rather than exporter and importer infrastructure variables. The gravity model forms part of a Heckman selection model, which is used to deal with the biases induced by excluding zero bilateral exports in the gravity model. The results suggest that it is the minimum quality of infrastructure between two trading countries that matters most for transport costs and therefore trade. This result also holds when using disaggregated export data and specific infrastructure variables. No robust evidence was found that Sub-Sahara Africa exports less than expected or that improving the quality of infrastructure has a significantly different effect on Sub- Saharan exports. However, using disaggregated trade data it was found that Sub-Saharan countries, given its characteristics, export more primary products and less manufactured goods (although the findings for manufactured goods are not robust).