Infrastructure reforms and prospects for trade

Abstract

Infrastructure and institutional settings for international trade play a key role in the efficient exchange of merchandise goods across borders. Once final goods depart the producer warehouse, a number of legal procedures associated with customs and security need to be completed at the facilities and service centers located at the borders before the goods can be loaded onto ships for exports. Quantitative measures suggest that ‘trade facilitation’ varies largely across countries; high income economies have state-of-the-art technologies and infrastructures, while developing regions lag far behind with regards to logistics. The goal of this thesis is to explore the extent to which trading capacity inflates transaction costs and reduces competitiveness of goods in international markets with a focus on trade estimations and macroeconomic impacts that are relevant to policy.^ The first essay establishes the causal effect of trade facilitation on bilateral trade flows within a simultaneous framework using data obtained from 109 countries. A partial equilibrium microeconomic model of trade is derived to underpin the bidirectional relationship between investment incentives and trade volumes. The elasticity of trade with respect to reforms is estimated to be positive and larger than that obtained using the single-equation's model. The second essay model trade-related capital investments within a general equilibrium framework that extends the scope of the existing literature by fully integrating costs of reforms. The newly-developed model is then applied to estimate the net benefits of infrastructural reforms in Sub-Saharan Africa. Empirical predictions suggest that net benefits from reforms are substantial. However, the opportunity costs of capital investments in terms of foregone present consumptions are steep. The results provide a new perspective on the behavior of persistent under-investments in many developing countries where short run costs are large. The last essay explores prospects of greater regional integration in South Asia from trade facilitation efforts in the region. Impacts on trade, welfare and poverty are substantially positive, that are being used to leverage development efforts at the Asian Development Bank (ADB).^