Connecting Landlocked Developing Countries to Markets

Connecting Landlocked Developing Countries to Markets Trade Corridors in the 21 st Century Edited by Jean-François Arvis, Robin Carruthers, Graham Smith, and Christopher Willoughby CONFERENCE EDITION

WB196_CLDCM_Booklet Overview.qxd 4/29/10 7:44 PM Page 1 CHAPTER 1 Landlocked Developing Countries and Their Developmental Challenges: An Overview A landlocked country has inherent disadvantages compared to countries with seacoasts and deep sea ports. Trade is more difficult because access to most international markets is more costly. Developing countries that are landlocked, many among the world s poorest countries, have even greater economic disadvantages: typically they are isolated from major markets and have small economies, limited natural resources, weak institutions, and, in many cases, a recent history of conflict. They also have disproportionate numbers of poor people whose plight has drawn the attention of the international community. In 2001, the United Nations (UN) set up a special office to address the needs of the least developed countries, landlocked developing countries (LLDCs), and small island developing states. Thirty-one LLDCs joined this group (listed in table 1.1). They are home to some 360 million people, more than 6 percent of the developing world s population. The largest concentration of landlocked countries and populations is in Sub-Saharan Africa; the 15 fully landlocked African countries have a combined population of more than 220 million, nearly 30 percent of the region s total. Sudan and the Democratic Republic of Congo, which account for 12 percent of the region s population, are de facto landlocked, that is, they have only short coastlines, far from their cities. Seven other longer standing LLDCs are 1

WB196_CLDCM_Booklet Overview.qxd 4/29/10 7:44 PM Page 2 2 Connecting Landlocked Developing Countries to Markets Table 1.1 Region Landlocked Developing Countries Country Population (million) GNI ($ billion) GNI (PPP) per head ($) Eastern Africa Burundi 8.5 0.9 330 Ethiopia 79.0 17.6 780 Rwanda 9.7 3.1 860 Uganda 31.0 11.3 1,040 Southern Africa Botswana 1.9 11.5 12,880 Lesotho 2.0 2.1 1,940 Malawi 14.0 3.5 760 Swaziland 1.1 2.9 4,890 Zambia 12.0 9.2 1,190 Zimbabwe 13.0 4.5 West Africa Burkina Faso 15.0 6.4 1,120 Mali 12.0 6.1 1,040 Niger 14.0 4.0 630 Central Africa Central Afr Rep 4.3 1.6 710 Chad 11.0 5.8 1,280 South Asia Afghanistan 8.1 Bhutan 0.6 1.2 4,980 Nepal 28.0 9.8 1,060 Central Asia Kazakhstan 15.0 77.7 9,600 Kyrgyz Rep 5.2 3.2 1,980 Tajikistan 6.7 3.1 1,710 Turkmenistan 5.0 4,350 Uzbekistan 27.0 19.7 2,430 Caucasus Armenia 3.0 7.9 5,870 Azerbaijan 8.6 22.6 6,570 Eastern Europe FYR Macedonia 2.0 7.1 9,050 Moldova 3.8 4.1 2,800 East Asia Lao PDR 5.9 3.7 2,080 Mongolia 2.6 3.4 3,170 Latin America Bolivia 9.5 12.0 4,150 Paraguay 6.1 10.5 4,520 Total 358.0 285.0 Source: World Bank data for 2007 or most recent year. GNI = gross national income; PPP = purchasing power parity. Note: The countries eligible to borrow from the World Bank ( Part Two Countries ) include three more LLDCs: Belarus, Kosovo, and Serbia, which have not joined the UN group. dispersed worldwide. They account for around 3 percent of the population of two large regions: South Asia, with Afghanistan, Bhutan, and Nepal, and Latin America, with Bolivia and Paraguay. The two landlocked countries of East Asia, Laos and Mongolia, account for less than one-half of 1 percent of that region s population.

WB196_CLDCM_Booklet Overview.qxd 4/29/10 7:44 PM Page 3 Landlocked Developing Countries and Their Developmental Challenges 3 In the 1960s through 1980s, LLDCs in Africa received economic aid and advice as part of the international community s attention to Africa and other least-developed nations. However, they were given no special consideration as a group. Since the 1960s, the international community has increased its efforts to improve international transport links for landlocked countries. For example, urgent assistance was provided to help develop trade route alternatives when political problems in the transit countries threatened to interrupt operation of key routes to the sea, such as those from Zambia in the 1970s and Malawi in the 1980s. Efforts were made to enable Africa and other developing regions to open up their markets for international road transport, applying elements of the reforms developed in Europe after World War II. In the 1990s, nine of the 15 former Soviet republics were added to the list of landlocked countries when they gained independence, as were three former Yugoslav republics (and a fourth, Bosnia, which is very nearly landlocked). Nine of these nations meet the UN defintion of LLDC. They account for some 80 million people, or more than 15 percent of the total population of Eastern Europe and Central Asia. As they struggled to set up international borders and border agencies and their income levels collapsed to less than half what they had been under the Soviet Union, these countries received financial aid and advice as part of the international community s efforts to stabilize their economies in the difficult transition period of the 1990s. When the Cold War ended, the conviction that more open trade promotes economic growth gained prominence. The General Agreement on Tariffs and Trade (GATT) was transformed into the World Trade Organization (WTO) in 1995, and increasing numbers of countries signed on. Also during the 1990s, the information technology revolution and the development of the Washington consensus, an approach to help reform the economies of crisis-wracked developing countries, greatly expanded world trade volumes and brought in many new players seeking to improve their competitiveness. The WTO s early focus was on lowering tariffs, mainly for imports. As progress was made on that front, the international community became more aware of the softer problems that are now listed under facilitation, and began to channel international efforts into identifying and finding solutions for the more acute problems.the current Doha Round of WTO negotiations, launched in 2001, seeks to extend trade benefits to countries not caught up in the initial globalization boom, as Thomas L. Friedman

WB196_CLDCM_Booklet Overview.qxd 4/29/10 7:44 PM Page 4 4 Connecting Landlocked Developing Countries to Markets describes in his book, The World Is Flat: A Brief History of the Twenty-First Century. The 1990s saw rising concern in the development community about the special difficulties landlocked countries face in a world where economic development is increasingly dependent on trade. As a result, the Millennium Development Goals, which were adopted by the heads of all governments at the UN in September 2000, include explicit commitment to address the special needs of landlocked developing countries. Initiatives also were launched at that time to make the world s trading system more inclusive. As one of these initiatives, the UN organized the first global conference on the problems of landlocked developing countries, held in Almaty, Kazakhstan, in 2003. It brought together the international community at the ministerial level to focus on ways to overcome the difficulties of LLDCs and their transit neighbors in ensuring reliable and efficient transport. The resulting Almaty Programme of Action stressed the need for major reforms over the next decade to overcome inefficiencies as well as the need for investment to reduce operating costs and delays. The 2008 mid-term review of the program reported significant, faster progress with some positive results already visible, but it called for acceleration to achieve solid improvements by 2013, the tenth anniversary of the Almaty conference. Transit Neighbors and Trade Corridors: Relationship Issues Most landlocked countries depend on one or two overland routes through transit neighbors, neighboring countries that have agreed to provide access to LLDCs to carry their international trade to and from the sea. The relationship raises many potentially divisive issues: infrastructure provision, maintenance and compensation; vehicle and driver entry rights, licensing, and insurance. Customs agneices of both parties fear that the merchandise will be disposed of en route without paying duties. Additional issues relate to bilateral trade and transit of passengers between the LLDC and its transit neighbors. The evidence shows that LLDCs have indeed generally faced greater difficulties than coastal countries in expanding international trade and increasing their incomes. Infrastructure Support Infrastructure has had its ups and downs in the agendas of the international aid community. Since about 2000, infrastructure has regained

WB196_CLDCM_Booklet Overview.qxd 4/29/10 7:44 PM Page 5 Landlocked Developing Countries and Their Developmental Challenges 5 recognition as a critical requirement for growth, and funding for it has recovered. Some international corridors have benefited from this assistance, notably, the Northern Corridor in East Africa and the Maputo Corridor between South Africa and Mozambique. Customs Reform At the same time, international financial institutions have for the first time become substantially involved in customs reform notably the Trade and Transport Facilitation for Southeast Europe program, under which the World Bank, European Union, and other donors supported customs modernization and related reforms in eight Balkan countries between 2000 and 2004. This involvement showed the importance of mobilizing sustained support for such reforms from the trading community (private sector), and also the importance of cross-border cooperation among governmental agencies (for example, customs at paired border checkpoints). Commodity Price Fluctuations In the period from about 2003 to 2008, commodity prices oil, minerals, and foodstuffs rose rapidly throughout the world, to the benefit of those landlocked countries rich in natural resources, in all regions. China became very active in purchasing raw materials, especially in Africa. As a result, resource-rich LLDCs recorded fast economic growth and began to close the income gap with coastal neighbors. On the other hand, those LLDCs that lacked natural resources faced ever harder choices as their import bills soared and their trade deficits grew. At the same time, some African LLDCs notably, Ethiopia, Lesotho, and Uganda introduced policy measures to promote trade that proved effective. Thus, in this period, some LLDCs made significant progress, while others faced ever greater economic hardship. What both groups had in common is that they remained vulnerable to unforeseen sudden changes in commodity markets. Further Efforts Needed A review by the UN of the progress under the Almaty Programme of Action in 2008 showed some progress in pinpointing where landlockedness hurts and the reported progress in measuring its effects. Many efforts so far had stressed infrastructure, technology, and legal instruments. However, these missed the social and political dynamics. First, infrastructure, while a necessary condition, was not sufficient: thanks to

WB196_CLDCM_Booklet Overview.qxd 4/29/10 7:44 PM Page 6 6 Connecting Landlocked Developing Countries to Markets large investments over the past two decades, landlocked countries no longer suffer from bad roads much more than do the inland areas of transit countries. Second, technology, while undoubtedly helpful, was not indispensable: the principles underpinning freedom of transit were in operation for centuries before computers were invented. Third, it was not for lack of legal instruments and treaties that success had been elusive. If anything, there were too many of these, since much of what they contained has not been implemented. Impact of the Global Financial Crisis The vulnerability of LLDCs became very clear when the global financial crisis hit in 2008 09. The advocacy for freer trade had presumed that expanded trade was a win-win proposition for all participants though evidence suggested that, within countries, income distribution had become more inequitable. The concern for LLDCs was that, because they had been missing out on expanded trade, they had been getting poorer if not absolutely, then at least relatively. Now many nations have responded to the crisis by taking protectionist measures, which, if sustained, will reduce world trade and leave everyone poorer. However, the World Bank advises against protectionism, whether countries are coastal or landlocked. It is noteworthy that, during this crisis, LLDCs with substantial natural resources did well while commodity prices were high. Some can expect to find themselves in crisis if the global slump continues, unless they can adjust their economies quickly. Diversifying their trade is one option for adjusting; this World bank advice to the other LLDCs is valid for them, too. This brings us to the present study. The World Bank s global perspective gives it an advantage in detecting common features across regions, learning from the access problems and solutions of LLDCs in one region, and seeing the potential for application of those lessons in other regions, from Mongolia to Bolivia, from Malawi to Armenia. The objective common to all LLDCs is to connect effectively to international markets through affordable and reliable supply chains. A New Conceptual Framework A review of the latest analytical research and evidence leads to the conclusion that the best prospect for LLDCs to overcome their inherent disadvantage is to focus on international corridors integrating four elements: infrastructure, regulatory reform, cross-border cooperation, and private-sector support.

WB196_CLDCM_Booklet Overview.qxd 4/29/10 7:44 PM Page 7 Landlocked Developing Countries and Their Developmental Challenges 7 This conceptual framework for viewing the access problem of landlocked countries differs from the traditional vision on the part of governments that focussed on physical infrastructure and emphasized control, that is, the state-led access solution embodied in many treaties still in force. Instead, the environment needs to be created for the private sector to deliver affordable and reliable services. This puts the role of policies and cross-border cooperation in a different perspective. This report summarizes the authors conclusions from the above analysis, identifying the critical areas for action and cooperation and recommending a policy and aid agenda for the international community, with an eye to the Almaty Programme of Action target of achieving visible improvements by 2013. The central objective of this book is to clarify the conceptual framework for a transit system for LLDCs and its components, what does and does not work. This framework is based on three major assumptions. The first assumption is that, at the heart of a functioning transit system is a private/public partnership, a relationship between competent logistics operators and the authorities of the country of transit that is mutually beneficial and, in some sense, contractual. The second assumption is that the principles of working transit procedures are essentially universal and low-tech, the fruit of millennia of evolution, with variants depending upon the degree of regional integration. The third assumption is that, while managing transit is part of each country s sovereignty, huge gains may be realized from integrating transit systems within a region. Very efficient systems developed in Europe after World War II are the de facto benchmarks for such transit regimes. Transit systems refers here to the infrastructure, legal framework, institutions, and procedures serving trade corridors, seen as a whole. Conceptually a transit system must have the following components: 1. Political commitment to allow transit trade, formalized in treaties that can be bilateral, regional, or multilateral. 2. The physical infrastructure, including border checkpoint facilities. 3. The capacity and competence of the public and private institutions and people involved in the movement of goods along a trade corridor to include: public agencies in the country of transit supervising the flow, mainly customs and other agencies involved in controlling international trade and transportation transportation services, including the trucking industry, customs brokers, and freight forwarders.

WB196_CLDCM_Booklet Overview.qxd 4/29/10 7:44 PM Page 8 8 Connecting Landlocked Developing Countries to Markets 4. The legal and administrative provisions and procedures for moving goods, including: Customs mechanisms for implementing the transit of goods Complementary mechanisms to facilitate the movement of vehicles and people, including vehicle regulations, visas for drivers, insurance, and law enforcement. Structure of the Report This book is organized as follows. Chapter 2 aims to show the importance for LLDCs of obtaining affordable and dependable access. It reviews the commodities typically exported by LLDCs and notes their vulnerability to global shocks, such as the commodity price boom of the past decade and the financial crisis that followed in 2008 09, as well as regional and national conflicts and extreme weather. It presents recent evidence on the cost and time penalties incurred by the trade flows of LLDCs vis-à-vis their coastal neighbors, which fall especially on imports. Chapter 3 focuses on the relationship between an LLDC and the transit country or countries it relies on for access to its markets. It assesses the political economy inherent in that relationship: what each party stands to gain from it and what economic policies and institutional arrangements should be promoted to make the relationship beneficial to both sides, within the recommended framework of public-private cooperation. In particular, this chapter addresses the question of how an LLDC can gain leverage to ease the constraints imposed by the reality of its access to markets depending on the goodwill and agreement of its neighbors. Chapter 4 examines the concept of a transit corridor, with attention to good practice in its management and how its performance can be measured consistently, in a way that best allows comparison across corridors. The framework for the regional cooperation needed for trade and transport is presented in chapter 5, which forms the core of this study. This chapter sets out the universal principles that should underpin a transit system for LLDCs. The working details of the transit regime are described in chapter 6, with reference to current experience in different regions. One of this study s main policy recommendations is to reform the regulation of the road transport industry for freight (trucking), encouraging the development of high-quality service among firms operating across borders. Only through such quality improvement is the paradigm of

WB196_CLDCM_Booklet Overview.qxd 4/29/10 7:44 PM Page 9 Landlocked Developing Countries and Their Developmental Challenges 9 mutual trust between transporters and border control agencies likely to be achieved. How this can be done is explored in chapter 7. Although road transport will remain dominant in the flow of goods along most transit corridors, railways, air freight, and inland waterways offer unrealized potential in certain markets. Chapter 8 examines the conditions under which these forms of transport can best play this role, and the policy implications for LLDCs. It also looks at the potential for facilitating logistics services and e-commerce. Chapter 9 concludes the book by bringing together the main policy recommendations that emerged from the study. Most of these recommendations are addressed to governments and private stakeholders involved in trade along transit corridors. But suggestions are also offered on how the international community can reorient its support to best effect. Several appendixes provide supporting analysis of individual trade corridors, institutional arrangements region by region, and regional transit systems and regimes. Vision for the Future The implementation of the recommended conceptual framework and its main components will make landlocked developing countries more active and successful participants in world trade. The framework does not require major investments or resources, but primarily a change of mindset, departing from the vision of state-led access programs with emphasis on infrastructure investment. Rather, the new vision for the future is that of seamless transit systems involving mutually beneficial partnerships between the governments of the landlocked and transit countries as well as a more cooperative, facilitating relationship between them and the private logistic services operating in the trade corridors. This objective can be achieved in a relatively short time with a catalytical contribution from international agencies, not only in financial support and technical assistance, but also through harmonization of practices and procedures related to transit and the trade corridors.

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