Shrinking Economic Distance: Understanding How Markets and Places Can Lower Transport Costs in Developing Countries

Even though transport costs have decreased in recent decades, the global economy is still not fully integrated. Developing countries face higher transport prices and longer shipping times than developed countries. For example, exporting to the United States from a low-income country is 57% more expensive than from a high-income country.

Shrinking the economic distance, or reducing transport prices and time related costs, between people and firms can greatly benefit developing economies by boosting productivity, creating jobs, raising incomes, enhancing food security, and lowering carbon emissions. Achieving these benefits requires efficient, high-quality transport.

This report examines the factors that keep transport costs high, delivery times long, and reliability low, aiming to guide policymakers in making reforms with impact.

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Main Findings:

Deregulating and increasing competition in the transport sector can increase the quality of service and lower prices.

Several countries have deregulated their trucking sectors over the past few decades, creating competitive sectors. In other countries, markets for trucking services are still not competitive, because of price regulation, formal and informal entry barriers that lead to high concentration, and collusion. The evidence shows that deregulation and strong competition in trucking benefit shippers and the economy.

Likewise, private sector involvement and competition between and within ports improve performance and reduce shipping costs. While consolidation and cooperation in the container shipping industry can lower costs due to economies of scale and scope, they can also increase prices because of increased market power.

Reducing the incidence of empty running trucks and cargo vessels can reduce transport prices.

Empty trucks and cargo vessels are common worldwide due to regulations that restrict picking up cargo at destinations, difficulties in matching shippers with carriers, and uneven distribution of economic activity. The impact of being able to find a return cargo has a significant impact on prices. Trucking prices to destinations with high economic activity, where it is more likely to find a return load, are about 14% lower than prices to areas with low economic activity.

Transport infrastructure can make it easier to overcome geographic barriers, but how well it does this depends on the quality, service, and operation of the infrastructure.

Distance, terrain, and weather all affect shipping costs. Reducing the distance for a typical food shipment in low- and middle-income countries by 100 kilometers can lower transport costs by about 20%. Using highways instead of smaller roads also cuts costs by 19%. Shipments during the rainy season cost about 6% more than those in the dry season, and this extra cost is higher in countries with poorer road infrastructure.

Policy Guidance:

Any reform agenda to develop efficient, high-quality freight transport and reduce economic distance should aim to foster efficient markets and places:

Efficient markets are markets in which service providers, workers, and suppliers have the incentive and ability to invest, innovate, increase productivity, and supply the best possible goods and services at the lowest possible prices and buyers can find the goods and services they need.

Creating such markets requires tackling market failures and market frictions -  including those caused by governments -  along the transport supply chain. Measures include strengthening competition for and in the market, promoting the development of efficient transport service providers, and improving demand aggregation and matching.

Efficient places mean that all places in the transport network—from road, rail, and water links to the nodes such as ports and border posts—are properly planned and function well. Such a transport network help mitigate the challenges of distance, terrain, and costs associated with dense urban areas, which can be worsened by climate change. Measures to create efficient places include building adequate transport infrastructure, improving the efficiency of port and border operations, and managing urban traffic.

About the Authors

Matías Herrera Dappe is a senior economist and the global lead on transport economics and policy at the World Bank, where he leads policy research programs on infrastructure with a focus on transport. He has published extensively on a wide range of topics, including infrastructure economics, economic development, trade and logistics, public-private partnerships, state-owned enterprises, competition, auctions, and fiscal policy. He holds a PhD in economics from the University of Maryland, College Park.

Mathilde Lebrand is a senior economist in the Prospects Group, a unit of the World Bank’s Development Economics Vice Presidency. Her research focuses on economic geography, transport, and trade. She has taught at the University of Montreal and worked at the World Trade Organization in Geneva. She holds a PhD in economics from the European University Institute.

Aiga Stokenberga is a senior transport economist at the World Bank, where she leads analytical work and investment and policy lending operations in urban mobility, regional economic corridors, and transport resilience in Latin America and the Caribbean and, previously, in Africa. She holds a master’s degree in international energy policy and international economics from the Johns Hopkins University School of Advanced International Studies and a PhD in urban economics and land use from Stanford University.