Infrastructure , Geographical Disadvantage and Transport Costs

We use several different data sets to investigate the dependence of transport costs on geography and infrastructure. Poor infrastructure accounts for 40% of predicted transport costs for coastal countries and 60% for landlocked. Landlocked countries can substantially reduce their high transport costs through improvements in own and transit countries' infrastructure. Analysis of bilateral trade data confirms the importance of infrastructure and gives an estimate of the elasticity of trade flows with respect to the trade cost factor of around -3. This means that raising trade costs by 10 percentage points reduces trade volumes by more than 20%. A deterioration of infrastructure from the median to the 75 percentile raises transport costs by 12% points and reduces traded volumes by 28%. Analysis of African trade flows indicates that their relatively low level is largely due to poor infrastructure. JEL number: F1, O1, O55