Economists and business analysts have employed every methodology imaginable—from gravity models to general equilibrium models, from freight flow simulators and regressions to supply chain analyses—to understand the impact of logistics bottlenecks on trade. The results are unambiguous: trade is impacted by logistics.
In many challenging markets, there is no access to finance for trade. This creates a gap between the funding needs of entrepreneurs and small business owners and what they are actually able to obtain in the market. Trade finance can fill this gap and facilitate global commerce at all stages of the supply chain, especially in developing countries.
The term “logistics” encapsulates the hard infrastructure in the transport networks—ports, airports, roads and rail, as well as the soft services needed to move goods—shipping, trucking, freight forwarding, warehousing and inventory management, customs clearance and border crossings—over that hard infrastructure. The hard and the soft elements of logistics are bound together by a third, more ephemeral, but equally important element: the rules and regulations that govern the use of infrastructure and services. These rules range from weight restrictions for trucks to customs clearance procedures, border inspection, phytosanitary requirements, and port tariff regulations, along with competition and anti-trust rules that govern land and ocean shipping and cargo handling practices. But still: when there are so many basic challenges to development, why spend time worrying about logistics?
Logistics matters because of firms’ competitiveness and the ultimate impact on the poor. For years, the World Bank and other development agencies have sought to understand the sources of economic growth and poverty alleviation to help client countries improve opportunities for employment and citizens’ quality of life. Intuitively, we recognize some factors of development—education, health, basic service provision—as pillars of this struggle. Other factors are more subtle, but also create the foundation for growth and poverty alleviation. Logistics is just such a factor of development.
A closer look
Logistics impacts firm productivity, drives economic competitiveness, and determines the cost of delivered goods. A recent World Bank analysis found that the logistics costs of delivered food products represent 20 percent to over 50 percent of the delivered price of food, depending upon the product and the trade route—about seven times greater than tariffs on imported foods.
In fact, as traditional barriers to trade—tariffs and duties—have steadily declined across the developing world in recent years, the physical cost of moving products has risen as a share of the final price of goods. Small companies—which are the engines of growth and the primary drivers of employment—are disproportionately punished by inefficient logistics costs. The Centro Logístico de Latinoamerica found that firms with turnover of less than $5 million per year spend 42 percent of their income on warehousing, inventory management, transportation, and distribution costs, while larger firms spend closer to 18 percent.
Firms in developing countries spend two to four times as much as firms in Organisation for Economic Co-Operation and Development countries on logistics as a share of the final price of goods. Logistics costs function like a regressive tax in cases like these, hurting the poorest consumers and smallest firms the most. So for a variety of businesses of the developing world, a reduction in logistics costs would translate into productivity gains and greater room for growth and employment.
Now let us return to the question of why logistics matters. For the poor, who may spend up to 70 percent of their income on food, a reduction in the logistics burden equals disposable income. As food imports soar as a share of consumption for the poor, logistics bottlenecks often center around ports. This is where road meets rail and both meet the ocean. At these ports, customs, phytosanitary, and security inspections cross with bonded warehousing, storage, and cargo handling. At these ports, trailers find chasses and containers are stripped, stuffed, and sent on their way to the people in need on the other end.