Impact of Transport Cost Reductions on Inequality

Improvements in transport infrastructures (modal and intermodal) and the concomitant reduction in transport costs may imply two major economic consequences:

• Exploitation of comparative advantages. Production can be located where the sum of inputs (such as labor) is minimal. Outputs can then be shipped to customers along the supply chain.
• Development of economies of scale. The concentration of production in one location so as to obtain economies of scale is also a consequence. Even if other locations may have lower productions costs, notably in terms of wages, they may not initially be sufficient enough to compensate for the advantages of economies of scale.

Considering the balance between the centrifugal effects of the exploitation of comparative advantages and the centripetal effects of economies of scale, globalization and its associated reduction in transport costs appears to promote the former more than the later. However, this shift is linked with a specific level of transport costs beyond which inequalities may be reduced. For instance, in the above figure, high transport costs characterize relatively self sufficient regional economies and a lower level of inequalities (A). As transport costs are reduced, inequalities are likely to increase since economies of scale are the first to benefit (B). The center has a higher rate of development than the periphery and a pattern of unequal trade can emerge, as it was the case between the developed and the developing countries. However, further improvements in transport infrastructures favor a more efficient use of comparative advantages, compensating for the initial economies of agglomeration advantages, a relocation of economic activities in the periphery and a wider access to the markets of the center. The likely outcome is a decline in inequalities (C). For instance, many developing countries, especially in Pacific Asia (Japan, Taiwan, South Korea, Hong Kong, Singapore and more recently China), have experienced significant growth of their economies. Since this growth is highly related to their growing access to the global economy (export-oriented development), transportation has been a significant factor in the reduction of inequalities.

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