Source: adapted from Arvis, J-F, G. Raballand, and J-F Marteau (2007) The cost of being landlocked: logistics costs and supply chain reliability, Policy Research Working Paper 4258. World Bank, Washington, D.C. World Bank (2007) Connecting to Compete: Trade Logistics in the Global Economy. The Logistics Performance Index and Its Indicators.
The Logistics Virtuous and Vicious Cycles
The integration to the global economy remains a challenge for several countries with improving logistics performance a salient policy objective as economic and social consequences can be significant. Customs clearance, transport infrastructure (ports, airports and hinterland transportation), information systems and logistics services are all importance component of logistics performance. Understandably, the more performing is the logistics sector the more likely economic development opportunities will arise and with them employment and wealth accumulation. Achieving improvement in logistics performance can be seen as a challenge of shifting for a vicious to a virtuous cycle. Trade facilitation strategies are mostly promoting the development of logistics capabilities while protectionism is commonly associated with commercial inertia and difficulties to insure efficient freight distribution.
Several countries are caught in a vicious cycle where existing interests are using freight distribution as a rent extraction mechanism where regulatory burden, the lack of market forces are associated with limited incentive to invest in additional facilities, low quality services and complex procedures (customs, taxation, inspections, etc.). Moving away from this vicious cycle often requires trade facilitation reforms, such as market liberalization so that a virtuous cycle is implemented instead. Such an inertia is commonly difficult to break, but the benefits can be substantial since it leads to more open markets, the incentive for capital investment, the building of scale economies (and the associated reduction in transport costs), higher quality services and more efficient supply chain management.
The development and provision of advanced logistics services varies from country to country. In the developed world, these services are extensive, competitive and have grown substantially. In most developing countries, the market for logistics services is small, which can be a major deterrent for companies wishing to establish a market presence. Four main classes of logistical performance can be defined:
  • Logistics friendly locations. They benefit from the dynamics of a virtuous cycle in logistics performance by offering seamless procedures and high-quality infrastructure. The logistics industry is integrated globally implying that many firms are operating in several countries and are thus able to provide multinational services. Most of the advanced economies of Western Europe, North America and East Asia (Japan, South Korea, Taiwan, Hong Kong) are within this category.
  • Locations under comprehensive reforms. The logistics industry has experienced substantial changes with reforms across several sectors of activity (customs, infrastructure, services). Although there are still elements related to the vicious cycle (e.g. regulations), reforms are consistently been applied, such as lowering barriers of entry and promoting competition, which attracts global logistics firms. The logistics sector of these locations is growing rapidly with the setting of new supply chains and facilities. They correspond to the developing economies of Latin America, East and Southeast Asia, including South Africa and India.
  • Locations under partial reforms. They have implemented some of the core reforms but there is a strong inertia towards previous situation, which is the source of uncertainties. The most salient problems are related to difficulties in working across sectors (e.g. different modes), resistance to change (delays for reforms), governance problems (lack of clear ownership), and barriers to entry (protected activities). Logistics is operating in a complex and often arbitrary environment, but global demand, local market potential and the possibility of additional reforms is inciting global logistics firms to establish services over niche markets. African, South Asian, and the Middle Eastern countries are generally in this category.
  • Logistics unfriendly locations. They are caught in the vicious circle and there is limited indication that the situation will change. Most of the transport sector and logistics are controlled by national interests using these activities for rent extraction. Basic reforms in customs or key infrastructure are difficult to design and implement as there is limited support from the public and private sectors. There is limited incentive to invest in infrastructure or services, in part because governance is highly problematic. Less developed economies and most landlocked countries are within this category.