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Connecting to Compete - Trade Logistics in the Global Economy

Global Arab Network - David Morgan

Thursday, 04 February 2010 01:02

Morocco_-_Diversified_economy_keeps_the_growth_up

Recent improvements in the vital area of trade logistics are examined in a new report, Connecting to Compete: Trade Logistics in the Global Economy.

The report from the World Bank’s International Trade Department is based on the 2010 Logistics Performance Index which provides a snapshot of selected performance indicators in nearly 130 countries, including expanded information on the time, cost, and reliability of import and export supply chains, infrastructure quality, performance of core services, and the user friendliness of trade clearance procedures.

The 2010 LPI and its indicators encapsulate the firsthand knowledge of movers of international trade, collected amid the economic turmoil of 2009.

Logistics encompasses an array of essential activities—from transport, warehousing, cargo consolidation, and border clearance to in country distribution and payment systems— involving a variety of public and private agents.

A competitive network of global logistics is the backbone of international trade, the report says. Unfortunately, many developing countries have not yet benefited from the productivity gains of logistics modernisation and internationalisation implemented over the last 20 years by advanced economies.

Improving logistics performance has become an important development policy objective in recent years because logistics have a major impact on economic activity.

World trade is moved between countries by a network of increasingly global logistics operators. But the ease with which traders can use this network to connect with international markets depends in large part on country-specific factors such as trade procedures, transport and telecommunications infrastructure, and the domestic market for support services, the report points out.

The Logistics Performance Index and its component indicators provide a unique global point of reference to better understand these key dimensions of logistics performance.

Evidence from the World Bank team’s research indicates that, for countries at the same level of per capita income, those with the best logistics performance experience additional growth: 1 percent in gross domestic product and 2 percent in trade. These findings are especially relevant today, as developing countries need to invest in better trade logistics to boost recovery from the current economic crisis and emerge in a stronger and more competitive position.

The report identifies modest but positive trends in key areas such as customs, use of information technologies for trade, and investment in private services.

The 2010 report highlights new areas that need further attention, such as the coordination of agencies involved in border clearance and the quality of domestic trucking and customs brokerage services.

Income is not the only determinant of a country’s logistics environment. Even in low-income countries, policymakers can do much to boost performance.

Liberalising logistics services markets, for example, can encourage local service providers to increase quality and price competitively. This is particularly important in sectors such as trucking and customs brokerage that are essential to efficient service delivery by international forwarders.

Countries with low LPI scores tend to have higher average times to import or export. But it is important to keep these delays in perspective. Lead times reported by international forwarders are much shorter than shipping times. Landlocked developing countries are at a disadvantage because they cannot control shipping conditions outside their borders.

Importing into a landlocked developing country typically takes a week longer than for its coastal neighbours, but times can vary widely, especially in Africa.

Even more than time and cost, logistics performance depends on the reliability and predictability of the supply chain.

The level of logistics service available in the best performing countries is about double that in the lowest performing countries. In the lowest performing countries, importers and exporters incur extra costs as a result of the need to mitigate the effects of unreliable supply chains, for example, by increasing inventory to hedge against failed deliveries.

The costs of poor performance ultimately fall on end users or consumers.
Unreliability of logistics can come in many forms in low performance countries. Excessive physical inspection or inappropriate reliance on inspector discretion causes large variations in clearance times, and multiple inspections are frequent. Increasingly strict safety and security measures impair service provision in all but the top ranking countries.

Information obtained from logistics professionals reflected in the 2010 report is seen as relevant for helping to identify priorities for government agencies planning to implement reform agendas in cooperation with private stakeholders. It finds that:

Except in high-income countries, the availability and quality of trade-related infrastructure is a major constraint to performance—but the specific priorities tend to vary across countries. Information technology infrastructure is widely available and widely used for trade processing, even in low-income countries.

Efficient border management and coordination of the various agencies involved in border clearance is increasingly important. The performance of agencies responsible for enforcement of sanitary and phytosanitary regulation— and to a lesser extent other types of product standards—appears to lag well behind customs in many countries.

A major challenge for the international community is how to help the lowest performing countries benefit from an increasingly open global trading system.

These countries need to make substantial improvements in logistics competence, processes, and business practices, which may be difficult to attain given numerous other priorities.

While Connecting to Compete 2010 highlights priority areas for increased policy attention, the report offers an optimistic message. Logistics professionals assess the trends in logistics and trade facilitation in their country of work to be generally positive. The use of increasingly standardised information technology solutions in logistics is widespread worldwide, and customs reform has progressed in most countries, irrespective of their level of performance.

The report finds that the logistics performance of a significant number of countries is gradually converging toward the level attained in the top performing countries. Part of this convergence is driven by a global trend toward consolidation and homogenisation of service provision, especially in container, air freight, express cargo, and contract logistics.

The current economic situation will further encourage this trend, it says. But the increased awareness and proactive policies of a growing number of countries also play a major role in driving better performance.

A key finding of the research shows that low-income countries face severe constraints on infrastructure quantity and quality, as well as human, technical, and financial capacity. These factors all negatively affect performance in a sector that is complex on a technical level and requires a mix of public and private inputs to function efficiently.

However, income alone does not explain logistics performance. Policymakers now clearly recognise the importance of trade facilitation and logistics and are making visible efforts to put in place the structures needed to boost performance, the report says.
It highlights the importance of the reforms that various countries have been implementing.

Tunisia
For example, in 2009 Tunisia established a national logistics council—involving the lead government agencies and the private sector and reporting to the Prime Minister— to implement a comprehensive action plan building on earlier successes, notably in port facilitation. Some key components of the action plan dealing with border procedures, ports, and logistics services were included in the competitiveness program designed with the European Union, the World Bank, and the African
Development Bank.

Morocco has developed a similar programme.
Participants in the survey viewed the quality of information and communication technologies (ICT) infrastructure as superior to that of other types of infrastructure, with two or three times more respondents indicating that ICT infrastructure is high or very high quality compared with other infrastructure. In contrast, rail infrastructure appears to be a problem: rail is rated as being of high or very high quality by at most half as many survey respondents as in other areas—frequently far fewer.

Evident across all performance groups, this pattern suggests systematic dissatisfaction with rail infrastructure.

Road infrastructure appears to be slightly less of a problem across performance groups than other types of infrastructure, but road quality is of higher concern in the third and fourth quintile of performance.

The quality and competence of core logistics service providers is also an important aspect of overall country performance.

Also important, in the air and maritime transport sectors survey respondents are significantly more satisfied with service providers than with infrastructure quality, suggesting an important ongoing role for development of air and maritime transport infrastructure.

The quality of services sector regulation can be an important determinant of sector performance.

Regulations supporting competition by lowering entry barriers and reducing the incidental costs falling on service providers can encourage quality upgrading and cost effectiveness.

Geography and speed en route are not the only factors that can affect import lead times, the report finds. There is scope for reducing time across all dimensions of the border process (time to clear goods as opposed to lead time, which also includes transport), especially on the import side.

Ongoing efforts at border management reform need to focus on the prevalence of physical inspection, proliferation of procedures, and red tape in low performance countries.

Export supply chains typically face fewer procedural burdens than imports, evidenced by the shorter lead time to exports than to imports.

Customs is not the only agency involved in border management; collaboration among all border management agencies—including standards, sanitary, phytosanitary, transport, and veterinary agencies—and the introduction of modern approaches to regulatory compliance are especially important. Evidence points to more streamlined processes by customs agencies, across performance groups.

Indicators of red tape illustrate a lack of coordination at the border and the burden it imposes on private logistics operators. Operators in the highest performing countries typically deal with around half the number of government agencies as operators in low performance countries.

The same is true for document requirements: two or three documents are typically required in the countries with the highest LPI scores, versus five or six in those with the lowest scores.

The question of simplifying documentation has always been high on the trade facilitation agenda, reflected in the many initiatives to create single trade windows. Some business environment indicators—such as the Doing Business indicators from the World Bank and the International Finance Corporation—give high weight to simplification in this area.

However, simplifying documentation and single window initiatives may not be enough without addressing weaknesses in the other dimensions of border management and, more generally, the soft and hard trade-related infrastructure.

The reliability of the supply chain is the most important aspect of logistics performance. A high degree of uncertainty means that operators have to adopt costly hedging strategies, such as maintaining relatively high inventory levels.

Recent research suggests that these induced costs on the supply chain can be even larger than the direct costs of freight.

Traders face a tradeoff between direct freight costs and reliability, depending on their commodity and the logistics performance of each country. Reliability and logistics costs directly affect firm competitiveness and, for developing countries, the potential to diversify from time-insensitive commodities.

Taking a more holistic approach to the clearance of goods is a key element of today’s trade logistics agenda, the report concludes.

The holistic approach requires better collaboration among all border management agencies—including standards, sanitary, phytosanitary, transport, and veterinary agencies—and the introduction of modern approaches to regulatory compliance.

It matters little if customs employs high levels of automation and adopts principles of risk management allowing them to selectively examine goods if other government agencies are not automated and continue to routinely inspect all imported goods regardless of the risk they pose, the report concludes.

Global Arab Network

Report will appear in Arab-British Business, the bulletin of the Arab-British Chamber of Commerce.

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