Logistics are key for the region

Improving logistics performance is at the core of fostering growth and competitiveness in Latin America. Better logistics strengthen domestic and foreign trade, and play an important role in attracting investment and creating employment in logistics-intensive sectors (WEF, Bain and World Bank, 2013; Shepherd, 2011; Blyde and Molina, 2012). Fundamentally, efficient logistics ensure good transport links and reduce transaction costs at large within the economy. In addition, it promotes integration into international trade, helping to boost exports, reduce import costs, and facilitate entry into Global Value Chains (Rodrigue, 2012; OECD/WTO, 2013).

Furthermore, logistics performance is also linked to enhanced levels of productivity as well as export sophistication, both of which are critical for facilitating structural change. After controlling for other variables affecting economic development, there is a statistically significant association at 1% between improved logistics performance on the one hand and productivity gains and sophistication of exports on the other (OECD/ECLAC/CAF, 2013). More specifically, countries improving their score by 1 point in the World Bank’s Logistics Performance Index (score between 1 and 5) would increase their labour productivity by about 35% on average (Figure 1). For instance, this would be the productivity gain for Paraguay or Venezuela if they were to achieve the same level of logistics performance as Portugal or Turkey. Similarly, the Dominican Republic would achieve the same gain if it were to raise its logistics performance to the same level as Korea. These are not small changes, but their economic impact would be significant.

Figure 1. Logistics and labour productivity: Partial correlations (values)

Note: 2012 data. Partial correlations used GDP per capita as a control variable. Outliers were discarded using the standard DFBETA methodology (no country in Latin America and the Caribbean was removed). Labour productivity is defined as GDP in US dollars per person employed in 2012, adjusted for purchasing power parity (PPP). The Logistics Performance Index is developed by the World Bank. In the legends, Chile and Mexico are included as Latin American countries rather than as OECD countries.
Source: OECD/ECLAC/CAF (2013) based on The Conference Board Total Economy Database, World Bank (LPI), Comtrade databases.

Logistics performance is particularly important for sectors of the economy which are highly dependent on intermediate inputs, time-sensitive in nature, or in which transport and logistics costs account for a considerable share of product value. When measuring logistics intensity in each economic sector based on logistics costs or time-sensitivity, Latin America’s production structure is on average more than three times more sensitive to logistics performance than that of the OECD countries (Figure 2). This result is driven by the region’s specialisation pattern, with a high involvement of logistics-intensive natural resources as well as fresh agricultural products and garments, which are time-sensitive. Therefore, not only would a better logistics performance boost the competitiveness of more goods – helping to diversify more Latin America’s economies – but it would be also gaining market share in Latin America’s traditional exports.

Figure 2. Time-sensitive, logistics-intensive exports (2010)
(% of total exports)

Note: Logistics-intensive sectors include mining, forestry and logging, wood manufacturing, paper publishing and printing. Time-sensitive sectors include agriculture, fisheries, food and drink manufacturing, clothing and horticulture. Latin America and the Caribbean (LAC) consists of 18 countries.
Source: OECD/ECLAC/CAF (2013) based on UN COMTRADE.

More efforts are needed to boost logistics performance in Latin America

The region still lags behind other regions in terms of its logistics performance. Moreover, although all countries in the World Bank’s Logistics Performance Index lag well behind the OECD country with the best score, some countries (Haiti, Cuba, Paraguay, Venezuela, Honduras, El Salvador, Bolivia and the Dominican Republic) have a differential that is 50-100% greater than that of Chile, the region’s leading country.

The region’s logistics gap is mainly due to areas, in which public policy plays a vital role. The largest gap is for infrastructure, followed by customs and then logistics services. The largest infrastructure gap is in the transport sector, notably in roads, where supply and quality remain below those typical of middle-income countries. In addition, the limited availability of co-modal transport options in Latin America contributes to elevated logistics and environmental costs.

Transport and logistics costs are substantially higher than tariff costs in Latin America. Average freight costs for trade between the United States and all its partners are less than double the tariff costs, but if only its LAC partners are considered the ratio rises to almost 9:1 (OECD/ECLAC/CAF, 2013). Thus, while some countries in the region have made considerable efforts in opening up to trade, a similar or greater efforts need to be invested in policy making to reduce logistics costs.

An integrated approach: short, medium and long term solutions

Several policies are needed to improve both “soft” and “hard” aspects of logistics. Since eliminating the gap for hard components like transport infrastructure cannot be achieved in the short run, it is important to implement policies that reduce transport costs of goods and services using existing infrastructures.

To close the transport-infrastructure gap, greater investment in the sector should be accompanied by improvements to the institutional framework. Vertical and horizontal coherence and co-ordination among stakeholders is also necessary to improve the efficiency of the transport sector.

Maximising the benefits from the current stock of infrastructure depends on the provision of “soft” aspects such as modern storage facilities, efficient customs and certification procedures, the use of information and communication technologies for logistics, as well as the promotion of competition in the transport sector. These elements can be used to encourage efficient use of available infrastructure and thus minimise logistics costs (OECD/ECLAC/CAF, 2013).

References: 

Blyde, J and Molina, D. (2012), Logistics Infrastructure and the International Location of Fragmented Production, IDB, Washington, DC.

Rodrigue, J.-P. (2012), “The benefits of logistics investments: Opportunities for Latin America and the Caribbean”, Technical Notes, IDB-TN-395, Department of Infrastructure and Environment, Inter American Development Bank, Washington, DC, April.

OECD/ECLAC/CAF (2013), Latin American Economic Outlook 2014, Logistics and Competitiveness for Development, OECD Publishing, http://www.latameconomy.org/

OECD/WTO (2013), Aid for Trade and Value Chains in Transport and Logistics, Aid for Trade and Value Chains Sector Studies OECD/WTO.

WEF, Bain and World Bank (2013), Enabling Trade Valuing Growth Opportunities, World Economic Forum, Geneva.