Measuring Impact of Trade Logistics Reforms ! Washington DC, April 6, 2011

1. MeasuringImpact of TradeLogisticsReforms! Washington DC, April 6, 2011 • UmaSubramanian ( Global Product Leader, TradeLogistics) • InvestmentClimateAdvisoryServices • World Bank Group

2. New Mantra: Managing for Impact • Clients’ and donors’ request for impact measures • How should we prioritize our interventions? • What is the impact of our work on investment and growth? • Where should we focus our efforts and funds? • IFC Strategy and Institutional Development Goals (IDGs) being tested (we are working with IFC Development Impact dept; M& E teams, etc) • M&E framework focused on tracking results and more recently reforms. No systematic measure of impact. • A new methodology for aggregating results into reforms has been developed in FY09 and is being piloted in FY10. Some products are using compliance cost savings measures (e.g. entry and tax) but the methodology does not work for Trade Logistics. • We are developing a methodology that measures impact of trade logistics reforms in a practical and relevant manner!

3. Rwanda: Measuring reforms for the private sector Practical reforms that have significant implications for increase in efficiency and productivity for the private sector. Question: how do we measure the benefits? • A total of 17 reforms since 2008! Reform examples include: • Implementation of automatic cancellation and validation procedures for inward and outward transit bonds. • What does it mean? Frees up working capital for traders. • Creation of risk management and intelligence unit, and implementation of risk based inspections and clearance regime. • What does it mean? Compliant low risk traders get speedy border clearance saving time and money. • Launch of a one bank counter for Majerwa (dry port) and Customs. • What does it mean? Simplifies the trade payment system for firms. • Removal of the import and export license. • What does it mean? One less document and less red tape.

4. What do we know? • Subramanian, Anderson and Lee (forthcoming 2011) • 1% reduction in export time could increase bilateral trade by a range between 0.18% (OECD countries) and 0.6% (Sub-Saharan Africa). • Djankov et al (2007): One percent reduction in time to export increases exports by 0.4 percent. One additional day in transit time is equivalent to a 70km increase in distance between trading partners. • USAID (2007): One extra day in transit for vegetables and fruit is equivalent to lowering price of produce by 0.9%. 8

5. What do we know? • David Hummels (2001): One day saved in shipping time is equivalent to a 0.8% reduction in ad-valorem tax for manufactured goods. • Subramanian, Anderson and Lee (2005) • Using China ES data, reducing customs clearance time by 1 day will generate: , • 2.1% increase In total factor productivity for Textile/Apparel Industry • 7.4% increase in total factor productivity for consumer goods 8

6. How to measure impact projections? Module1 Two Modules • Projections of increase in exports due to reduced time to trade • Module 2 Estimating cost savings to private firms due to trade logistics reforms

7. Module1 How to measure impact projections? • Projections of increase in exports due to reduced time to trade • Module 2 Estimating cost savings to private firms due to trade logistics reforms

8. Reducing Trade Transactions Time Has a Direct Impact on Trade Increases Export of … by … Sub Saharan Africa6.1% South Asia5.8% East Europe & Central Asia5.0% Middle East & N. Africa4.1% East Asia and Pacific Islands4.1% Latin America and Caribbean3.5% OECD 1.7% A 10% reduction export time For Colombia this is equivalent to US $740 million Direct implications for growth, private investment and poverty reduction Source: Forthcoming research paper (Subramanian, Anderson and Lee (2011)

9. Reducing time to trade by 10% has higher impact on countries with “creaky” regulations and procedures

10. Module1 How to measure impact projections? • Projections of increase in exports due to reduced time to trade • Module 2 Estimating cost savings to private firms due to trade logistics reforms

11. Building blocks to measuring Cost Savings … for Trade Logistics Projects Cost savings to private sector due to trade logistics reforms Inventory Cost Savings Lower User Fees and Charges Reduced Cargo Loss and Damage Decreased Capital Carrying Charge

12. How would you compute these cost savings?

13. Decreased Capital Carrying Charge Capital carrying charge = f {shipment value, interest rate, time to trade} Reduced Cargo Loss and Damage Cargo Loss and Damage= f{ Annual import value, frequency of damage or loss, percent value of consignment lost or damaged in transit}

14. Reduced User Fees and Charges Charge User Fees and Charges = f {documentation charges, port and terminal fees, trucking charges, time to trade} Inventory Cost Savings Inventory Cost= f{Inventory turnaround, interest charges for goods in storage, storage costs, inventory losses due to spoilage or damage in storage}

15. Key Features of the impact model • Parsimonious selection of data points to be collected as baseline! • Pre-determined parameters that will be refined by typology of countries going forward

16. Reform could bring 37% savings in trucking costs for a Rwandan firm!

17. Simplification and process re-engineering reduces inventory costs for Rwandan firm

18. Cost savings of over $30 million from import reforms for Rwanda (ex-ante savings estimation ) (discounted)

19. Do not Panic! Here’s what you will need to collect!

20. Here’s what you will need to collect! Baseline data (1)

21. Here’s what you will need to collect! Baseline data (2)

22. Thank you!

23. Non-linear Econometric Model: Stage 1: Estimated a multinomial logit model • Explanatory Variables • Income of Destination country (WDI) • Distance between origin-destination countries • Liner Shipping Connectivity Index (UNCTAD) • Cost to import of the Destination Country; DB 2009 • Time to import of the Destination Country; DB 2009 • Average Tariff of the Destination Country: (UNCTAD) Dependent Variable: Proportion of total goods exported from Country i to Country j = From the Multinomial Logit Model parameter estimates we can calculate inclusive value Stage 2: Export Regression Model • Independent Variables • Inclusive Value • GDP of Countries i and j • Liner Shipping Connectivity Index: UNCTAD • Infrastructural Quality (Global Competitiveness Index: WEF) • Time for exports of the Destination Country • Average Tariff of the Destination Country • Dependent Variable: Total Export of Country i to the World =