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Creating Global Value Through Efficient Trade Logistics

Creating Global Value Through Efficient Trade Logistics. Warren H. Hausman Hau L. Lee Uma Subramanian. Motivation for logistics indicators research Methodology for developing logistics indicators Cross country comparisons of selected logistics indicators

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Creating Global Value Through Efficient Trade Logistics

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  1. Creating Global Value Through Efficient Trade Logistics Warren H. Hausman Hau L. Lee Uma Subramanian

  2. Motivation for logistics indicators research Methodology for developing logistics indicators Cross country comparisons of selected logistics indicators Logistics indicators as determinants of bilateral trade Supply chain-based logistics index Overview

  3. What Determines Bilateral Trade?

  4. Past Studies on Bilateral Trade GDP GDP Distance Institutions Infrastructure Country characteristics Institutions Infrastructure Country characteristics

  5. Our Focus GDP GDP Distance Institutions Infrastructure Country characteristics Institutions Infrastructure Country characteristics Logistics Frictions (Time and Cost Metrics)

  6. Institutional quality and infrastructure variables have been based on subjective indices or expert assessments. Quantifiable and measurable logistics performance indicators have not been used. Variables used are not easily translated into operations i.e. not directly actionable. Best results without using country-specific dummy variables explain 66% of variability in bilateral trade. Research Opportunities

  7. Determine the significance of logistics performance in influencing bilateral trade through the use of measurable and quantifiable logistics indicators. Perform a critical assessment of logistics performance of countries globally. Develop supply-chain logistics index to guide resource allocation and deployment for improving logistics efficiency. Objectives of Research

  8. Snapshot of Methodology Focus on containerized imports & exports Textiles/ Apparel Coffee, tea, cocoa, spices • 140 Countries 2005 Survey • Detailed Questionnaire Survey • Extensive follow-up through email and phone calls by World Bank • Survey • responses from practitioners/ intermediaries (Panalpina)

  9. Total time for a trade transaction Document processing time Customs clearance Technical control Vessel turnaround Vessel waiting time for berth CSI related time Global Logistics IndicatorsDimensions of measurement: Examples Time Cost Complexity Efficiency Total cost for a trade transaction Port & terminal charges Document Processing Customs clearance cost Inland freight • Signatures for a trade transaction • Number of documents per transaction • Percent of containers inspected • Level of inspection • Criteria for inspection No. of containers unloaded per berth hour Port shutdown days Inland transport speed Frequency of vessel calls at port Source: World Bank Global Logistics Indicators Survey

  10. Methodology Framework… Pre-Arrival or Pre-Shipment Activity Imports Inland Transportation Border Clearance Exports Process 1 Process 2 Process 3 Process 4 Port & Terminal Handling Activity Process 5 Process 14

  11. Methodology: Assumptions Firm Product • Manufactured or processed products • (SITC 65; 84; 07)* • Medium valued product • Transported in dry cargo 20-ft (FCL) • Not: hazardous product, military equipment • Does not require refrigeration or special envir. • Does not involve any special phyto-sanitary or • environmental standards Private, registered limited liability company Medium size (200 employees or more) Located in the most populous city Domestically-owned with no foreign ownership Subject to commercial laws and regulations Exports >10% of sales to international markets Procedures Port • Interaction of firm with external parties • All legal procedures required for trade, • including those that may be “side-stepped” • in exceptional circumstances • Formal costs; no informal payments • included in cost figures • Port of entry and exit is a sea-port • Port is the one that serves the most populous city

  12. Poorer countries take longer to process trade transactions 150 Kyrgyz Republic Burundi 100 Niger Kazakhstan Days for an Import Transaction Mongolia Zimbabwe Nigeria 50 Nepal Nicaragua China Argentina Senegal Turkey Chile France Japan Philippines New Zealand Dominican Republic United States 0 Germany 10 20 30 40 GDP per capita (thousands of dollars) Source: World Bank Global Logistics Indicators Survey

  13. Average Time for a Typical Import Transaction By region 80 69 60 58 53 49 49 48 46 Days 44 40 41 37 36 33 28 20 14 0 OECD EAP LAC MENA SAS ECA AFR Source: World Bank Global Logistics Indicators Survey

  14. Landlocked Countries face bigger constraints Coastal countries Land Locked Countries 150 Uzbekistan Burundi 100 Rwanda Kazakhstan Median=61 Mongolia Days for an Import Transaction Burkina Faso Bangladesh Zambia Nigeria Median=30 Lesotho 50 Colombia Sierra Leone Togo Botswana Nicaragua Italy Nepal Italy Guatemala Paraguay Indonesia China Argentina Hungary Philippines United Kingdom Czech Republic Dominican Republic Japan Austria Singapore Germany 0 40 1 10 20 30 1 10 20 30 40 GDP per capita (thousands of dollars) Source: World Bank Global Logistics Indicators Survey

  15. Of the total time to import a container, hard infrastructure accounts: Coastal Countries About a third About a fifth Port and Terminal Port and Terminal Handling Handling 9% 12% Inland Inland Transportation Transportation 9% 24% Pre-arrival 52% Customs and Pre-arrival Inspection 62% 17% Customs and Inspection Landlocked countries 15% Source: World Bank Global Logistics Indicators Survey

  16. Total Cost for a Typical Import Transaction Cameroon 5787 Zambia 4616 Algeria 2248 Kazakhstan 2029 1800 China Korea 1631 United States 1428 India 1409 Brazil 1335 South Africa 1242 Malaysia 841 Ireland 821 700 Spain Sweden 550 Norway 506 Thailand 501 0 1000 2000 3000 4000 5000 6000 7000 US $ Source: World Bank Global Logistics Indicators Survey

  17. Regional Variations in Cost for a Typical Import Transaction AFR AFR 1983 438 LAC SAS 1677 286 ECA EAP 1370 104 SAS ECA 1277 77 EAP MENA 1130 74 MENA LAC 1120 73 OECD OECD 983 0 500 1,000 1,500 2,000 0 100 200 300 400 US Dollars Percent (Cost/ Per Capita GDP) Source: World Bank Global Logistics Indicators Survey

  18. Number of Signatures for Typical Export Transaction Congo, Dem.Rep. 42 Azerbaijan 40 39 Nigeria 21 Mongolia Lao PDR 17 15 Bangladesh 8 Senegal 7 Colombia 7 China 6 Venezuela United States 5 5 Italy 5 Ireland Korea 3 3 Indonesia 3 France Finland 3 2 Singapore 0 10 20 30 40 Number of Signatures Source: World Bank Global Logistics Indicators Survey

  19. Higher Hurdles for Poorer countries 30 29 Number of Signatures for Imports 20 16 13 10 9 8 5 4 2 0 High income Upper middle income Lower middle income Low income Total For Customs Source: World Bank Global Logistics Indicators Survey

  20. Percent of Import Containers Inspected By region 80 72 64 60 53 50 Percent 40 42 34 30 24 24 20 23 20 15 0 EAP ECA MENA AFR LAC SAS Trade/GDP Percent of Containers Inspected Source: World Bank Global Logistics Indicators Survey

  21. Percentage of Import Containers Inspected 100 80 60 40 20 0 Jordan Mexico Turkey Japan Columbia Pakistan Nigeria USA Bangladesh Malaysia Germany Sri Lanka Dominican Rep. South Africa Source: World Bank Global Logistics Indicators Survey

  22. Bureaucracy inversely related to income 80 69 60 Percent 44 40 29 20 11 0 High income Upper middle income Lower middle income Low income Percent of Containers Inspected Source: World Bank Global Logistics Indicators Survey

  23. Criteria for Selection of Containers for Customs Inspection (Sample countries) Routine Inspection of all containers Containers Selected for Inspection Based on Risk Analysis India Mozambique Pakistan Vietnam Sri Lanka Nigeria Kenya Egypt Ghana Honduras Germany Sweden Spain Australia France Thailand Latvia Serbia-Montenegro Slovak Rep Bosnia & Herzegovina Source: World Bank Global Logistics Indicators Survey

  24. Augmented Gravity Model Basic Attraction • Exporter GDP • Importer GDP • Distance Bilateral Trade • Time • Cost • Variability Logistics Indicators Institutional Quality • Exporter’s corruption index • Importer’s corruption index • Regional trade agreement dummy

  25. Critical Global Logistics Indicators Time • Exporter’s average time for all procedures • Importer’s average time for all procedures Cost • Total costs for import-related procedures • Exporter’s Max Time – Average Time for all procedures • Importer’s Max Time – Average time for all procedures Variability

  26. Augmented Gravity Model Results Coefficient t-Statistic Log GDP exporter Log GDP importer Log distance Log Exporter’s Avg Time for Procedures Log Importer’s Avg Time for Procedures Log of Importer’s Total Cost for Procedures Log Exporter’s Max Time – Avg Time Log Importer’s Max Time – Avg Time Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Adjusted R-Squared Observations F-Statistic 1.265 0.956 -1.390 -0.373 0.171 -0.492 -0.236 0.090 0.188 0.134 0.343 75.57 54.17 -39.02 -5.24 2.13 -10.68 -4.28 1.18 10.82 6.27 4.73 0.716 5149 1287.0

  27. Measurable and quantifiable logistics indicators improve explanatory power of gravity model for bilateral trade. Logistics indicators results show efficient logistics in time and cost can contribute to increased trade. Variability matters – higher variability in processing time can be a deterrent to bilateral trade. Observations

  28. A single metric to evaluate and measure logistics efficiencies Weights of each variable in the Logistics Index show relative benefits Use weights to guide resource allocation and deployment of logistics improvements A single measure enables quick and easy benchmarking Supply-Chain Based Logistics Index

  29. Supply Chain-Based Logistics Index Distance Shipping Cost Total Cost of Processing Trade-Related Costs Total Landed Cost Total Time (Freight + Ports) Inventory Cost (In-Transit) Coefficient of Variation of Total Time Inventory Cost (Safety Stock) Product Cost

  30. Three-Stage Logistic Index Estimation • Log Exporter GDP • Log Importer GDP • Exporter’s Corruption Perception Index • Importer’s Corruption Perception Index • Regional Trade Agreement Dummy Bilateral Trade Stage 1 • Log Distance • Log Total Processing Cost • Total Time • Coeff of Variation of Total Time Logistics Index Residual from Stage 1 Stage 2 • Stage 1 variables plus • Logistics Index Bilateral Trade Stage 3

  31. Stage 1 Logistics Index Model Results Coefficient t-Statistic 1.200 0.888 0.298 0.252 1.005 61.67 46.04 24.09 17.85 11.5 Log GDP exporter Log GDP importer Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Adjusted R-Squared Observations F-Statistic 0.620 5149 1710.0

  32. Stage 2 Logistics Index Model Results Coefficient t-Statistic -1.307 -0.232 -0.007 -0.947 -34.61 -6.02 -3.74 -4.56 Log Distance Log of Total Trade Related Costs Total Trade Related Time Coeff of Var for Total Time Adjusted R-Squared Observations F-Statistic 0.225 5149 385.0

  33. Stage 3 Logistics Index Model Results Coefficient t-Statistic 1.285 0.925 0.253 0.164 0.346 1.083 76.1 55.55 22.86 12.5 4.87 41.13 Log GDP exporter Log GDP importer Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Logistics Index Adjusted R-Squared Observations F-Statistic 0.713 5149 2317.0

  34. Model Comparisons Augmented Gravity Model Logistics Index Model Number of Variables Adjusted R-Squared F-Statistic 11 0.716 1287.0 6 0.713 2317.0

  35. Implications for Logistics Improvements* A one percent reduction in: Results in this % increase in trade: “Distance” (surrogate for shipping cost) Trade-related cost Trade related time (average) Standard deviation of proc. time 1.415% 0.251% 0.143%** 0.308%** * Based on Stage Two and Three Regression Results ** Calculations based on exports from Brazil, China and Pakistan to US and UK

  36. It is possible to derive a single logistics index that captures all the explanatory power of all the logistics indicators. The logistics index is a significant determinant of bilateral trade. The logistics index is derived from distance, time, cost and variability measures. Logistics Index Observations

  37. Logistics indicators are a significant determinant of bilateral trade. A single Logistics Index has equal explanatory power to the set of logistics indicators. Private enterprises and government agencies should collaborate to improve logistics performance and reduce logistics friction in order to foster trade. The Logistics Index can be used to guide resource allocation and deployment for such improvement projects. Summary

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