It’s common for economists to argue that infrastructure investments are good for trade. Such investments are often on grand projects, such as new train lines, however. Research from the Vienna University of Economics and Business suggests that simply improving road quality might be equally beneficial.
The researchers suggest that one of the reasons for high trading costs when crossing borders is the often underdeveloped infrastructure in border regions. They highlight that despite many developing countries spending around 3% of their annual budget on transport, this rises to around 10% in many developing countries. They cite research showing that the volume of trade between regions depends heavily on the quality of the road network, and this is especially problematic in border areas as the quality can differ significantly between interior regions and border regions.
Stifling trade
The researchers examined data on the distances between over 200 cities across Europe, using either the formal “straight-line” distance (whether or not such a direct road actually exists); the road distance, taking into account the fact that people and goods travel over existing roads of adequate quality; and the travel time.
Most of the time the first measure is lower than the second, and often significantly so when suitable roads aren’t available and detours are required. The research shows that the road distance between cities within the same country is often significantly less than between cities in different countries, even when the straight line distance between them is similar.
For instance, the road distance between cities in the same country is around 9% higher than the straight-line distance, but this grows to 30% greater when connecting cities in different countries. What’s more, travel times are also 28% longer when driving between countries than within a country.
“Empirical studies show that the volumes of trade between regions in different countries are substantially lower than those between ‘identical’ regions within one country,” the researchers explain. “This is the so-called ‘border effect.’ It cannot be explained only by customs regulations. For instance, it takes place in Europe, where the borders are open. In some cases, it is even observed in trade within a country, when inter-regional trade is lower than that within a region, other things being equal.”
Lack of cooperation
This difference can largely be explained by the fact that national governments often try to optimize investment in national infrastructure, but there is seldom sufficient coordination of cross-border investment.
This results in more being spent on roads to connect interior regions than on roads to connect regions across borders. This epitomizes the so-called “free-rider problem” whereby few want to invest because they would prefer others do so for them. This increases the travel time between locations and acts as a barrier to trade.
The researchers note that even in the EU, where borders are frictionless in so many ways, most funds for road maintenance are allocated on a national level, with just 1% of EU infrastructure spending allocated for cross-border projects. By not making this investment, the researchers believe that it increases the “border effect” by around 21%, which reduces international trade by 18%.
“Increasing investment in cross-border transport infrastructure requires international coordination,” the researchers conclude. “Without it, countries will naturally invest less than is necessary, and this will affect the time, cost, and volume of trading.”
