the evidence suggests that a decline in international trade costs increases the returns from spatial characteristics that facilitate trade, such as being on a coast or a navigable river. Globalization has the potential to spatially concentrate economic activity within countries.
How Trade Costs, Infrastructure, and Institutions Affect Growth within Countries While the previous section discusses evidence on spatial reallocation of economic activity following globalization and integration in GVCs, this section discusses the extent to which domestic trade and transport frictions fragment domestic markets and disconnect farther-off regions from ports and metropolitan hubs. In fact, internal trade costs vary widely within countries. In India, internal trade barriers (such as corruption and local taxes) are estimated to make up to 40 percent of all barriers (Van Leemput 2016).3 In China, bilateral trade costs between cities that are not primates—the city that is disproportionately larger than any other in its jurisdiction—can be five times higher than that between Beijing and Shanghai (Yang 2018). Higher trade costs reduce domestic accessibility and value added and inhibit the ability of economically distant regions to specialize and trade. Based on recent empirical work on trade costs, this chapter proposes the following four stylized facts: 1. Infrastructure is not the only element of trade costs, or even the most important one. 2. The interaction of scale economies in transport and production spatially concentrates trade. 3. Improvements in infrastructure “hardware” may be necessary, but are not sufficient to reduce domestic trade costs for distant regions. 4. Complementary investments in “software” are needed so that a decline in trade costs does not widen spatial inequality.
Stylized Fact 1. Infrastructure Is Not the Only Element of Trade Costs, or Even the Most Important One Time in transit, information barriers, and market structure have important bearings on domestic trade costs. The cost of distance is 2.5 times higher in Ethiopia and 4.0 times higher in Nigeria than in the United States, even when controlling for the fact that the United States has more and better-quality roads (Atkin and Donaldson 2015). It is not only the poor quality of roads but also of logistics and trucks, as well as long queues at border crossings, that contribute to higher transport costs in developing countries (Redding and Turner 2015; Donaldson 2018).4 The higher costs of trade in Africa are partly explained by the use of old truck fleets that are fuel inefficient, the
Globalization and Digital Development: Bridging Distances within Countries
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