FOREWORD
The following paper has not been presented during the Europaeum Summer School
2002 in Oxford. Indeed, the topic " the impact of land-lockedness on trade: an empirical
investigation through the Central Asian case" seemed to me rather too far from the topic of
the conference, which was the European economic integration.
Lectures and presentations have enabled me to better understand the topic of my
paper.
During the Summer School, it has been emphasized the limits of current economic
integration. Indeed, it appears that trade integration is crucial for the future development of
economic integration in Europe. Indeed, the importance of the impact of asymmetric shocks
depends on the level of economic integration.
However, whereas the financial integration has been almost completely achieved, real
integration i.e. trade integration remains largely incomplete. A strong home bias remains
persistent in Europe.
Several factors contribute to what was called trade resistance before. Economists still
try to determine what is limiting notably trade flows. Within this framework, transport costs
have been generally pointed as the main factor limiting trade expansion. The most used form
of transport costs modelling is the "iceberg" one from Samuelson. It is now attempted to
model in more details this component. However, the main difficulty is to measure this factor.
Obviously, distance and geographical factors in general can explain the level of
transport costs. Bilateral distance is, for instance, at the core, of the gravity approach.
Tinbergen (1962) empirically demonstrated the negative correlation between bilateral distance
and trade flows.
A new part of the literature is investigating the impact of borders on trade. Following
McCallum (1995), a concept of "border effect" has been defined. During the Europaeum
Summer School, Angela Cheptea presented a paper on "border effect and East-West
integration", using Head and Mayer model (2002), by defining transport costs as a function of
distance and border.
Technical barriers to trade could also explain impediment to trade. Pierguiseppe
Fortunato's presentation could constitute an element of evidence. The quality of information
1
between companies within different countries seems to be rather salient. Hence, the border
effect could also be explained by an information discrepancy.
The following paper is trying to investigate the impact of a geographic specificity,
land-lockedness, on trade. It has been demonstrated, with a gravity approach, that landlockedness has a major negative impact on trade. Indeed, according to Limao and Venables
(2001), land-lockedness reduces trade by 70% among the large used country sample.
This paper is trying to determine which factors explain the transport costs burden.
Land-locked developing countries have to cope on average with double transport costs vis-àvis the coastal developing countries. With that end in view, we try to demonstrate the
importance of border-crossing on trade especially within the CIS space. This empirical
analysis has been mainly focused on Central Asian economies due to the fact that almost none
have been dedicated to the analysis of land-lockedness in this region. However, the empirical
evidence of the negative correlation between the number of border-crossing and trade could
also be applied to Central European countries.
In this case, this paper can be linked to the topic of the Europaeum Summer School.
Borders greatly impede trade within Europe. Mitigating the economic effects of borders
between countries and limit transport costs by developing strong transport infrastructure could
consequently invigorate the development of European economic integration.
September 2002
2
THE IMPACT OF LAND-LOCKEDNESS ON TRADE:
AN EMPIRICAL INVESTIGATION
THROUGH THE CENTRAL ASIAN CASE
Gaël Raballand1
ROSES, Sorbonne University,
106-112 Boulevard de l’Hôpital
75013 Paris, France
Keywords : land-locked, gravity, transports costs, Central Asia.
1
I am grateful for comments and suggestions of Gérard Duchêne, Mathilde Maurel, Thierry Mayer, Yelena
Kalyuzhnova and one anonymous referee. This paper was presented in May 2002 during the Second Spring
school in economic geography in the University of Pau (France) and during the Second joint workshop ROSESCentre for Euro-Asian studies (University of Reading) in Reading (UK).
3
In this paper, the impact of land-lockedness on trade is estimated for a sample using a
gravity approach. Studying in a first step Central Asian economies, it appears that landlockedness implies a high transport cost burden. In a second step, the impact of landlockedness on trade has been measured using three measures of land-lockedness: the first
estimation is obtained thanks to the introduction of a dummy variable, the second uses the
shortest distance between a land-locked country and the nearest major port facility and the
third represents the number of borders with coastal countries. Over more than 4500
observations, among a 46 country sample over a five year period, land-lockedness would
reduce trade by more than 65 % when measured by a dummy variable. The two other
measures are confirmed by panel database analysis. Deriving from several regressions, it
appears that transport cost burden is the main determinant of this negative impact of landlockedness on trade.
Journal of Economic Litterature classification numbers: F12, F17.
4
1. INTRODUCTION
The fall of the USSR led to the creation of 15 new countries. Among them, nine were
landlocked. According to the geographic definition, a landlocked country is one, that does not
have open access to the sea2. At present, more than one out of five countries in the world is
land-locked.
If we exclude micro3 or mini European States4, only two out of 38 land-locked
countries are classified as high-income economies5, all of them being European States6
whereas 46 out of 207 coastal states are classified as high-income economies. The economic
definition of land-lockedness is much more complex than the geographic one. Countries are
economically land-locked in the sense that their economic development is constrained when
several factors (geographical, economic and even political) are present like remoteness from
major markets, poor infrastructure, border crossing difficulties or high transportation costs. It
is worth noting that most of these factors are present as well in island developing country
economies.
Until now, most of the papers broaching this topic have been mainly centered on the
linkage between land-lockedness, transport costs and infrastructure or land-lockedness and
growth: in the first case, Radelet, Sachs (1998), Stone (2001), linked to growth, MacKellar
(2000)). The only notable exception is Limao, Venables (1999) who really did a survey of the
impact of land-lockedness on trade.
2
Open access to the sea does not mean absence of seacoast. This distinction is particularly salient for Central
Asian countries. Indeed, the Caspian is a salted sea. The canal Volga-Don links the Caspian Sea to the Black
Sea. Nevertheless, one can not consider this canal as breaking the land-lockedness of Central Asian countries.
Central Asian countries do not have any sovereignty right vis-à-vis the canal, which is not the case when you are
a recognized coastal State. On the economic basis, this system of canals does not break economic isolation
because Russian authorities are overcharging ships crossing Volga-Don canal (13300 USD), Volga-Baltic
(10000 USD), thus limiting drastically exports via inland waterways from Central Asian countries (cf. National
Ports and Waterways Institute (1996)).
3
See geographers' classification, for instance in Sanguin (1983).
4
Andorra, Liechtenstein, Luxembourg, San Marino.
5
World bank's classification: www.worldbank.org/data/databytopic/class.htm
6
Austria, Switzerland.
5
Through which mechanism a difficult access to port facilities can have an impact on
countries’ development? A priori, this fact should not seriously impede trade and economic
growth. Nevertheless, Europe excepted, it is what is happening in the world nowadays.
The objective of this paper is to quantify precisely the impact of land-lockedness on
trade using a gravity approach. This paper will also demonstrate empirically that land-locked
countries are equally geographically land-locked but not necessarily equally economically
land-locked. The impact of land-lockedness is far greater for Central Asian countries, which
accumulate geographical, economic and institutional obstacles rather than for Central
European countries, which gather geographical, economic and institutional strengths. The
geographic definition of land-lockedness does not coincide with the economic one. The
empirical analysis will start from the application to Central Asian countries7 as this region has
been neglected in the surveys concerning land-lockedness and is gravely affected by this
geographic factor. Land-lockedness of the region has been frequently pointed to since 1991 to
explain the growing gap between Russia's Southern and Western flanks. First, several points
linked to impact of land-lockedness in this region will be highlighted. Then we will realize if
this particular case is confirmed in a more general context of land-locked countries.
2. CENTRAL ASIA, LAND-LOCKEDNESS AND TRADE
It is generally pointed out by geographers that the new economic geography neglects
‘real places'. Geographers have studied land-lockedness issues extensively, and to get a better
understanding of this topic, it is crucial not to neglect their contribution. These assumptions
applied to Central Asian countries could give a better overall view of the economic impact of
this geographic factor.
According to geographers, land-locked states’ independence has generally been
granted in exchange for agreeing to accept territories with inadequate climates and economic
difficulties. Most of these states are quasi-deserts, deserts, or mountainous areas. Most of the
European land-locked states are on the Alpine Arc, most of those in Africa lie in the Sahel
region or on the continental ridge, and the Central Asian land-locked states are at the heart of
the largest endoreic8 basin, mostly semi-desert. Land-locked countries are generally small
countries9.
7
In this paper, Central Asia is defined as post-Soviet Central Asia, which includes five countries: The Kyrgyz
Republic, Kazakhstan, Tajikistan, Turkmenistan and Uzbekistan. Although some tables include countries like
Afghanistan or Mongolia, the analysis is centered on post-Soviet Central Asia.
8
A region, whose surface drainage waters do not reach the oceans.
9
Indeed, the average land area of high-income economies is around 720,000 square kilometres, 730,000 for
middle-income economies, 520,000 for low-income economies and only 410,000 for land-locked countries.
6
This resource deficit is obvious when compared to coastal states. Geographers tried,
for instance, to create new tools and criteria in considering the economic viability and
independence of land-locked states. With this end in view, the concept of "economic
density"10 was introduced. According to this work, economic viability and independence of
land-locked states is a function of the level of their economic activity vis-à-vis their coastal
neighbouring states. Land-locked countries’ territory cannot enable these states to have a high
level economic of activity relative to coastal ones. Economic density proxy is the total GDP
divided by country’s surface area. Table 1 gives some examples of these comparisons for
Central Asian countries.
Table 1: Economic density comparisons
Coastal states
Russia
China
China
Uzbekistan
European Union
European Union
European Union
Land-locked States
Kazakhstan
Kazakhstan
Kyrgyzstan
Kyrgyzstan
Luxembourg
Austria
Switzerland
Ratio coastal/land-locked
2.1
15.9
7.4
2.1
0.4
1
0.5
Source: GDP (in 1998) and countries area figures from World Development Indicators.
Table 2 shows the economic vulnerability of Central Asian land-locked states vis-à-vis their
neighbouring countries. It is worth noting that it also demonstrates differences among the first
category countries: economic density is, for instance, more than two times higher in
Uzbekistan in comparison with Kyrgyzstan. This table can also be interpreted as being
symptomatic of inadequate economic resources in these countries and explain, in a certain
way, low trade levels.
Finally, for geographers like Debrie and Steck (2001), the impact of being landlocked
is relative. Indeed, throughout history, a country could be seen favourably as being centrally
located, whereas several decades later, perhaps after a period of economic decline, it would be
considered to be land-locked. For instance, in the XVIth century, Central Asia was the centre
of East and West trade. The conflict between the Persian and Ottoman empires led to a mutual
blockade. According to Amineh (1999), it induced the start of an economic decline of Central
Asia in the XVIIth century. Trade flows increased again when Russia annexed the region. In
Calculations from World Bank data, calculated for 43 high-income, 91 middle-income, 64 low-income and 41
land-locked independent countries.
10
Doumenge, pp. 11, 20, 21, (1986).
7
other words, a country can be considered either as centrally located or land-locked even
though it has the same geographical specificity, the absence of coastline.
Economists' attention has mainly been concentrated on the transport costs issue.
Radelet, Sachs (1998), using CIF/fob data from IMF for 97 developing countries (of which 17
were land-locked), have estimated that transport costs and insurance are twice as high for
landlocked countries as coastal countries. Authors demonstrate the link between transport
costs and economic growth notably for developing countries. For these states, exports are
crucial for earning foreign currencies, and are necessary for purchasing imported capital
goods for reaching growth in the long run. Higher shipping costs dramatically reduce rents
earned and make more expensive intermediate goods imports. In conclusion, Radelet and
Sachs state that "geographic isolation and higher shipping costs may make it much more
difficult if not impossible for relatively isolated developing countries to succeed in promoting
manufactured exports". Gallup, Mellinger and Sachs (1999) highlight the fact that land-locked
countries may be disadvantaged through three channels: cross-border migration of labour is
more difficult than internal migration, infrastructure development across national borders is
much more difficult to arrange that similar investments within a country, and coastal
economies may have military or economic incentives to impose costs on landlocked countries.
Limao, Venables (1999) find the same results concerning transport costs. They also highlight
the positive mitigating effect of infrastructure. Using the gravity approach, these authors
estimated that the median landlocked country only has 30 % of the trade volume of the
median coastal economy. Applying their gravity to Sub-Saharan Africa, they find that poor
infrastructure is a major determinant of the low bilateral trade values of African economies.
MacKellar, Wörgötter and Wörz (2000) chose to analyse the impact on growth. Over the
period 1960- 1992, they estimated that land-lockedness reduced growth percentage by 1,5 %
per year among a sample of 92 low-income and middle-income countries. As a policy
response, derived from theoretical models, they advocate developing alternative transportation
routes. According to them, efforts should concentrate on transport issues and incidental and
trade policies because it is "fundamentally a transport problem". Finally, they argue that the
regional dimension is crucial regarding this topic. Stone (2001) using IMF estimations of
"freight payments as a percentage of imports" found a comparable transport cost burden. Out
of 64 possible comparisons between land-locked countries and transit countries, 47
differences in transport costs were in favour of transit states, which means that in ¾ of the
cases, transport costs are higher in the land-locked country than in the transit one.
8
Consequently, economists focus on the transport cost burden. This assumption is confirmed in
the case of Central Asian countries (cf.Tables 2 and 3).
Table 2: Transport costs of Asian land-locked States
Land-locked
country
Transport
costs Transit country
(in percentage
import values)
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
Uzbekistan
Average 3
Russia
Russia
costs Difference Landof locked/transit
countries
5.3
0.2
5.3
5
Russia
5.3
of
5.5
10.3
n/a
14.5
n/a
10.1
Transport
(in percentage
import values)
Russia
9.2
4.8
Source: Stone (2001).
Table 3 : Comparative costs of shipping a container from the USA to Central Asia
Country of destination
City of destination
Kazakhstan
Kyrgyzstan
Russia
Turkey
Almaty
Bishkek
Moscow
Ankara
Port of entry
Cost in USD
Great circle
distance
(in km)
St. Petersburg
St. Petersburg
St. Petersburg
Izmir
12000
12000
6000
4000
10490
10478
7828
8733
Source: Stone (2001), page 36-37.
From the table 2, we can see that transport costs are almost twice as high for Central
Asian countries as for Russia. The main issue is to correctly estimate transport costs. IMF
estimations contain several statistical biases11. But when referring to real costs figures for
shipment, it appears, once again, that a transport price discrepancy between Central Asian
states and countries like Russia still exists.
Central Asia has already had to cope with important transport costs increases. Lloyd
(1997) states that in the XIXth century, in order to avoid exorbitant tariffs imposed by
Russian authorities on goods transiting Afghanistan, Indian and Bukharan merchants
established alternative trade routes. Russian officials created a strong trade redeployment
through an intervention on transport costs. The development of an efficient transport network
(linked to Russia) in the late XIXth century (mainly through Transcaspian railway
construction) finally secured Russia's economic control over Central Asia by controlling of
exports “white gold”, i.e, cotton12. This problem is more acute in the case of Central Asian
economies whose trade is highly concentrated on products intensive on raw materials, with
11
For discussions of these biases, see Stone (2001)., page 7.
In five years, between 1888 and 1893, cotton carried by the Transcaspian railway was multiplied by a factor of
four.
12
9
low added value13. Moreover, the predominant modes of transportation are almost exclusively
by land (road, rail or pipeline). Indeed, air freight is negligible in the region. According to
World Bank data in 2000, air freight (estimated in millions of tons per kilometre14) was
limited to 12 for Kazakhstan, 4 for Kyrgyzstan, 3 for Tajikistan, 12 for Turkmenistan and 75
for Uzbekistan; these figures compared to 30.131 for the USA, 1.937 for Switzerland and
1.041 for Russia. Pomfret (1999) characterize air transport as ”minimal” in the region.
Although cheaper than air transport, transportation by rail, road, or even pipeline15, is
burdened by high costs.
High transport cost can also have an important effect on trade direction. According to
Leamer and Storper (2001), decline in trade with adjacent countries16 could be reinforced as a
result of the development of the new economy. Indeed, though the importance of face-to-face
contact will not disappear, new technologies make possible greater linkages at very long
distances. For this reason we can expect a further decline in adjacent trade. Leamer and,
Storper have calculated that adjacent trade declined from 30,6 % to 27,6 % among OECD
countries between 1970 and 198517. Analysing figures for Central Asian countries, it seems
that adjacent trade is still strategically important for them (cf.table 4). This ties in with
Radelet and Sachs' assumption that for high shipping cost countries, it is much more difficult
to promote export-led growth, even if tariff rates are reduced and prudent macroeconomic
policies implemented. It seems that land-locked countries are consequently prone to trade
with neighbouring countries.
Table 4: Adjacent trade18 share in total trade of Asian land-locked countries
Countries
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
Adjacent trade share
50,4
32,6
32,9
33,6
13
According to the COMTRADE database, at a level of three or four digit figures, exports were highly
concentrated on products intensive in raw materials in 2000: the five main export products represented
respectively 90% of the total exports in Turkmenistan, 90% in Tajikistan, 70% in Kazakhstan, 60% in
Kyrgyzstan and 60% in Uzbekistan. Among all these flows, only aircraft parts in Tajikistan, textile fabrics in
Turkmenistan or flat rolled iron in Kazakhstan can not be considered as completely dependent on raw materials.
But the vast majority of exports from Central Asian countries is derived from natural resources, with a
subsequently potential for value-added.
14
According to World Bank World Development Indicators, this data represent the sum of the metric tons of
freight, express, and diplomatic bags carried on each flight stage (the operation of an aircraft from takeoff to
its next landing) multiplied by the stage distance of air carriers registered in the country
15
According to a senior oil company official, the transport component can be estimated at 2-3 dollars per barrel
for the Caspian oil over a total cost of 10-12 dollars per barrel, or approximately 20%.
16
Adjacent trade is the percentage of trade between adjacent countries.
17
Cf. Leamer and Storper (2001).
18
Calculations have been done for imports only.
10
Uzbekistan
Average for five C.A. countries
OECD 1985
18,2
33,5
27,6
Source: Leamer, Storper for OECD 1985 ; author's calculations from IMF DOTS.
Adjacent trade share varies among land-locked countries. It is most probable that this
figure depends on the market sizes of neighbouring countries. That is why Kazakhstan, which
borders on Russia and China, has the highest shares. Nevertheless, the average share is still
higher than that of the OECD countries' as calculated by Leamer and Storper.
3. ESTIMATION OF THE IMPACT OF LAND-LOCKEDNESS ON TRADE
In recent years, the economic modelling of geographical disadvantage has been analysed.
Redding and Venables (2000) developed a theoretical model to capture market access
penalties. From this framework, they derived a gravity-like relationship but did not really take
into account land-lockedness specificity. We use this model, further defining the transport
costs component, and adding more geographical variables. Redding and Venables (2000)
main assumptions are deriving from a theoretical framework based on a standard new theory
trade model, extended to include transport frictions in trade and intermediate goods in
production19. A gravity-type relationship is estimated using measures of market and supply
capacity and transport costs (cf.equation 1).
ni pi xij = S i M j (Tij )1−σ
(1)
Market access ( Mj ) is the appropriately distance weighted sum of the market
capacities of all partner countries, and supplier access ( Si ) is the analogous sum of supplier
capacities, measuring the proximity of an importing country j to suppliers of manufactures.
(Tij )1−σ measures bilateral transport costs between countries.
We assume supply, market capacities and bilateral transport costs defined as followed:
S i = f ( Popi , Gdpi , Instit i )
M j = f ( Pop j , Gdp j , Instit j ,Volatil ij , Access j )
(Tij )1−σ = f ( Distij , Landlockij , Tariff i , Infrai , Infra j )
With this end in view, the benchmark equation is the following:
M ij = α + β Popij + γ Pop j + δ Gdpi + ε Gdp j + λ Dist ij + κ Landlock ij + ρ Tariff i +
τ Accessi + ξ Instit i + ψ Instit j + ω Infrai + ι Infra j + σ Volatil ij +
19
μ
(2)
It is deriving from models explicited in Fujita, Krugman, and Venables (1999).
11
3.1 Definition of the variables
According to Bayoumi (1999), exchange rate volatility has a negative impact on trade.
This should be stronger for developing countries because of the absence of a "forward
exchange rate" mechanism (Viaene, 1992). To the contrary, Wei (1998) found empirically
that the impact on trade is higher for developing countries and the presence or not of hedging
instruments is not relevant to explain this phenomenon. Volatilij is the bilateral exchange rate
volatility (for further details, see appendix B). A positive correlation between exchange rate
volatility and trade growth is frequent in empirical studies. Economic authorities, especially in
developing countries, sometimes use exchange rate for absorbing macroeconomic external
shocks and it enables them to develop trade in the mid-term.
Tariff i is the mean tariff duties vis-à-vis the imports in percentage (unweighted).
Volatilij and Tariff i have been introduced in order to avoid capturing exchange rate and tariffs
effects when estimating land-lockedness variables. It is difficult to collect consistent
protection data on Central Asian countries and countries in transition in general and the most
important trade impediment in this regard is non-tariff duties or non-conventional protection.
It is important to avoid what the former US Treasury Secretary, Lawrence Summers, called
the "tyranny of geography"20. He warned against concluding that "the economic failures of
isolated, tropical nations with poor soil, an erratic climate and vulnerability to infectious
disease can be traced simply to the failure of governments to put in place the right enabling
environment". As Anderson, Marcouiller (1999) pointed, along with geographic factors, it is
crucial to introduce a variable reflecting institutional capability to explain trade level. It is all
the more important that several geographers think that the institutional factor is crucial to
understanding correctly the negative impact of land-lockedness. Knack and Kiefer’s (1997)
indicators would have been a useful tool for analysis, but unfortunately they were impossible
to find for most countries of the sample. The selected proxy is Coface indicators (see
appendix B for details). Because land-lockedness is by definition a geographical specificity,
another geographical variable is introduced in the equation: the access to a large market. The
remoteness or location index has been estimated in several cases in the empirical trade
literature in the last few years (cf. Polak (1996), Helliwell (1997), Wei (1998), Smarczinska
(2001)). Market potential analysis is important among the new economic geography models.
Helliwell (1997), Fujita, Krugman and Venables (1999) used the same measurement: the
mean distance weighted by partners’ GDP. In this paper, following Gallup, Sachs and
20
Quoted in Hausmann Ricardo, (2001).
12
Mellinger (1999) a variable representing the market access disadvantage is introduced. It is
called Accessi , which is the shortest distance (in kilometres)21 between country s and one of
the three major markets: European Union, Japan or the US. Havrylishin and Al-Atrash (1998)
highlighted the positive linkage between openness, reform and trade in case of transition
economies. Consequently, in order to avoid capturing openness level with landlocked
variable, we did try to introduce an appropriate variable for trade openness. The first intention
was to use the Trade Openness Index calculated by Lawson, Gwartney and Skipton
(www.freetheworld.com) but it was finally impossible to make this choice due to numerous
missing countries (approximately half of the sample countries). Consequently, the only
variable capturing trade openness remains tariff duties. One has been able to compose an
infrastructure variable. In the last years, several articles have clearly demonstrated the major
mitigating effect of the negative impact of land-lockedness on trade (cf. Limao, Venables
(1999) Bougheas, Demetriades (1999) and Aghion, Schankerman (1999)). A composite index
has been calculated for all sample countries that combines the importance of paved roads,
railway networks and telephone lines. This variable is called Infrai or Infra j . Transport costs
are made up of several elements (transportation, customs duties, cost of delay, etc. …).
According to Hummels (1999), their impact is higher than that of customs duties. But there is
a major difficulty in obtaining reliable data. Most researchers used as a proxy, cif/fob
margins, but due to the unusual composition of the sample, it was impossible to collect
consistent data of cif/fob margin for most the countries of the sample.
The major interest of this paper is to measure the impact of land-lockedness on trade
using three measures of land-lockedness.
Successive estimations have been estimated. Firstly, a dummy variable has been
introduced for trade relations between two land-locked countries (equal to 1) or in another
case (0). The variable is called Landlockij . It is a traditional variable reflecting countries
characteristics.
The second estimation is more geographical. Indeed, ShortDi or ShortD j are the
shortest distance between a country and the nearest major port facility. Indeed, one factor that
could help to explain the difference in impact of land-lockedness on trade in Europe and in
Asia, is distance from a port. Indeed, Switzerland or the Czech Republic are 500- 600
21
The authors explain they experimented a certain number of distance measures, all of which produced similar
outcomes. Consequently, they chose the simplest. We make the same selection. But contrary to these authors, it
has not been weighted by population figures.
13
kilometres away from ports like Hamburg or Genoa whereas Almaty (Kazakhstan) or Bishkek
(Kyrgyz Republic) are more than 3,000 kilometres by road from Saint Petersburg or Karachi.
This variable is the shortest distance (in kilometres, by road) from the main economic city to
the closest major port facility. This fact is well-known by geographers and has been
emphasized in several publications. Using the distance to port facilities, Doumenge has even
developed a system of classification comprising four classes ranging from countries where
"land-lockedness is bearable" (distance from a port of less than 500 kilometres and access to
two major port facilities) to "excessively land-locked countries" (distance more than 2,000
kilometres)22. Even among land-locked countries, especially large land-locked countries like
Kazakhstan, different regions can be differently affected by this geographic specificity.
Indeed, Mangistau region is more than 1000 kilometres closer from Russian port facilities
than Almaty region. It is more difficult to demonstrate with this database (based on country
data) differences among regions. But, at least, this variable can underline the importance of
the pure geographical distance.
The third measure stems from a more bargaining approach because this aspect also
seems to be important regarding the impact of land-lockedness on trade. Coastnbi or
Coastnb j represent the number of borders with coastal countries. It is often pointed out that
the impact of land-lockedness depends on the possibility or not to bargain with several coastal
countries. It is often crucial for a transit country to attract transit trade flows from land-locked
states. If a monopoly exists for one coastal state, the bargaining power is inexistent for the
land-locked country and consequently the impact on trade is higher23. This is, for example, the
case of Turkmenistan, which can only rely on Iran to mitigate the effect of its geographical
location.
3.2 Statistical and econometric approaches
Contrary to most studies, all the CIS countries have been included in the sample,
notably all the CIS land-locked states (see Appendix I). The sample consists of 46 countries,
of which 18 are land-locked. African land-locked countries have been excluded because all
the existing surveys of this issue have been dedicated to these countries (UNCTAD, World
Bank), to the neglect of Asian countries (except Nepal, Laos and Mongolia). Nevertheless, the
disintegration of the USSR, followed by the Czechoslovakia split and the end of the Yugoslav
Federation produced 11 additional land-locked countries, which increased their numbers in
22
Doumenge (1986), page 21-22.
This fact has also been pointed out by MacKellar, Wörgötter and Wörz (2000), page 5, in order to justify the
development of alternative transport routes.
23
14
the world by one quarter. Estimations have only been conducted over a period of five years
(1995-1999) due to serious data inconsistencies before 1995 for CIS countries. The total
number of potential observations is 10.350. Due to statistical problems with tariff data,
observations number has been reduced to more than 4400. As concerns the statistical
approach, panel estimation has been selected with logarithmic form of the variables. As Egger
pointed out, most studies related to gravity-type estimations have been done with a crosssection methodology. According to him, two authors had recourse to panel methodology in
this case24. Panel econometrics enables us to capture the relationships between the relevant
variables and disentangle the time-invariant country-specific effects. The next question is to
choose between random and fixed effects. Selected choice should be the fixed-effects model.
But, in the case of the fixed-effects model, time-invariant variables cannot be tested. This is
precisely what we are striving to demonstrate, by highlighting the importance of geographic
factors on trade. That is why, we did have recourse to random-effects model.
3.3 Results
The main lesson from these estimations (see appendix C) is that the three measures of
land-lockedness are robust, with the inclusion of institutional and economic factors, which
means that land-lockedness does indeed have a major negative impact on trade. According to
the estimation with a dummy variable, land-lockedness reduces trade by 65%25 among this
country sample. This result is close to that of Limao and Venables (1999). Distance between
an importing country and major port facilities is also a salient point affecting trade level
differences among land-locked countries. This factor contributes to the explanation of why
Central Asian land-locked countries are far more crippled by their geographic specificity than
European land-locked countries. Concerning measures of land-lockedness, database analysis
confirms the importance of the bargaining power of land-locked states. Indeed, estimation IV
confirm that the greater the number of options a land-locked country has, the more it imports.
Land-lockedness has a lesser impact if the state without sea access has several options for
importing goods. It is all the more understandable when considering that countries such as
Switzerland or Austria or even the Czech or Slovak Republics in Central Europe have more
chance to bargain for reduced transit costs.
Estimations V, VI, VII is a combination of the three measures in order to define what
are the main determinants of the negative impact of land-lockedness. From the three
regressions, it appears that the geographical definition (of which the proxy is the shortest
24
25
Baldwin (1994) and Mátyás (1997) quoted in Egger (2000).
Impact = 1 – (exp (-1.05)) = 0.65
15
distance from ports) is the most robust measure. Indeed, when the three measures are
included, only ShortD estimations remain statistically significant with the expected sign.
Moreover, R-squared is the highest when ShortD measures are introduced in the estimated
equation. Hence, the geographical component is the most successful explanation of the impact
of land-lockedness on trade. That is why it is crucial to study extensively transport costs
burden. Indeed, additional distance from ports is contributing to increase substantially
transport costs.
The last geographic variable, the remoteness from major markets, is also statistically
significant and with an expected negative sign, which means that further you are located from
major markets, the least trade flows will be. It confirms that being land-locked at the core of
Europe is not equivalent to being land-locked in the heart of Central Asia.
Moreover, the estimations confirm the existence of gravity-type relations. It is even
more interesting in our case, to note that exchange rate volatility would not have any real
negative impact on trade. This confirms Wei’s results (1996) because our country sample is
mainly constituted of developing countries. According to him, only developed countries are
affected by this phenomenon. Indeed, exchange rate has become a major tool for authorities in
charge of economic policy used in order to thwart external shocks. In most of the cases, the
institutional variable is not statistically significant. This fact is most probably due to data
inconsistencies, but as pointed in appendix B, it is extremely difficult to obtain data for all the
countries of this sample regarding this issue.
4. TENTATIVE EXPLANATIONS OF THE IMPACT
How can this important negative impact be explained?
Sea access is nowadays crucial because maritime trade has gradually expanded in the
last three centuries. Decline of real costs of shipping (cf. Table 5) can explain the
development of maritime trade.
16
Table 5: Real costs of ocean shipping
400
376
350
300
298
287
250
200
196
150
100
100
50
107
47
51
0
1750 1790 1830 1870 1910 1930 1960 1990
Source: Crafts and Venables (2001).
For instance, in 1998, imports by liners was representing more than half of total US
imports26. Maritime trade has become more and more important for countries. States deprived
of sea coast could consequently be victims of this trend. In the same time, inland haulage
transport cost has not diminished at the same pace. According to Beilock and al. study (1996),
per kilometer costs for overland transit are approximately three times higher than for maritime
one.
A second possible factor concerns the border-crossing obstacle. Contrary to coastal
states, land-locked states have no maritime borders but only land borders. Surveys, notably
from UNCTAD, emphasize the real cost of border-crossing for land-locked countries. Several
costs are crippling these economies: tariffs, delays in border-crossing, technical costs of
adapting another transit system, and transparency issues at border-crossings. It is obviously
extremely difficult to estimate all these costs for land-locked countries. In any case, it is sure
that these obstacles are severe impediments to trade. Land-locked states are heavily dependent
on border-crossing. Beilock and al. (1996) calculated, from their database, that each bordercrossing within the FSU region implies over a 400 USD increase in per truckload freight
rates. Hence, multiplying border-crossings can be a factor that explains the impact of landlockedness on trade, especially among developing countries or those in transition.
The last, and most common explanation, is the transport costs burden. Stone (2001)
tried to estimate this factor. Overall, 18 out of the 30 land-locked countries studied have
transport costs higher than 10% of imports value while 11 of the 32 coastal transit countries
have rates that high. In Africa, for instance, 13 out of 15 land-locked countries have burdens
26
Fink, Mattoo and Neagu (2001).
17
of at least 10%, with 7 exceeding 20%. This factor is gathering several explanations. Hence, it
is most probably the best indicator of the impact of land-lockedness on trade.
4. CONCLUDING REMARKS
The main lesson from the estimations is that the three tested measures of landlockedness are robust, with the inclusion of institutional and economic factors, which means
that land-lockedness has indeed a major negative impact on trade with several determinants.
The main benefit of this paper is to demonstrate that the effect is closely linked to
geographical location, distance from major markets, main trade flows and main hub (airports
or ports) facilities measured by additional transport cost. Future research should be
undertaken on the relationship between countries accessibility, geographic specificities and
transport costs level.
Regarding the Central Asian case, until 1992, this region had not really taken into
account its economic disadvantage linked to its geographic specificity because as a part of the
Soviet Union, it was not really affected by the transport cost burden. Indeed, in the Soviet
economic system, transport was never considered to be a cost factor, but was accepted as a
by-product of the politically-determined production and consumption structure. Hence,
resource allocation decisions ignored transport costs. Pomfret (1995) had, for instance,
pointed that the aluminium smelter complex built in Tajikistan (Tursunzade) was functioning
thanks to alumina supplies from Ukraine and Azerbaijan, which were made possible after
having imported bauxite from Guinea. Nowadays, the aluminium complex is experiencing
severe problems with alumina and electricity supplies.
With the end of the Soviet system, Central Asian states became again severely
disadvantaged by a lack of infrastructure and their remoteness from major economic markets.
After USSR disintegration, Central Asia is rediscovering land-lockedness cost and its impact
on trade and, further, on development.
APPENDIX A
Sample countries
1. Land-locked countries (18):
Europe: Armenia, Azerbaijan, Moldova, Belarus, Switzerland, Austria, Luxembourg, Hungary, Czech Republic,
Slovak Republic ;
Asia: Kyrgyz Republic, Uzbekistan, Kazakhstan, Tajikistan, Turkmenistan, Afghanistan, Nepal, Mongolia.
2. Island countries (10):
Fiji, Vanuatu, Papua New Guinea, Tonga, Samoa, Solomon, Maldives, Sri Lanka, Mauritius, Indonesia.
18
3. Partner countries (18):
Europe: European Union, United States, Russia, Georgia, Ukraine;
Asia: Turkey, China, Iran, Pakistan, India, Japan, South Korea, Singapore, Thailand, Malaysia, United Arab
Emirates;
Oceania: Australia, New Zealand.
APPENDIX B
Data
Pop and Gdp are the structural variables in a gravity-type estimation. Data come from World
Development Indicators for population and gross domestic product (at purchase power
parity).
Distance: is always controversial. With a large sample spanning three continents, the great
circle distance is more acceptable. This is what has been used in the current study. Bilateral
distances are extracted from the website, at www.indo.com/distance/, using polar coordinates
for unreported countries (Samoa, Tonga and Mongolia). Capital cities have been selected
except when the economic strength of the capital city was economically negligible vis-à-vis
the main city (for instance New-York and Washington ine US, Sydney and Canberra in
Australia, Karachi and Islamabad in Pakistan, and Istanbul and Ankara in Turkey). In case of
the European Union, Brussels was chosen as its economic center.
Import: data come from the IMF direction of Trade Statistics. In the case of unreported
import data, export figures from partner countries have been included. When the statistic was
still missing, an arbitrary 0,1 was integrated in the database.
Volatil: represents the bilateral exchange rate volatility. It has been calculated after having
obtained monthly bilateral exchange rates among the 46 sample countries. Four databases
were used: IMF balance of payments, Cd-Rom version,
Prof. Werner Antweiler' database, University of British Columbia, Vancouver, Canada,
pacific.commerce.ubc.ca/xr/data.html,
Statistical Economic and Social Research and Training Centre for Islamic Countries
www.sesrtcic.org/cgi-local/indquery.pl,
Official WHO/UN Exchange Rates www.whqmarcopolo.who.int/exchrate/exindex.asp,
FRED www.stls.frb.org/fred/data/exchange.html.
Were missing data for Uzbekistan (1995, 1996, 1997), Tajikistan (1995), Turkmenistan
(1995, 1996) and Georgia (1995, 1996, 1997).
19
Tariff: represents the mean tariff duties vis-à-vis imports as a percentage (unweighted). Data
has been collected from different international sources (World Bank, WTO, OECD) but many
observations remain incomplete (half of the sample).
Instit: the selected proxy is the Coface indicator (@rating). For this indicator, country risk is
measured on a scale from A1 to D, by the public credit insurance credit office. It was
previously measured on a scale from 1 to 6. The former scale has been selected. Foreign
currency shortcoming risk, a state’s capability to respect its commitments vis-à-vis foreign
creditors, and indicators of payment problems are included in this indicator along with
political factors. Hence, it is more global than a simple institutional indicator. Its main interest
to this survey resides in the fact that it is available for all the sample countries.
Access: is the shortest distance (in kilometres) between country i and one of the three major
markets: European Union, Japan or the US. For the source, see distance data.
Infra: a composite index that has been calculated for all sample countries. It combines the
importance of paved roads, railway networks and telephone lines. The first two categories
come from the “CIA World Fact Book”(www.cia.gov/cia/publications/factbook), the last
from World Development indicators. Total infrastructure stock is defined as the sum of the
three categories. In order to take into account the difference between small and large
countries, this sum has been divided by total population.
ShortD: is the shortest distance (by road, in kilometres) between a land-locked country and
the nearest major port facility. Data are from the Encarta. A factor of zero has been arbitrarily
assigned to coastal and island countries, assuming that the main economic center is located on
the coast, which is the case for most of the countries sampled.
Coastnb: represents the number of borders with coastal countries. It ranges from 0
(Uzbekistan) to 5 (Belarus and Hungary). Considering that coastal states have a very high
bargaining power because they have an open access to sea, by definition, 5 was affected to
them.
APPENDIX C
Empirical results
Variables
Landlock
ShortD i
ShortD j
Coastnb i
I
- 1.05***
II
- 0.98***
(- 5.39)
(- 7.24)
III
IMP ij
IV
0.08
VI
- 0.01
VII
- 0.57*
(0.38)
(- 0.07)
(- 2.7)
- 0.11***
- 0.09***
- 0.11***
(- 6.29)
(- 4.13)
(- 5.88)
- 0.24***
- 0.24***
- 0.24***
(- 13.50)
(- 11.56)
(- 12.80)
0.9***
V
0.47*
0.70***
20
Coastnb j
Access i
Pop i
Pop j
Gdp i
Gdp j
Dist ij
Volatil ij
Tariff i
Instit i
Instit j
Infra i
Infra j
const
observations
couples
R-squared
over.
(4.56)
(2.02)
(3.23)
0.55***
0
0.49***
(6.15)
(0.02)
(5.29)
- 0.1***
- 0.17***
- 0.08***
- 0.11***
- 0.1***
- 0.08**
- 0.11***
( - 3.55)
( - 6.92)
( - 3.12)
( - 3.91)
( - 3.52)
( - 3.09)
( - 4.07)
- 0.55***
- 0.27***
- 0.49***
- 0.50***
- 0.47***
- 0.49***
- 0.51***
(- 7.63)
(- 5.14)
(- 6.74)
(- 6.79)
(- 6.45)
(- 6.74)
(- 6.87)
- 0.83***
- 0.59***
- 0.56***
- 0.77***
- 0.56***
- 0.56***
- 0.77***
(- 12.49)
(- 11.58)
(- 8.28)
(- 11.28)
(- 8.28)
(- 8.27)
(- 11.32)
1.19***
0.83***
1.19***
1.13***
1.14***
1.19***
1.12***
(14.38)
(14.91)
(14.77)
(12.99)
(13.51)
(14.67)
(12.88)
1.68***
1.31***
1.49***
1.61***
1.49***
1.49***
1.61***
(24.47)
(26.01)
(21.9)
(23.02)
(21.75)
(21.88)
(22.92)
- 1.21***
- 1.21***
- 1.40***
- 1.16***
- 1.39***
- 1.40***
- 1.22***
(- 17.49)
(- 22.24)
(- 21.4)
(- 17.94)
(- 20.62)
(- 20.86)
(- 17.87)
0.51***
0.35***
0.50***
0.51***
0.51***
0.50*
0.51*
(2.31)
(3.48)
(2.72)
(2.71)
(2.75)
(2.72)
(2.73)
- 0.09***
- 0.1***
- 0.11***
- 0.11***
- 0.1***
- 0.11***
(- 4.03)
(- 4.05)
(- 4.43)
(- 4.35)
(- 4.04)
(- 4.07)
-0.01
0.1*
- 0.03
0.02
0
- 0.03
0.01
(- 0.24)
(2.08)
(- 0.56)
(0.26)
(- 0.08)
(- 0.56)
(0.22)
0.17**
0.03
0.09
0.16*
0.09
0.09
0.16*
(2.42)
(0.7)
(1.31)
(2.28)
(1.24)
(1.31)
(2.28)
- 0.08***
- 0.03*
- 0.08***
- 0.09***
- 0.08***
- 0.08***
- 0.08***
(- 3.26)
(- 1.73)
(- 3.69)
(- 3.74)
(- 3.61)
(- 3.69)
(- 3.36)
- 0.06***
- 0.02
- 0.01
- 0.05*
- 0.01
- 0.01
- 0.05**
(- 2.66)
(- 0.84)
(- 0.36)
(- 2.24)
(- 0.40)
(- 0.36)
(- 2)
- 15.63*** - 8.25***
-11.46*** - 17.02*** - 11.75*** - 11.44*** - 15.77***
(- 12.54)
(- 9.43)
(- 9.48)
(- 14.88)
(- 9.38)
(- 9.21)
(- 12.79)
4478
1275
0.75
9269
2068
0.72
4478
1275
0.78
4478
1275
0.76
4478
1275
0.78
4478
1275
0.78
4478
1275
0.76
I : with Landlock and Tariff,
II : with Landlock without Tariff,
III : with ShortDist,
IV : with CoastNb,
V : with Landlock, ShortD and CoastNb,
VI : with Landlock and ShortD,
VII : with Landlock and CoastNb.
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