Why Latin America needs a new approach to trade

Technology Eye | May. 27, 2016

The lack of good transportation infrastructure in Latin America hinders trade as it increases costs and reduces supply reliability. Inter-American Development Bank studies show that tackling transportation costs can be as effective a tool as trade negotiations to increase trade in the region.

The overall Latin American picture is not good. An analysis of the 2014 World Bank Logistic Performance Index (LPI) reveals some evidence that reinforces the need to do more:

Transportation is key for the development of regional supply-chains. Supply-chains demand good infrastructure, logistics and trade facilitation between borders. Without it, firms have to build up more stock reserves and working capital. This strongly affects national and regional competitiveness due to high financial costs.

Efforts to change this situation in Latin America have not been sufficient. The current economic crisis may undermine some of the regional efforts that were already facing challenges because of a lack of organizational resources, conflicting priorities, poor private sector engagement and regulatory asymmetries.

The planning of regional infrastructure projects will have to take a more realistic approach. The limited results of different regional initiatives such as IIRSA in addition to the current fiscal environment indicates that infrastructure projects that successfully enhance integration will be a result of national initiatives and focused on bilateral actions.

A new approach is necessary - from an overambitious to a pragmatic agenda. Initiatives should focus on a limited number of countries with common goals and should also aim to be less dependent on fiscal resources.

Many benefits can be attained through simpler measures based on more competition in the goods transportation market and trade facilitation initiatives focusing on customs and bureaucracy, without losing the opportunities from the development of physical infrastructure.

Transaction costs in Latin America are higher than they should be. A few examples suggest that much can be done to reduce trade costs in the region:

Beyond physical infrastructure, two initiatives deserve priority:

More competition in goods transportation : This requires the revision of current regional agreements on road, maritime and air transportation with the goal of reducing freight costs and increasing the frequency of trips. Real competition may require opening markets beyond the regional agreements. Also, Latin American countries should discuss new maritime and road transportation agreements which cover the creation of:

There are important initiatives in the region that deserve reinforcement. We must do more.

This note summarizes a CNI (Brazilian National Confederation of Industry) study on challenges for logistics integration in South America, 2015.

This blog is part of a series of articles published ahead of the World Economic Forum on Latin America 2016 , taking place from 16 to 17 June in Medellin, Colombia.

SOURCE: World Economic Forum

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