The role of intra-national trade costs in market integration: Evidence from Liberia

Introduction

Understanding trade barriers is key to find efficient policies that promote growth. In West Africa, land transport prices are among the highest in the world, and many markets are still isolated. In those markets, high transport prices result in high commodity prices, and few possibilities for producers to access bigger markets, which impede growth. The goal of this project is to study and understand high freight transport prices in Liberia – and give policy makers the tools to tackle them.

What drives transport prices in Liberia?

Several mechanisms can explain high freight transportation prices. One reasonable explanation is that transport companies are facing high marginal costs. Liberia, like many developing countries, has a poor road network that extends transport times and damages vehicles. This is costly for transport firms who might compensate by setting high transport prices. Other inputs for these firms also include fuel, labor and imports of trucks (or any other vehicle). In places with high barriers to entry, low competition can also allow firms to charge high markups.

Why does this matter?

The policies to tackle high transport prices will differ if a mechanism prevails. In order to lower marginal costs for transport firms, the policy makers should invest in infrastructure. To tackle high input costs, they should facilitate the import of inputs such as oil, or trucks so as to lower their costs for transporters. In this project, we propose to measure directly transport prices, and the marginal costs incurred by transporters. Our goal is to determine whether one channel prevails.

Approach

In the past, economists measured marginal costs indirectly. David Atkin and Dave Donaldson (2012) estimate transport costs by using detailed price data. I propose a direct measure of the costs inferred by the firms, and the prices they charge. By measuring the prices in different locations as well as the variation in marginal costs incurred by transport companies over time, we can estimate the role of poor infrastructure in explaining high transport prices. The final goal of this paper is to advise policy-makers on the strategy to tackle high transport prices and find new implications on the distribution of wealth.

National context and policymaker interest

This analysis is especially relevant in the context of Liberia. The country is today in a post-Ebola period, investments are shifting from medical facilities to policies that develop industries and bolster the economy. As imports represent a significant part of Liberia’s commodity goods, the government has to focus on the efficient way to facilitate their trade inside the country. At the same time, facilitating trade will also boost exports and promote production in economies previously isolated. After the economic adversity and commodities slowdown experienced during the Ebola crisis, finding efficient ways to promote growth has become urgent.

Outputs