Shipping Costs, Manufactured Exports, and Economic Growth
Steven Radelet and Jeffrey Sachs
January 1, 1998
In the Wealth of Nations, Adam Smith put great stress on the relationship between geographic location and international trade. Smith observed that a more extensive division of labor was likely to develop first along sea coasts and navigable rivers, where transport costs were especially low:
As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to sub-divide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inland part of the country.
Smith attributed the rapid development of civilizations around the Mediterranean basin to the relative ease of sea-based trade in the region. He saw the shortage of navigable rivers into inland regions of Africa as a detriment to development on that continent. He also noted the pattern of rapid development in the New World: “In our North American colonies, the plantations have constantly followed either the sea-coast or the banks of navigable rivers, and have scarce any where extended themselves to any considerable distance from both.” And so it was in the United States that the first and most extensive development was along the coast lines; the Mississippi, Ohio, and Hudson River valleys; and the Great Lakes region.
Are Smith’s observations of any relevance today? Are geographical location, especially access to the sea, still important determinants of a country’s development prospects? Though interest in transport costs has recently risen in the theory of international trade (see, for example, Krugman, 1996), there continues to be almost no empirical work on the role of shipping costs in patterns of trade and development.2 In this paper we examine some empirical evidence on differences in shipping costs across developing countries, and its impact on manufactured exports and economic growth. We find that geographical considerations -- specifically access to the sea and distance to major markets -- have a strong impact on shipping costs, which in turn influence success in manufactured exports and long-run economic growth. Countries with lower shipping
costs have had faster manufactured export growth and overall economic growth during the past thirty years than country’s with higher shipping costs. The evidence suggests that high-shipping cost countries will find it more difficult to promote export-led development, even if they reduce tariff rates, remove quantitative restrictions, and follow prudent macroeconomic policies. At a minimum, firms in such countries would be forced to pay lower wages to compensate for higher transport costs in order to be able to compete on world markets for manufactures. The required offset in wages might be quite substantial in the usual case for developing countries in which imported inputs constitute a high proportion of the value of exports. In such sectors, high transport costs can easily wipe out export profitability even if wage levels were to fall to zero. As a result, geographically remote countries such as Mongolia, Rwanda, Burundi, Bolivia may not realistically be able to replicate the East Asian model of rapid growth based on the export of labor-intensive manufactes.