Landlockness trade policies

One widely agreed on fact in economics is that being landlocked negatively affects trade, as the landlocked dummy is always significant in gravity equations. The explanation given most of the time is that transportation costs are higher. 

One would expect trade policy to be accommodative to compensate for this geographic curse. However, we observe the opposite. Wei (2000) suggested this may be because “a country that is naturally more open, as determined by its size, geography and other factors – would find it optimal to devote more resources to building good institutions. Such economies may display less corruption and a higher quality of government than naturally less open economies.”

To see how landlocked countries managed their trade policy, I regressed some indicators of trade policy (average 2004-2009) from the Doing Business database (IFC) on being landlocked, and on being a landlocked developing country, controlling for GDP per capita in 2005. The results are striking, and in the table below. To export to a landlocked country, one needs about two more documents, 22 more procedural days, and $1300 more per container. These numbers are even bigger when we focus only on poor landlocked countries.

	Landlocked	Developing landlocked
Number of all documents required	1.73	2.21
	1.06	1.42
Days necessary to comply with all procedures	21.81	28.44
	19.40	24.91
Cost associated with all the procedures (US$ per container)	1282.40	1626.116
	953.84	1174.22

OLS coefficients 100% significant, controlling for GDP per capita, R squares vary between 35% and 60%, 162 countries. First line is for importing, second for exporting.

Landlocked countries are an easy place to extract rents as trade routes are easily controlled by corrupt officials or business groups. As explained by Arvis et. al. (2007), “facilitation” payments at roadblocks and weighbridges are ubiquitous. In West Africa, they add 10% to overhead costs and can occur every 30 km. These are even worse at border crossings, inevitable for landlocked countries, where transit operators, customs staff, local police, and the military altogether,  all want their share of the transit rents. For a Kyrgyz truck to enter Uzbekistan, the official cost is 450$. Speeding up the process costs 200$ more.

Geographical barriers to trade could indeed provide more opportunities and hence incentives for less liberal trade policies. This is what the landlocked dummy captures.