Saturday, December 20, 2008

first crack at transport cost impact

I recently read Marc Levinson's The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, and was reminded of a task on my to-do list that I have yet to cross off: I want to create one of those fancy maps I love where distance represents transportation cost/time. I'm still not sure of the details. Perhaps I'd take each major market and then have all the other countries orbiting around the market, with distance based on transport cost and country size based on GDP.

Unfortunately, I haven't gotten to that point because it's proven damn difficult to get anything near comprehensive data on the subject. Levinson has a few nuggets:

Being landlocked, one study calculated, raises a country's average shipping costs by half. Another study found it cost $2,500 to ship a container from Baltimore, on the U.S. Atlantic coast, to Durban, in South Africa - and $7,500 more to haul it by the road the 215 miles from Durban to Maseru, in Lesotho.
I checked the bibliography and snagged the source PDFs online. One of them, Infrastructure, Geographical Disadvantage and Transport Costs, has some interesting data on African country transit costs, albeit from 1999.

I threw the data into Excel, popped in the current GDP (PPP) per capita, and below is the result. In the original paper linked above, the transport cost for US to Germany was 1.0. I created a "large market" proxy transport cost by averaging the transport costs from each city to the US, Germany, and Japan.

*Oil-rich country, transport costs for non-oil products may be underestimated

In the bubble chart below, bubble size is proportional to GDP per capita, with the Transport Cost on the Y-axis, countries sorted by GDP per capita (lowest to highest) along the X-axis.

When I sorted by transportation cost, three countries stood out to me as having some of the lowest transportation costs yet only average GDP per capita: Senegal, Togo, Gambia

Further down on the list, three more countries stood out with average transportation cost rates associated with much higher GDP (e.g., $2,000 range) than they achieved: DRC, Guineau-Bissau, Sierra Leone.

I don't know a ton about the countries besides violence, but thought I'd bring them up in case an African aficionado happened to have something to offer.

For my part, I make no conclusions. This is just the first attempt at exploring transportation costs. I'm still on the lookout for better data, but for now, I'll leave you with conclusions from that 1999 paper.
Our main results are, first, that infrastructure – both own infrastructure and that landlocked countries’ transit routes -- is a significant and quantitatively important determinant of transport costs and of bilateral trade flows. For example, improving destination infrastructure by one standard deviation reduces transport costs by an amount equivalent to a reduction of 6,500 sea km or 1,000km of overland travel.

Second, being landlocked raises transport costs by around 50% (for the median landlocked country compared to the median coastal economy). However, improving the infrastructure of the landlocked economy from the median for landlocked economies to the 25th percentile reduces this disadvantage by 12 percentage points, and improving the infrastructure of the transit economy by the same amount reduces the disadvantage by a further 7 percentage points.

Third, combining estimates from transport cost data with the trade data we are able to compute the elasticity of trade with respect to transport costs; it is high, at around –2.5. This means that the median landlocked country only has 30% of the trade volume of the median coastal economy.

Improving infrastructure to the 25th percentiles raises this to over 40%.
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Tuesday, December 9, 2008

stay loyal to principles, skeptical of means

Once we've acknowledged the potential for regulation to improve the functioning of a market, the next task is to determine the likelihood that regulation will indeed accomplish its stated goal. Just as our market skeptics are right to point out that we need to judge 'capitalism' by it's real-world performance, we must judge government action by the same. And our pluralistic democracy, for all its strengths, does a remarkable job of turning the most noble of causes into dismal and destructive regulation.

The more we break down 'regulation' into its specific components, the better we are able to assess the respective likelihood of attaining stated aims and creating additional negative externalities. Only then can we weigh the likely effects of our darling regulation with the likely effects of inaction. Presumably, at the end of such an exercise, support or opposition of 'regulation' would be less broad and more tailored to specific types of interventions in specific instances.

For example, the appeal of government subsidies for investment in alternative energy is clear. It's become a proxy battle for those who support a large commitment to reducing carbon emissions and those who oppose it. Those that support this large commitment, however, should be more circumspect, and allow for the possibility that they might support the principle of carbon abatement, but still oppose subsidies because of what the regulation will look like at the end of the day.

Ezra Klein has said as much:

"One more time: 79 cents of every dollar the federal government invests in renewable energy goes towards corn ethanol, a heavily subsidized boondoggle that is little better than gasoline. Which is why I worry about targeted investment strategies. It's not impossible to conjure up massive investment strategies that would make a tremendous impact on global warming. Gary Lipow does a nice job of it here. But it's hard to imagine such an initiative entering the United States Congress and not emerging as pork encrusted in corn. The incentives are too poorly aligned."
Klein goes on to briefly mention the idea of a cap-and-trade system, before again agreeing with skeptics that "so much will be exempted and rebated and set aside that it will, in practice, be nearly as bad."

He finally allows that a straightforward carbon tax may indeed be the best option (sidenote: supported by Al Gore and Ralph Nader, among others).

Of course, these aren't the only carbon abatement programs in place or in consideration. We have CAFE standards, which many want to make more stringent, despite the fact that "the premise of CAFE is a little bizarre—that manufacturers are responsible for the choices of their customers and penalized if car-buyers prefer more fuel-intensive vehicles. Across the political spectrum from left to right, the more direct, logical and efficient alternative of a carbon tax has its advocates, but they remain a persecuted minority," as the Economist points out.

Unfortunately, the conversation about what to do about carbon has not allowed much room outside a broad-based support or opposition to carbon abatement programs en sum. Opposition to particular programs is seen as a proxy for half-hearted committment to the principle. Yet it's perfectly possible that Ezra believes more in the destructive power of carbon emissions than John Q, yet supports fewer of the abatement programs.

Subsidies, CAFE standards, cap-and-trade systems, carbon taxes, and gas taxes represent only some of the regulations applicable to a single unpriced externality (carbon emissions). What's more, I don't want to dismiss the potential of subsidies, for instance, out-of-hand because of their massive failure in alternative energy. In fact, I would invite those sympathetic to subsidies to refine their argument, perhaps forming a push for (and only for) 'subsidies for basic research independent of commercial applications.'

I would like to see educated debate move beyond principled support/opposition for more or less government action, and toward a pragmatic analysis of the means. It only takes a look at today's headlines of proposals for a "car tsar" to underscore the importance of differentiating between the principle (well-functioning auto industry that doesn't blow up the planet), which is the end, and the proposal itself (see: tsar, drug... tsar, terrorism), which is nothing more than an often shoddy means.

In the mean time, be just as wary of he who supports all efforts to save the world from carbon and auto bankruptcies as you are of those who make the same pledge to protect us from Islamo-fascists (what a term!) If he can't discriminate between wasteful and ineffective means to serve his principle, he probably is an irrational zealot.
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