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Connecting to Compete 2016: Trade logistics in the global economy

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Connecting to Compete 2016: Trade logistics in the global economy

Connecting to Compete 2016: Trade logistics in the global economy
Photo credit: WEF

New ranking of 160 countries highlights lag in least developed countries’ progress

Progress in logistics performance has slowed for the first time since 2007 for the world’s least developed economies, while emerging economies that implement comprehensive initiatives continue to improve their performance, according to a new World Bank Group report released on 28 June 2016.

The latest edition of the Logistics Performance Index, which is a part of the bi-annual report, Connecting to Compete 2016: Trade Logistics in the Global Economyranks 160 countries on key criteria of logistics performance, including border clearance efficiency, infrastructure quality, and timeliness of shipments, among others. For the third time, Germany is the top performer. Syria ranked lowest.

Global trade depends on logistics, and how efficiently countries import and export goods defines how they grow and compete in the global economy. Countries with efficient logistics can easily connect firms to domestic and international markets through reliable supply chains. Countries with inefficient logistics face high costs – both in terms of time and money – in international trade and global supply chains. This can severely hamper a nation’s ability to compete globally.

“There is no trade without logistics and poor logistics often means poor trade,” said Huxiang Zhao, President of the International Federation of Freight Forwarders Association. “Logistics performance requires the integration of many elements throughout the entire supply chain.”

“Logistics performance both in international trade and domestically is central to countries’ economic growth and competitiveness,” said Anabel Gonzalez, Senior Director for the World Bank Group’s Trade & Competitiveness Global Practice. “Efficient logistics connects people and firms to markets and opportunities, and helps achieve higher levels of productivity and welfare. Unfortunately, the logistics performance gap between rich and poor countries continues and the convergence trend experienced between 2007 and 2014 has reversed for the least performing countries.”

Countries like Kenya, India and China, all improved their previous performance according to the report, which is based on survey data from more than 1,200 logistics professionals. The report ranks countries on a number of dimensions of supply chain performance, including infrastructure, quality of service, shipment reliability, and border clearance efficiency.

Over the past six years, the world’s top-10 performers have remained consistent and include dominant players in the supply chain industry. Low-income economies with the worst performance are often landlocked, small islands, or post-conflict states. However, for the first time in the history of the Connecting to Compete reports, landlocked countries are no longer automatically disadvantaged, as shown by the performances of both Rwanda and Uganda, which benefit from regionally coordinated efforts to improve trade corridors.

“Logistics performance is about achieving reliability of supply chains linking economies to markets. In the most constrained countries the needs focus on infrastructure, or critical improvements in customs and border management,” said Jean-Francois Arvis, from the Trade & Competitiveness Global Practice at the World Bank Group and co-author of the report. “More logistically performing countries have to address complex sets of issues centered on the development and quality of services. And all top performers show strong cooperation between the public and private sectors in developing a comprehensive approach to efficient logistics.”

Among the criteria measuring countries’ logistics performance, the report shows that logistics services are improving, however, logistics professionals are the least satisfied with rail, regardless of the countries’ income levels. On the border management side, customs agencies got better ratings than all other agencies involved in the process, with those responsible for sanitary and phytosanitary regulations lagging behind.

The logistics agenda has shifted in priorities over the last 10 years, especially as slower trade growth puts pressure on the logistics industry to re-organize its networks and innovate. The scope of policies addressing logistics performance is moving from border issues in trade and transport facilitation to domestic performance concerns. Moreover, the logistics industry and the public sector have to address major challenges such as raising skills and competency levels, and adapting to slower trade growth. Managing the footprint and the sustainability of supply chain is also now a high priority.

“Looking back across past editions of the LPI, we have been able to demonstrate to policymakers that logistics matter to all countries, regardless of income level,” notes Arvis. “Today, logistics are increasingly complex as they incorporate more areas such as green logistics, jobs, or city distribution.”

“This year’s LPI continues to show the complexity of the reforms and the different priorities depending on a country’s logistics performance,” said Daniel Saslavsky, from the Trade & Competitiveness Global Practice at the World Bank Group and co-author of the report. “Logistics policies are now not only limited to transportation or trade facilitation. They are part of a broader agenda that also includes services, development of facilities, infrastructure and spatial planning.”

The scores are based on two sources of information: a worldwide survey of logistics professionals operating on the ground (such as global freight forwarders and express carriers), who provide feedback on the countries in which they operate and with whom they trade; and quantitative data on the performance of key components of the supply chain, such as the time, cost, and required procedures to import and export goods.

Since its inception, the LPI and the Connecting to Compete report have been prepared by the World Bank Group’s Trade team with the participation of the Turku School of Economics and the support of the International Association of Freight Forwarders (FIATA).

Key Findings

  • Top performing countries have remained relatively consistent since 2010. The top 15 performing countries have changed only marginally since 2010, and include dominant players in the supply chain industry, such as Germany, the Netherlands, and Singapore. The 2016 report ranked Germany the highest and Syria the lowest. Countries at the bottom of the rankings are either fragile economies affected by armed conflict, natural disasters, political unrest, or geographic constraints.

  • The “logistics gap” between more and less developed countries persists. High income countries, on average, score 45% higher on the LPI than low-income countries. In previous editions of the report, the lowest performers appeared to be catching up. However, this trend reversed in 2016, and the gap between the top ranked countries and those at the bottom of the scale widened.

  • Supply chain reliability continues to be a major concern for traders and logistics providers alike. Among the top 30 countries in the LPI, approximately only 1 in 10 shipments fail to meet quality criteria in the top 30 performers. Among the bottom 30 countries, nearly three times as many shipments fail to meet these standards.

  • Income alone does not explain performance. The willingness to reform and implement good practices and policies can have a direct impact on fluidity of crossborder shipments. Examples like the Single Customs Territory in the East African Community, which allowed for steep reductions in clearance times along regional corridors, can be good examples of how such policy changes can have dire positive impacts on supply chain efficiency.

  • Infrastructure continues to play a big role in assuring basic connectivity and access to gateways for most developing countries. In all income groups, survey respondents reported that infrastructure is improving. However, countries in the bottom quintile of LPI scores are improving at a much slower pace than those at the top of the scale. Regardless of income levels, logistics professionals are the most satisfied with ICT infrastructure and the least satisfied with rail infrastructure.

  • Border management reforms are a serious concern. Countries at the bottom of the rankings continue to struggle with paperwork and long delays. This is especially true for low- income economies constrained by geography such as landlocked developing countries.

“The LPI plays an important role in raising awareness, and is often the starting point of a policy dialogue,” says Daniel Saslavsky, trade specialist and co-author. “With the LPI and other tools, we are continuously supporting the evolving reform process.”

» View the interactive map.


Summary

Logistics performance both in international trade and domestically is central to the economic growth and competitiveness of countries, and the logistics sector is now recognized as one of the core pillars of economic development. Policy makers not only in the best performing countries, but also in emerging economies, increasingly see the need to implement coherent and consistent policies to foster seamless and sustainable supply chain operations as an engine of growth.

Efficient logistics connects firms to domestic and international markets through reliable supply chain networks. Conversely, countries characterized by low logistics performance face high costs, not merely because of transportation costs but also because of unreliable supply chains, a major handicap in integrating and competing in global value chains. Supply chains are complex, but their performance is largely dependent on country characteristics, especially the soft and hard infrastructure and institutions that logistics requires to operate well, such as imports, regulations, procedures, and behaviors.

Now in its fifth edition, the Logistics Performance Index (LPI) embodies the experience of logistics professionals worldwide and tries to capture the complexity of supply chains in synthetic indicators that are comparable across countries. The LPI has provided valuable information for policy makers, traders, and other stakeholders, including researchers and academics, on the role of logistics for growth and the policies needed to support logistics in areas such as infrastructure planning, service provision, and cross-border trade and transport facilitation.

Logistics performance converges at the top, but the gap is widening between the worst and best performers

LPI 2016 Figure 1 World BankThe results of Connecting to Compete 2016 point to Germany as the best performing country, with an LPI score of 4.23, and Syria as the lowest, with a score of 1.60 (equivalent to 19 percent of Germany’s score on a scale from 1 to 5). The converging trend between the top and worst performers that appeared in the previous LPI surveys (2007, 2010, 2012, and 2014) seems to have slightly reversed. The average scores in each quintile reveal that the gap between the top 2 quintiles and the countries at the bottom in performance is widening again (figure 1).

The modest convergence since 2007 was explained in the 2014 report by a perceived improvement in trade-supporting infrastructure in low- and middle-income countries and, to less extent, in their logistics services and their customs and border management. This explanation may still be largely valid in the majority of ranked countries. In 2016, however, the widening of the gap between the top and the bottom was amplified by the highest average scores ever among the top countries (4.13 in 2016) and the lowest average scores among countries at the bottom since 2007 (1.84 in 2007; 1.91 in 2016).

The differing pace of progress is also seen in the ratings on the quality of domestic trade and transport infrastructure. In the domestic section of the LPI questionnaire, respondents were asked to assess the extent of improvements in these areas since 2014. While about 60 percent of the respondents in the top 2 quintiles rated the situation in 2016 as improved or much improved, only about a third in the bottom quintile and fewer than half in the third and fourth quintiles shared this view.

Logistics performance captures more than income, as observed since the first LPI report in 2007. International supply chains are organized across groups of regional trading countries. Provisions for services and trade facilitation initiatives are designed and implemented regionally. Reflecting on these mechanisms, the LPI data show that performance is quite consistent within integrated sub-regions. For instance, Western and Central Africa shows lower performance than Southern Africa or than East Africa, which has engaged in significant improvement in trade corridor efficiency. North African and Middle Eastern developing countries are doing comparatively worse than their income level would indicate, due to lack of integration, political unrest, and security challenges. In South Asia, lack of integration means that the good logistics performance of India does not improve that of its neighbors. Meanwhile, East Asian economies have performed consistently well across LPI editions.

LPI results: Consistent within but not necessarily between regions?

As observed in previous editions of the report, logistics performance, as captured by the LPI, transcends the overall level of development and income. Geography matters, too. The crossborder nature of many logistics activities, such as trucking or freight forwarding, means that logistics performance is driven in part by subregional connectivity patterns. The performance of a regional gateway may diffuse across regional borders. As the example of East Africa shows (featured in this report), consistent improvement in integration and corridor performance benefits several countries.

The standard regional groupings (Sub-Saharan Africa, Eastern Europe and Central Asia) represent clear hemispheric blocs, yet are too large to reveal much about performance convergence or heterogeneity within and between subregions.

In an attempt to reach a finer attribution of performance, regions were subdivided as shown in the figure, and LPI score variance was decomposed in two: on one hand, the variance explained by variations in performance within subgroups and, on the other hand, variance explained by variability between subgroups. Overall, total variance in LPI scores can be explained majorly (64 percent) by variance across subregions.

While this is an intuitive and expected result, it is also indicative of the coordinated movement in the rank that regional blocs can experience relative to neighboring subregions, and it shows that subregional convergence in scores merits further analysis. While certain positive regional developments could explain such performance premiums in specific parts of the world (for instance, elimination of border formalities within corridors), other, negative occurrences (such as armed conflict and political unrest) can present a contagion phenomena not easy to avoid.

Coastal access is another important enabler of logistics performance. In development economics generally and in trade and transport facilitation in particular, much attention has been paid to the disadvantaged position of low- and middle-income landlocked countries. Lack of access to the sea poses persistent challenges to the growth and development of landlocked developing countries and has been the main factor hindering their ability to better integrate with the global trading system. The transit of export and import goods through the territory of at least one neighboring state and frequent change of transport mode lead to high transaction costs and reduced international competitiveness. The issue of landlocked developing countries has also generated much policy work such as the 2003 Almaty Program of Action under the United Nations and the Vienna Program of Action 2014-24.

The trade logistics handicap is illustrated by the average overall LPI scores for 2010-16 of landlocked and coastal countries across World Bank regions. This comparison shows a rather consistent pattern, where coastal countries score better than their landlocked peers at similar income levels. In the upper-middle-income group, this difference in Europe and Central Asia was 0.31 score points.

The difference was even larger among lower-middle-income economies in South Asia (0.52 score points). In Sub-Saharan Africa, however, several landlocked countries performed better than coastal ones: by 0.20 points in the low-income group and by 0.14 points in the upper-middle-income group. Only Sub-Saharan African countries in the lower-middle-income group followed the familiar pattern, with a 0.20 point lead by coastal countries over landlocked countries. Among high-income countries of the Organisation for Economic Co-operation and Development (OECD), the difference between landlocked (3.69) and coastal countries (3.71) was almost insignificant (0.02 points).

LPI 2016 Regional comparison World Bank

Supply chain reliability and service quality are key objectives across all performance groups

Logistics firms have a strong incentive to provide predictable deliveries in both the developed and the developing world. Supply chain reliability continues to be a major concern among traders and logistics providers. In a global environment, consignees require a high degree of certainty on when and how deliveries will take place. This is much more important than the speed of the delivery. Predictability also carries a premium, which many shippers are willing to pay. In other words, supply chain predictability is a matter not merely of time and cost, but also of shipment quality. In the top LPI quintile, only 13 percent of shipments fail to meet company quality criteria, the same proportion as in 2014. By comparison, nearly three times more shipments in the bottom quintile (over 35 percent) fail to meet company quality criteria. This finding again illustrates that, in supply chain efficiency and reliability, the logistics gap is real and persistent.

Infrastructure development continues to accomplish much in assuring basic connectivity and access to gateways for most developing countries. This has also been consistently observed in the LPI since 2007. The perceived quality of certain types of infrastructure also seems to follow a similar pattern across all LPI editions. The quality of information and communications technology (ICT) infrastructure is again rated highest across all respondents, and here the gap between lowest and highest performers is narrowing the most. By contrast, satisfaction with rail infrastructure remains low. The widest gap in satisfaction is with warehousing and transloading infrastructure: while 65 percent of the respondents in the top LPI quintile regarded the quality of these as high or very high, only 13 percent in the bottom quintile had the same view. Ratings on other types of infrastructure vary by region.

Trade logistics services are provided under different environments globally. As in 2014, we see that the quality of services provided by logistics firms is often perceived as better than the quality of the corresponding infrastructure the firms operate. This may partly be explained by the respondent base, that is, freight forwarders and logistics firms rating their own services. Nonetheless, the pattern that emerges from responses across LPI editions is rather uniform: the more international operations, such as air and maritime transport and services, tend to receive high scores even if infrastructure bottlenecks exist. Railroads, meanwhile, continue to show low ratings almost everywhere. Low-income countries still score poorly on road freight services.

Service quality differs substantially at similar levels of perceived infrastructure quality. This indicates that even high-quality hard infrastructure cannot substitute or replace operational excellence, which is based on the professional skills of service providers, well-functioning soft infrastructure, and smooth business and administrative processes.

Trade and transport facilitation is critical for lower performers

Efficient clearance procedures at the border are critical to eliminating avoidable delays and to improving supply chain predictability. To achieve this, governments need to facilitate trade, while safeguarding the public against harmful activities ranging from health hazards to crime and terrorism. Realizing these two objectives – facilitating trade and safeguarding the public interest – is a challenge for policy makers and authorities, especially in countries with a low performance record, where delays and unexpected costs are more common. As in previous editions, this edition finds that border clearance times tend to be longer in countries with less friendly logistics environments.

The 2016 results imply that trade facilitation tools and principles have taken hold in many countries thanks to growing awareness and international initiatives to support trade facilitation reforms in developing countries. Coordination among government control agencies continues to require attention, including the need to introduce best practices in automation (for example, single windows) and risk management in non-customs control agencies, which have been less open to reform. Accordingly, customs agencies have again obtained much higher LPI ratings than the other agencies rated in the domestic part of the LPI, such as sanitary and phytosanitary control agencies and those enforcing the quality or technical standards of goods.

Yet, the implementation of trade and transport reform is lagging in the logistically constrained countries that are most in need of attention from the international community. Moreover, their neighbors also often face serious governance challenges (for example, conflict-ridden or post-conflict countries and fragile states). Many landlocked developing countries and small island states also fall into this category because their connectivity with global markets may be severely challenged by their economic size or geography. Long overdue and still mostly unresolved implementation challenges, such as troubled regional transit regimes, seriously hamper these countries. The realization of sensible facilitation policies remain key for future progress given that many now have a basic connective infrastructure.

Relatively rapid improvements can also be achieved regionally if countries have a strong political will and align their efforts in implementing administrative reform. This is the case, for example, of the Northern Corridor that links Burundi, Rwanda, and Uganda with the port of Mombasa in Kenya and also serves eastern parts of the Democratic Republic of Congo, South Sudan, and Tanzania. Some of the soft trade and transport facilitation reforms with a significant impact were implemented even before hard infrastructure projects were completed. The soft reforms provided a greater, more rapid return on investment relative to hard infrastructure.

Logistics friendlier countries face complexity, new policy concerns, and competitive pressure

The LPI results since 2007 have shown that higher service quality is driving logistics performance in emerging and richer economies. Yet, the development of services, as in third- or fourth-party logistics, is a rather complex policy agenda not least because the provision of these more advanced services cannot be created from scratch or developed purely domestically. In logistics-friendly countries, manufacturers and traders already outsource much of their basic transport and logistics operations to third-party providers and focus on their core business, while managing more complex supply chains. The more such advanced services are available at a reasonable price-cost ratio, the more shippers will outsource their logistics. The current environment for international trade – structurally slower growth patterns relative to before the 2008-09 financial crisis – puts a lot of pressure on the industry, which is also pushing for quality and innovation.

The 2016 survey confirms that the policy agenda is becoming more complex. The demand for environmentally friendly logistics solutions, or green logistics, is gradually becoming a common feature in most advanced logistics environments. Two-fifths of survey respondents acknowledge this is a major concern in the top performance quintile. The 2016 survey introduced a new set of questions on skills and the logistics labor force. The results highlight a shortage of skilled labor, though there are differences across countries and job profiles.

There is thus an expanding need for consistent strategies that cut across the numerous policy dimensions, especially in high- and middle-income countries. Policy makers in large emerging or developed economies have to deal not so much with border issues, such as in low performance countries, but with the internal performance of domestic supply chains (a reality not well captured in the main LPI index). Comprehensive strategies increasingly focus not merely on looking at the sources of costs, but on steering a sector with a large footprint in the economy and with links to concerns about the environment, jobs, land use, urban planning, and other issues.

A growing number of countries follow this route, which is rarely easy. The implementation of reforms involving many stakeholders can be slow. Except in low performing countries, short-term, high-impact interventions (the low hanging fruits) are likely to have already been implemented. Countries successful in introducing far-reaching changes have been those combining regulatory reform with investment planning, interagency coordination, and incentives for operators. Detailed, accurate data are needed for policy making and monitoring. The growing availability of large datasets or even big data is a new opportunity that so far is being seized only by a few countries, such as Canada and South Africa.


The Logistics Performance Index is an interactive benchmarking tool created to help countries identify the challenges and opportunities they face in their performance on trade logistics and what they can do to improve their performance. The LPI 2016 allows for comparisons across 160 countries. The LPI is based on a worldwide survey of operators on the ground (global freight forwarders and express carriers), providing feedback on the logistics “friendliness” of the countries in which they operate and those with which they trade.

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