Trade and Employment From Myths to Facts - International Labour ...

Chapter 7: Trade diversification: Drivers and impacts
7.4.3 Diversification, spillovers and industrial policy
The graphs in figure 7.4 highlight a clear statistical association between government
supply-side policies, notably the provision of education and infrastructure, and export
diversification.
Government provision of infrastructure and education reflects the presence of
market failures. As for education, the willingness of employers to provide it is limited,
even for vocational training. 18 Reasons include the public-good character of education,
the difficulty to retain trained workers, and the footloose nature of many employers
in developing countries, which does not encourage social responsibility.
As for road infrastructure, building costs are largely beyond what private-sector
users are willing to invest given their public-good nature. Only mining companies
are sometimes willing to invest in road infrastructure directly serving their needs, or
large plantations in local networks of rural roads. Where governments are unable or
unwilling to invest in road infrastructure, transportation costs choke commercial activities,
both domestic and international, as Gollin and Rogerson (2010) document
in the case of Uganda. 19 As a consequence, only a tiny proportion of crops make it
to urban markets and even fewer to international markets, resulting in very concentrated
export structures.
Even where roads exist, sometimes transportation services are too expensive for
the private sector to provide, in particular in low-density areas. A recent paper by
Raballand et al. (2011) reports the results of a randomized experiment in rural Malawi
aimed at understanding why rural transportation services are not provided even when
rural roads exist. By randomly varying bus fares, they show that bus use is strongly
price-sensitive but, most strikingly, that there is no price with positive demand at
which costs are covered. 20 In the absence of a rural bus service, it is virtually impossible
to transport goods (handicrafts, spices and other low-volume items) to the market,
reducing the scope of marketable products and income-earning opportunities (in particular
for women). Citing other studies that point in the same direction, Raballand
et al. (2011) conclude that building roads – a favourite donor activity – does not
18 As an illustration, the World Bank’s Private Sector Competitiveness and Economic Diversification
Project in Lesotho has aimed at building workforce skills through the establishment of two workertraining
centres in Maseru and Maputsoe. The initiative had both public- and private-sector participation,
the management councils in both centres being led by the private sector. But obtaining
government funding for the centres has proved a challenge, since only three employers (from
Lesotho, South Africa and Malaysia) have expressed interest in participating in their financing.
19 Gollin and Rogerson (2010) observe that the density of paved roads in Uganda today (16,300 km
for a land area of 200,000 km2) is comparable to what the Romans left behind when they evacuated
Britain in AD 350 (between 12,000 and 15,000 km of paved roads for a land area of 242,000 km 2 ).
As a result, the prices of agricultural products when they reach markets are often more than double
the farmgate prices.
20 Raballand et al. (2011) refrain from estimating a price elasticity of demand, but instead regress
the probability that an individual took the bus over the investigation period (July-December 2009)
for a fare, which was randomly assigned using a voucher system. When the bus service was free, 47
per cent of the surveyed individuals took the bus at least once. The proportion declined smoothly
to reach zero at 500 kwacha (US$3.57) per ride. Similar results were obtained using the number of
rides as the dependent variable.
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