If business and enterprise is the beating heart of an economy, then logistics is the lifeblood. Just as blood transports nutrients to different parts of the human body to keep it whole, freight trains, cargo ships, and trucks deliver goods and resources to wherever they need to go.
As an economy grows, the more crucial the role logistics networks play to its development. More so with the rise of e-commerce.
Southeast Asia alone is predicted to become a $240 billion e-commerce industry by 2025. With such a massive market of buyers and sellers, the importance of a free-flowing transport network is evident.
“Infrastructure is an essential ingredient for economic development and growth. Transport infrastructure, for example, facilitates cheaper and more efficient movement of goods, people and ideas across places,” Ejaz Ghani, a lead economist from the World Bank, wrote on the organization’s Web site in 2015.
“It also impacts the distribution of economic activity and development across regions to the extent that agglomeration economies and efficient sorting can be realized, the levels of competition among industries and concomitant reallocation of inputs towards more productive enterprises are achieved, and much more.”
Many business leaders, policy makers, and academics, Mr. Ghani noted, point to inadequate infrastructure as a critical obstacle to sustained growth.
One recent example of logistics’ effect on economic growth is China’s Belt and Road Initiative (BRI), an effort to create jointly-built trade routes emulating the ancient and historic Silk Road and promote regional cooperation in Asia, Europe, and Africa.
In 2013, Chinese President Xi Jinping announced plans to build the BRI as a 21st century maritime Silk Road economic belt. The BRI is geared towards encouraging greater policy coordination, infrastructure connectivity, investment and trade cooperation, financial integration, cultural exchange and regional cooperation between Asia, Europe and Africa, by creating jointly-built trade routes emulating the ancient Silk Road. The BRI will encompass more than 70% of the world’s population (4.4 billion) and 62% of the world’s GDP (around US$21 trillion) illustrating the colossal scale of the initiative.
Research initiated by the RAND Corporation titled “China Belt and Road Initiative: Measuring the impact of improving transport connectivity on international trade” measured the impact that improving multimodal transport connectivity might have on multilateral trade and economic growth in countries and regions across the BRI.
The research found that multimodal transport infrastructure and connectivity can facilitate trade expansion, attract foreign direct investment, speed up the industrialization process, facilitate regional integration, and accelerate the process of economic growth. Additionally, they found that having a rail connection between trading partners has the largest impact on improving trade in the BRI region.
Logistics in a globalized world
The value of logistics is compounded in a rapidly shrinking world. As of 2018, the World Bank estimates the logistics industry to have reached $4.3 trillion, owing to the explosion of trade and commerce brought about by progress.
In nearly every country in the world, logistics is the network of services that supports the physical movement of goods within and across borders, comprising of an array of activities from transportation, warehousing, brokerage, express delivery, terminal operations, and even data and information management. The more efficiently this system can direct the flow of goods to their destinations, the easier it is for a country to facilitate trade and grow.
“Logistics are the backbone of global trade,” Caroline Freund, director, Macroeconomics, Trade & Investment Global Practice at the World Bank Group, wrote in the organization’s Web site.
“As supply chains become more globally dispersed, the quality of a country’s logistics services can determine whether or not it can participate in the global economy.”
That the world is connected through — and relies on — an unobstructed system of roads, bridges, and trade routes is clear in the manufacturing of modern everyday objects like the smartphone. In one device, there could be any number of mineral imports from mines in Europe or circuitry from China; one device could then have been assembled by robots in the US.
The relationship between economic development and logistics is further explored in the World Bank’s “Connecting to Compete” report, which evaluates countries’ logistical capabilities across a number of indicators, taking into account factors such as including logistics competence and skills, the quality of trade-related infrastructure, the price of international shipments, and the frequency with which shipments reach their destination on time. The Logistics Performance Index (LPI) aims to aid governments benchmark their progress over time and in comparison to similar countries.
The report scores countries based on two factors. Domestic LPI covers quantitative and qualitative assessments of a country’s services from logistics professionals working inside the country. Factors such as infrastructure, quality of service providers, border procedures, and supply chain reliability are detailed in this component.
International LPI provides evaluations of a country’s services by logistics professionals located outside the country. This component provides qualitative information of how a country’s trading partners perceive the efficiency and quality of its logistics services.
Not surprisingly, high-income countries, particularly those in Western Europe, emerge as world leaders on logistics, gaining scores 48% higher, on average, than low-income countries. Among the 30 top performing countries, 24 are members of the Organization for Economic Co-operation and Development (OECD).
“Across the board, we have seen most countries investing in logistics-related reforms, especially in the areas of building infrastructure and facilitating trade,” Jean Francois-Arvis, economist at the World Bank Group and report co-author, wrote.
“Despite these efforts to modernize services, developing countries face many remaining challenges. This explains a persistent gap between high- and low-income countries in terms of logistics performance.”
However, the report also found that among their respective income groups, Vietnam, Thailand, Rwanda, China, and India all outperform in logistics. These countries tend to have access to seaports or large international transportation hubs.
Meanwhile, the bottom 10 countries in the ranking are composed of mostly low-income and lower-middle-income countries. These are either fragile economies affected by armed conflict, natural disasters, political unrest, or landlocked countries that are naturally challenged by geography or economies of scale in connecting to global supply chains.
For individual countries, logistics performance could be the key to their economic growth and competitiveness is clear. The World Bank found that inefficient logistics raise the cost of doing business and reduce the potential for integration with global value chains. The toll can be particularly heavy for developing countries trying to compete in the global marketplace.
“The modern era of international trade is one of increasingly complex interactions between people, firms, and organizations. Supply chains cross countries and regions. Trade has become a 24/7 business and good performance in trade requires connectivity along not only roads, rail, and sea, but in telecommunications, financial markets and information-processing. Having inefficient or inadequate systems of transportation, logistics, and trade-related infrastructure can severely impede a country’s ability to compete on a global scale,” the World Bank wrote. — Bjorn Biel M. Beltran