# **MOTIVATION AND MAIN FINDINGS**

1. In many countries, policymakers hope that spatial equity in the distribution of transport infrastructure will help in balancing economic opportunities across regions. Malawi is among these countries, where the government’s growth and development strategy (MGDS) identifies transport infrastructure as a priority area for public investment. The national public sector investment program focuses on network expansion. Eleven roads have been upgraded in 2007 - 08, and the focus of investments is on “big infrastructure”. However at the outset, it is not clear if bad roads the largest contributor to transport costs in Malawi – in fact, research from developed countries such as France show that there are considerable gains from improving competition in the transportation industry. And to get the highest payoffs from transport infrastructure improvements, there is need to prioritize improvements based on a location’s natural and economic geography.

2. Lessons from analytic work on economic geography and experience in developed and developing countries also tell us that reduction in transport costs in fact increase the spatial concentration of people and firms. The World Development Report 2009 “Reshaping Economic Geography” (WDR 2009, World Bank 2008) provides a succinct review of the drivers of transport costs and consequences of reducing them. These include the following:

- **_What determines transport costs_ ?  It’s not only infrastructure.** Estimates of transport costs suggest that these have fallen by almost 40 percent over the past three decades.  As comprehensive statistics on prices for transport services do not exist, most empirical work is based on the estimation of transport costs. For example, in France trucking costs fell by 33 percent between 1978 and 1998,with the main contributors being the deregulation of the trucking industry (a reduction of 21.8 percentage points) and the lower vehicle costs (–10.9 percentage points). On the other hand transport infrastructure (–3.2 percentage points) and declining fuel costs (–2.8 percentage points) were much less important. While the importance of core infrastructure will vary depending on the coverage of the network (i.e. importance will be higher in countries with sparse network coverage), market structure of the transport services industry is an important contributor to transport costs.  In addition, what is being traded also matters for transport costs: the lower weight value ratios of goods being traded along with changes in the modal composition of how goods are transported have reduced ad valorem transport charges (cost of transport as a share of the value of the traded goods).

- **_What are policy priorities for reducing transport costs_** ? **Don’t forget regulation.** Research in economic geography has assumed away the internal workings of transport—goods to be transported are seen as an iceberg to be hauled from one place to another, and transport costs are the part of the iceberg that melts away. Thus critical policy-related aspects have been neglected, and the policy focus has exclusively been on “hard” infrastructure.<sup>2</sup> However, policymakers should be concerned about scale economies in the transport sector that tend to create monopolistic behaviour and circular causation between lower transport costs and greater trade and traffic.

- **_What are the implications of falling transport costs?_ More spatial concentration, not dispersion, of production.** Recent analytic work in economic geography points out that for activities that benefit from increasing returns to scale, a fall in transport

> 2 However investments on physical infrastructure have neglected road maintenance. In Africa, for example, it is estimated that $45 billion was lost in road stock value during the 1970s and 1980s, which could have been avoided by spending $12 billion for preventive road maintenance (World Bank 2008). Poorly maintained roads increase transport costs by increasing costs of maintaining vehicles and reducing their speed.

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