costs is accompanied by higher geographic concentration of economic activities. With high transport costs, large economies of scale will remain unexploited, and production is inefficient. When transport costs fall, spatial differences in production and economic growth will increase, both within and between countries. In the United States for example, the expansion of railroads in the mid nineteenth century transformed cities from public service providers to engines of growth. Cities in Illinois, Michigan, and Ohio close to transport hubs attracted people and industries with increasing returns to scale, reaping productivity effects from specialized inputs and larger labor markets.

3. The World Bank and other donors such as the African Development Bank and UK DFID have been collaborating with the Government of Malawi to identify both the types of public investments that matter, as well as where these investments will be spatially efficient and generate the highest economic gains for the country. While these investment patterns are likely to support locations with demonstrated economic potential, thereby increasing regional disparities in production, this should not be an immediate concern for policymakers. They may in fact want to invest in human capital and social services in isolated regions, bringing parity in basic standards of living as well as creating opportunities for labor migration to better integrate their citizens with labor markets in dynamic locations. In fact, the WDR 2009 highlights that enabling geographic mobility of labor is a key ingredient for countries to gain from the geographic concentration of economic activities along with convergence in living standards.

4. This paper contributes to the debate on transport costs in Malawi, providing fresh empirical evidence based on a specially commissioned survey of transport providers and spatial analysis of the country’s infrastructure network. Typically, information on road network quality, traffic demand, and transport prices are hard to come by – making it difficult to separate the effects of road densities from quality and organization of the transport services industry.

5. The main findings from the analysis are as follows:

# **Constraints:**

- **_Infrastructure quality as well as market structure of the trucking industry are important contributors to regional differences in transport costs_** : On infrastructure, the quality of the trunk road network is not a major constraint – rather differences in the quality of feeder roads connecting villages to the main road network have significant bearing on transport costs. The costs due to poor feeder roads are exacerbated by low volumes of trade between rural locations and market centers. With empty backhauls and journeys covering small distances, only a few transport service providers enter the market, charging disproportionately high prices to cover fixed costs and maximize markups.

- **_International and domestic transport markets are segmented_** :  The survey of truckers shows that the average unit transport price (per ton, per km) is 228.4 kwacha from rural areas to the country’s main cities – in comparison, transport prices range between 10 and 12 kwacha per ton per km on routes linking the country to international markets. This is a clear indication that transport markets are segmented with limited mobility across segments. The domestic and international routes are significantly different to a point where most operators on international routes (if they had excess capacity) could not operate with their present fleets on domestic routes (their trucks could simply not run on some of these roads), and neither would expected profits warrant their trouble to go after such traffic.

- 2 -