investment in productive capacity. Thus, by supporting domestic infrastructure investment, AFT programs may foster the ability of the private sector to take advantage of new trade opportunities, improve competitiveness of domestic products, and more generally enhance the role of private activity in promoting development.

# **Box 1. The Gains from Trade and Access to Infrastructure**

From the perspective of external trade performance (as opposed to growth _per se_ ), improved access to infrastructure is critical for most developing countries who intend to reap the benefits from trade. There are three specific channels through which infrastructure can impinge on trade performance: through transportation costs, the quality of the labor force, and adjustment costs to tariff cuts.

From the perspective of international trade, the reduction in production costs that improved infrastructure may lead to is the most direct effect. Eliminating infrastructure constraints, such as water shortages, electricity outages and difficult road access, can facilitate the process of shifting private resources to more productive sectors, for instance from nontradables to tradables, or from agriculture to services and manufacturing. In addition, by facilitating movement of people and goods, improved infrastructure can lead in the medium term to higher investments in the rural sector and greater agricultural diversification, by raising expected rates of return. Farmers must be able to obtain inputs at reasonable costs, and also to sell their outputs at remunerative prices. Transportation costs, in particular, are crucial for them to decide whether or not to engage in certain activities.

Several studies have indeed documented the importance of good infrastructure for trade and export performance. In a study conducted in the late 1990s, the African Development Bank found that freight charges on exports of the poor countries of the region to the United States, as a proportion of CIF value, are on average 20 percent higher than for comparable products from other low-income countries. Yoshino (2007) found that poor quality of public infrastructure—measured in terms of the average numbers of days per year for which firms experience disruptions in electricity—has an adverse effect on exports in sub-Saharan Africa. In Rwanda, farmers receive only 20 percent of the price of their coffee as it is loaded onto ships in Monbasa; the other 80 percent disappear into the costs of poor roads (as well as red tape) between Rwanda and Kenya. High domestic and international transport costs have also been identified as a key impediment to export growth in South Africa (see Naudé and Matthee (2007)). De (2008, 2009) found that transport costs and the quality of infrastructure are a key component of trade costs for several Asian countries, including China.

Regarding Latin America and the Caribbean, a study by the Inter-American Development Bank suggests that for many countries of the region shipping costs (which depend significantly on port efficiency) may be a greater barrier to U.S. markets than import tariffs (see Micco and Pérez (2002)). Moreover, a comparative <u>study by Dollar et al. (2006) of four countries in Latin America (Brazil, Honduras,</u> 12