By Vedika Sakhardande
“All the inland parts of Africa, and that part of Asia which lies any considerable way north of the Euxine [Black] and Caspian seas, the ancient Scythia, the modern Tartary and Siberia, seem in all ages of the world to have been in the same barbarous and uncivilized state in which we find them at present.”-Adam Smith
In 1776, Adam Smith noted how proximity to waterways allowed markets and industries to expand in ways that land-carriage could not afford. He noticed that those regions located away from coasts had a slow rate of development owing to their geographical positioning, while their coastal neighbours had much higher levels of development. And now, despite the two centuries of progress in transport technology and legislature for cross-country trading, being landlocked continues to be a severe hindrance in the socio-economic development of a region. 17 of the 44 landlocked countries are considered the least developed countries in the world.
Why does being landlocked matter?
Landlocked countries are disadvantaged by their lack of access to the sea even when they are no farther than the interior parts of coastal economies. Hence, the issue of being landlocked extends past the geographical proximity to the coast and is impacted by political boundaries and relative bargaining powers of countries.
Landlocked countries are highly dependent on transit states for access to trade. They generally face high costs due to the “transit charges” levied at borders. These charges include payments for transit goods’ licenses, border fees, temporary road licenses and foreign vehicle permits. These can amount to nearly 20% of the direct freight costs. Moreover, the transit system is highly unregulated and corrupt due to which administrative delays and bribe-taking are rampant. Landlocked countries face a cost penalty ranging from 8% to 250% and a time penalty of 9% to 130% as compared to their coastal neighbours.
In their paper, “Economic Development Problems of Landlocked Countries”, Landis et al. provide a simple model to understand why these higher costs reduce the average growth of landlocked countries by nearly 1.5% per year. Landlockedness functions as a tax on exports and a tariff on imports. It raises the price of imports and reduces the price of exports by the net of transport costs. Resultantly, landlocked countries face a decrease in trade and this reduces the real income of citizens. The income effect of a fall in real income of citizens causes them to reduce the value of imports, while under the substitution effect they switch from imports to domestic goods which in turn reduces the available export surplus. Hence, as a net result, the GDP falls.
The socio-economic disadvantages of being landlocked
Landlocked countries are significantly poorer than their maritime neighbours. On average, landlocked countries export 60% less value per year than their maritime transit nations. The unpredictable nature of transit routes also makes trade with landlocked countries unfavourable. The mean level of FDI inflows to the landlocked nations is 1/49th that of the maritime transit nations. Low FDI hinders investment in trade infrastructure and further perpetuates the low levels of growth.
Low GDP leads to poor performance of other development indicators such as health and education as well. At places where regional conflicts or civil wars have blocked transit routes and increased costs, this problem is exacerbated. For example, due to the civil war in Mozambique, Malawi was forced to reroute its freight which cost it an additional $75 million per year. The lack of access to proper health facilities causes high rates of child and maternal mortality and lowers life expectancy. High costs of trade also affect food prices which raise the costs of living in landlocked countries. Landlocked countries are also vulnerable to global price volatility. In 2017, the cost of importing oil surged by nearly 50% for Zambia. This is detrimental to the industries and reduces the market competitiveness of landlocked nations.
Landlocked developing countries also faced severe disruption due to the COVID pandemic. Restrictive measures at transit country borders affected the movement of goods and services and raised trade costs. As landlocked countries generally export primary commodities, supply chain disruptions and a fall in global demand led to a dip in the primary source of income for several of them.
How can the situation of landlocked countries be improved?
Several studies such as those by Milner and Zgovu 2003 and Hoekman and Nicita 2008have shown that geographical restrictions are the primary reason for low levels of trade in developing countries. However, factors such as political influence, bilateral relations and legislative support also have a significant influence on the growth of a country. Improvement in these factors could aid in the development of severely disadvantaged regions such as central Africa and Asia.
All of the ten landlocked states of Europe are prosperous. Landlocked countries like Switzerland and Liechtenstein perform better than most coastal regions. Similarly, Bhutan faces minimal logistical delays and transit costs due to the prevalence of strong Indian-Bhutanese relations. The formation of regional economic communities such as the European Union could aid in the equitable development of landlocked states. Common markets such as the SADC (Southern African Development Community) and the COMSEA (Common Market for Eastern and Southern Africa) have greatly helped landlocked countries in Africa transport goods without a local license or permit. Stabilization of political relations through regional cooperation can reduce the unreliable nature of trade for landlocked countries and prompt FDI inflows. The common market can also serve as an incentive to strengthen infrastructure and build better networks that could benefit all the members.
Though several programmes, frameworks and agreements have been formulated to aid the development of landlocked states, they are generally poorly implemented and enforced. The United Nations Convention on the Law of Sea provides freedom of transit through the territory of transit states for landlocked states, however, this right of access must be agreed upon by the transit neighbour. As a result, landlocked nations are generally highly dependent on their transit states. Chile has effectively denied transit rights to Bolivia due to poor political relations that have reduced the latter’s development potential. Removal of the arbitrary veto power of transit states through bilateral reforms such as the GATT (General Agreement of Tariffs and Trade) could prevent the misuse of power by transit states. Regularisation of the customs and clearance process during transit could reduce inefficiency for the landlocked country while ensuring a steadier source of income for the transit state.
Being landlocked serves as a tax on development. As arbitrary political boundaries distance a country from the coast, it faces worsened prospects for trade, income and quality of life. The worst affected countries are stranded from the chain of global trade not just due to their geography but due to the multitudes of political challenges they face. Regional co-operation and improved trade legislature can serve as means to boost the development of landlocked countries, while also aiding coastal economies in developing better markets and building more reliable customs systems.
References:
http://hdr.undp.org/sites/default/files/landlocked_countries_2003.pdf
https://openknowledge.worldbank.org/handle/10986/2489
https://journals.sagepub.com/doi/10.1177/016001799761012334
https://www.researchgate.net/publication/5112526_Economic_Development_Problems_of_Landlocked_Countries https://www.dandc.eu/en/article/landlocked-developing-countries-struggle-high-trade-costs-and-depend-transit-countries