The Role of Remoteness and of Transport Costs

Bilateral trade of geographically distant countries is likely to be negatively affected by the distance separating them from their trading partners and positively affected by their remoteness, defined as the average weighted distance between two countries with weights reflecting the absorptive capacity of the partner country. In presence of competitive transport costs, the effect of remoteness and distance is diluted. An augmented gravity model applied to the Pacific islands’ bilateral trade from 1980 to 2004 shows that a doubling of the elasticity of distance would decrease their average bilateral trade by 80 per cent. Remoteness positively affects the Pacific islands’ bilateral trade, but does not compensate for the negative effect of distance. The opposite is found for the Caribbean islands, where the elasticity of trade with respect to remoteness is eight times bigger than that for the Pacific islands. The World Institute for Development Economics Research (WIDER) was established by the United Nations University (UNU) as its first research and training centre and started work in Helsinki, Finland in 1985. The Institute undertakes applied research and policy analysis on structural changes affecting the developing and transitional economies, provides a forum for the advocacy of policies leading to robust, equitable and environmentally sustainable growth, and promotes capacity strengthening and training in the field of economic and social policy making. Work is carried out by staff researchers and visiting scholars in Helsinki and through networks of collaborating scholars and institutions around the world. www.wider.unu.edu [email protected] UNU World Institute for Development Economics Research (UNU-WIDER) Katajanokanlaituri 6 B, 00160 Helsinki, Finland Typescript prepared by Liisa Roponen at UNU-WIDER The views expressed in this publication are those of the author(s). Publication does not imply endorsement by the Institute or the United Nations University, nor by the programme/project sponsors, of any of the views expressed. By lowering transport costs, improved infrastructure fosters trade. A K-means cluster analysis for 30 small island developing states shows that the Pacific islands belong to the clusters with the weaker infrastructure stocks, leaving them with a large scope for improvement.