The effect of distance and communications costs on intra-African trade

Evans Mupela looks at the cross-sectional patterns of export intensity on the continent in relation to distance and costs of information communications technology (ICT)1, and finds that both play a significant role in the realisation of higher trade intensity among African countries.
Communications costs are an important aspect of the barriers to trade, often referred to as trade costs. These are the costs that must be overcome to actualise trade transactions. In other words, all the costs incurred in getting goods to the final users other than the costs involved in producing the goods themselves.

The higher these costs, the more difficult it is to carry out a trade transaction and the smaller the volume of trade. Barriers to trade such as transport costs, exchange rates, freight charges and border-related trade barriers have been studied in the past, but less so the impact of the cost of information gathering and the transmission of messages. These have often been neglected or have been subsumed under transport costs or border-related trade barriers.

To model these costs separately is important, as the share of services in world trade has increased dramatically over the last two decades and advances in communications have made distance seem less important in the setup of trade transactions. The purpose of the study, Communication costs and trade in sub Saharan Africa: a gravity approach, was to investigate whether high communications costs between countries had a negative impact on the volume of trade among sub-Saharan African countries.

Intra-African trade suffers from poor international transport infrastructure and high communication costs.

The study used a gravity setup to empirically test the hypothesis that high communications costs in this region had a negative impact on the volume of trade between African countries.

The gravity model of trade in international economics predicts bilateral trade flows based on the economic sizes (often using GDP measurements) and distance between two countries. This model predicts that trade will be more frequent between countries that are closer to each other than with those further away. The gravity tendency is likely to weaken when trade
with bigger economies outside Africa is taken into account, for example when former colonial ties result in trade relations with distant countries.

Intra-African trade suffers from poor international transport infrastructure and high communication costs. It has recently been shown that communication costs in Africa are several times higher than those in South Asia (Figure 1).

The study focused on the effects among countries in sub-Saharan Africa to eliminate as far as possible the effects of former colonial ties.

The methods used, therefore, involved isolating communications costs and looking at the cost of gathering, transmitting and receiving information across international barriers through international telephone and internet services.
These were represented by the costs of broadband and international phone calls, which are the communications costs that are likely to affect international trade. International calling rates were measured in US dollars per minute while internet bandwidth was measured in dollars per megabit per second (Mbps), which represented the variable cost aspect of communication.

The results showed that distance and communication costs mattered for trade in sub-Saharan Africa. The overall result seemed to be that distance affected export intensity negatively as did the cost of fixed and mobile lines and broadband communication in both coastal and landlocked countries.

Figure 2 shows strong gravity tendencies for trade among sub-Saharan countries2. The figure shows that the total volume of trade from South Africa and Zambia decreased with distance from the exporting country.
This trend was replicated to varying degrees in other countries.

Figure 3 shows the scatter plot for the sub-Sahara region. Exports were generally very low in countries with high calling rates per minute. The scatter plot shows a clear pattern of high bilateral call charges and low exports, and a general trend of low bilateral calling charges and high exports. Although there are a lot of countries in the low cost/low export area of the plot, there is not a single country in the high cost/high export area. This pattern is consistent with the regression results in the study.

In conclusion

By adding variables representing the cost of international connectivity to a traditional gravity equation, we find that international communication costs have a significant negative effect on the volume of trade in sub-Saharan Africa. This implies that efforts aimed at reducing the cost of international communications in Africa may contribute to the reduction of trade friction between countries in this region and an increase in export intensity among these countries.

International communication costs have a significant negative effect on the volume of trade.

Affordable international connectivity coupled with good transport infrastructure would have a positive impact on the total volumes of trade between African countries, especially where there are great distances between countries.

Given present market conditions, the indirect effect of the existing infrastructure of satellites and optical fibre gateways has a negative influence on trade, as it results in high international calling rates and high broadband connectivity costs. This study provides a foundation for arguments for local African investments in both technologies and the development of policies that will reduce international communications costs across the board in Africa.

Author: Dr Evans Mupela, post-doctoral research fellow in the Economic Performance and Development research programme, HSRC.