BRIEFING PAPER No. 11, 2009 Case for South Asian transit arrangement Paras Kharel T The special challenges facing the 31 landlocked developing countries (LLDCs) of the world are well documented. Lack of direct access to the sea, isolation from major economic centres, inadequate transport infrastructure (both in LLDCs and transit countries) and cumbersome transit procedures constrain their growth prospects, especially through the well-worn path of international trade, thus rendering the death-of-distance hypothesis "more fiction than fact".1 These factors result in high transport costs, inflating landed import prices and eroding international competitiveness of exports. A World Bank study found the median landlocked country experiences transport costs 42 percent higher than the median coastal economy, and halving transport costs increases trade volume by a factor of five.2 There is ample cross-country evidence suggesting that geography matters for growth performance. For example, on average, LLDCs experience 1 percent slower growth than coastal economies; being entirely landlocked subtracts roughly 0.7 percent from a developing country's annual growth; and a landlocked country with transport costs 50 percent higher than a similar coastal economy can expect slower growth of about 0.3 percent per annum.3 Barring rare exceptions like Botswana, whose economy's heavy dependence on low-weight high-value exports (such as diamond) allows it to bypass its transit neighbour infrastructure by using air transport, LLDCs are dependent on transit neighbours for access to international markets. Faye et al. (2004) identify four types of dependence of LLDCs on transit neighbours that are important in explaining the poor development and trade performance of LLDCs: dependence on neighbours' infrastructure; dependence on sound cross-border political relations; dependence on neighbours' peace and stability; and dependence on neighbours' administrative practices.4 The three LLDCs of South Asia-Afghanistan, Bhutan and Nepal-are no exception to these challenges. The bilateral transit arrangements in force constrain their trade expansion and diversification prospects. This paper makes a case for a regional transit arrangement in South Asia, arguing that regional cooperation on transit and transport will benefit not just the LLDCs but the coastal countries, too.
2 BRIEFING PAPER No. 11, 2009 It has only recently been recognized that, in many instances, prohibitive transport costs represent a more restrictive limitation on LLDCs' participation in international trade than tariffs or other trade barriers.5 What LLDCs pay for transport services is, on average, almost three times more than tariffs levied by developed countries, ranging from 3 percent to 7 percent on goods originating from most developing countries.6 The reduction in tariffs in several rounds of multilateral trade negotiations, together with the continued granting of preferential tariff treatment to LLDC exports by major developed and advanced developing countries, has increased the relative importance of simpli cation and harmonization of international trade procedures for LLDCs. In 2007, duty-free treatment was granted by developed countries to an average of 94 percent of total imports, excluding arms, originating from LLDCs, up from 80 percent in 2000.7 Because LLDC merchandise has to pass through at least one transit country, the quality of transit regimes becomes crucial. According to