Increasing GDP BY Removing Red Tape
By Sherwin Pomerantz
A new report released by the World Economic Forum issued on January 22nd finds that reducing supply chain barriers could increase global GDP and world trade much more than reducing all import tariffs. In addition, economic gains from reducing supply chain barriers would be more evenly distributed than gains associated with tariff elimination, with particular benefits for sub-Saharan Africa and Southeast Asia.
Supply chain barriers can take many forms such as these cited in the report:
- In Brazil, managing customs paperwork for exports of agricultural commodities can take 12 times longer than in the European Union (a full day versus a couple of hours).
- Poor quality infrastructure services can increase the input material costs of consumer goods by up to 200% in certain African countries.
- Obtaining licenses and lack of coordination among regulatory agencies in the U.S. led to delays in up to 30% of chemical shipments for one company, with each late shipment costing $60,000 per day.
- In Russia, product testing and licensing in the computer sector can lead to high administrative costs and delay time-to-market anywhere from 10 days to eight weeks.
- India’s Preferential Market Access regulation, which gives preference to locally produced high-tech products in government procurement, could increase costs by 10% over the cost of imports.
Amazingly, the report finds that if all countries improved border administration and transport & communications infrastructure halfway to global best practices, global GDP could increase by 4.7% and world trade by 14.5%, compared to gains of 0.7% and 10.1%, respectively, from the elimination of all import tariffs. Even a less ambitious set of reforms that moved countries halfway to regional best practices could increase global GDP by 2.6% and world trade by 9.4%.
For example, adopting electronic documentation for the air cargo industry could yield $12 billion in annual savings and prevent 70-80% of paperwork-related delays. In addition, easing regulatory compliance of international trade that SMEs face when selling through the Internet could increase cross-border SME sales by 60-80%.
Israel is also guilty of many of these practices, where merchandise is held up for days or even weeks because of minor bureaucratic issues such as missing information on accompanying forms, a general misunderstanding of what the merchandise represents or issues relating to the ultimate use of the incoming products.
WEF suggests that governments, to address these barriers to growth should simply agree to work with businesses and analysts to create mechanisms to collect data on factors affecting supply chain operations. Those can then be used to identify clusters of policies that jointly determine key supply chain barriers, identify priorities for action and assess progress.
In a word, the government and business communities, in tandem, should pursue a more holistic approach toward international trade negotiations that spans key sectors impacting trade logistics, including services such as transport and distribution, as well as policy areas that jointly determine supply chain performance (in particular those related to border protection and management, product health and safety, foreign investment, and the movement of business people and service providers).
In these difficult economic times, increasing the “bottom line” must be addressed from both the bottom up (i.e. increasing sales) as well as from the top down (i.e. through streamlining regulations). It would seem, therefore, that the effect of making even minor changes in requirements to ease trade has tremendous impact on GDP growth. Taking these top down measures to improve the situation requires serious commitment on the part of international and national regulators to put aside traditional rules and biases for the common good. Considering past experience, let’s hope that the world’s leaders heed the call before the end of our lifetimes.