Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Transport costs and the trade diversion effect of natural resource discoveries

Roberto Bonfatti, Steven Poelhekke

Last modified: 2012-06-27


Natural resource discoveries in developing countries are often associated with the construction of new transport infrastructure, connecting the resources to the port from where they get shipped. To the extent that this infrastructure may be useful to other trades as well, it may bias a country's structure of transport costs in favor of imports from overseas countries, diverting trade away from regional trading partners. This is particularly evident in Africa, where many countries are better connected to faraway countries than to neighbors, contributing to explaining a dismal performance of intra-African trade. We investigate the trade diversion effect of natural resource discoveries in the context of a gravity model of trade. Our main findings are that coastal countries that have more mines trade less than average with neighbors, and that this effect is stronger when the mines are closer to commercial centers. However - consistently with the idea that this is due to resource-related infrastructure - landlocked countries that have more mines trade more with their transit neighbor. Our results have important consequences for the distributional effect of natural resource discoveries at a regional level, and may provide some concrete policy advice on how best to transform resource wealth into actual development.

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