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2 LOGISTICS FRIENDLINESS, GDP AND THE PERCEIVED LEVEL OF CORRUPTION OF COUNTRIES Lauri Ojala Turku School of Economics and Business Administration, International Business (Logistics), Turku, Finland Cesar Queiroz The World Bank, Washington D. C. Abstract How "easy" or "difficult" individual countries are perceived to be as trade and transport partners can be analyzed in a number of ways. A survey was conducted in 2001 among international freight forwarders in order to illustrate how "easy" or "difficult" individual countries are perceived to be from a logistical point of view. The Baltic States are used to highlight the results. The concept of "Logistics friendliness" was adopted following its introduction by Murphy and Daley (1999). According to Murphy and Daley, logistical friendliness (unfriendliness) refers to the ease (difficulty) of arranging international freight operations to/from a particular country. The "friendliness" and "unfriendliness" should be seen as two different concepts (constructs) rather than opposite ends of the same continuum. The survey approached 60 international freight forwarders through e-mai\. Among other questions, each respondent was asked to rate a set of pre-determined countries as to what extent he/she perceived the named country as logistically "friendly" or "unfriendly". The countries included were based on the 90 countries in the Corruption Perception Index (CPI) collected by Transparency International and Goettingen University. The indicative results show a striking correlation between on the one hand the logistics friendliness and the CPI, and on the other, the GOP per capita. This Is a strong indication that the less perceived corruption there is in a country, the easier it is to trade and arrange the logistical practicalities with that country. Similarly, the higher the level of GOP per capita, the same occurs. This is no surprise as such, but the relatively strong correlation between the logistical friendliness and CPI (0.845); and GNP/capita (0. 784, respectively) is noteworthy. The high correlation between logistical friendliness and the Economic Freedom score (0.690) underline the role of the general business environment too. Keywords: Logistics friendliness, Country ranking, Corruption Perception Index Introduction Facilitation of logistics arrangements is an issue of high priority both at regional, national and international level. Generally speaking, logistics friendliness or logistics friendly regions can be measured in a number of ways. For example in the U.S., Transportation & Distribution and Expansion Management magazines recently released the results of a study ranking the most logistics-friendly cities in the United States. Employing what is known as the "Logistics Quotient," the study was designed to provide an objective ranking of America's cities relative to their logistics friendliness. For Transportation & Development magazine, it represented an effort "to provide a specialized tool to assist logistics professionals in evaluating the strengths and weaknesses of site options." Among the categories used in the Logistics Quotient were the Transportation and Distribution Industry Climate; Workforce/Labor Costs, Availability, and Skill Levels; Road/Highway Basic Infrastructure and Spending, Road Density/Congestion/Truck Safety, Road Conditions, and Taxes and Fees; Water Ports; and, Metrics for Air Service. Several American cities or regions quote the resutts in their promotional websites (see e.g. In a context of analysing general obstacles of doing business in certain countries or regions, a broader approach is warranted. An extensive, recent study was done by Brunet ti et al. (2001) with 3,685 questionnaire responses, which takes into consideration six Categories of Obstacles. These are (i) LRN Conference 2002, Birmingham 211

3 Regulations; (ii) Trade and exchange rate policies; (iii) Inflation and financing; (iv) Public revenue and expenditure policies; (v) Uncertainty; and (vi) Corruption and crime. The overall scores of the six groups of obstacles for the 22 World regions identified in the study are shown in Table 1. Rank Region Countries in Region Rating North-Eastern Europe Ireland and United Kingdom 41.9 Central Western Europe Austria, France, Germany, and Switzerland 42.6 North America Canada and United States 46.4 Southern Europe Italy, Portugal, and Spain 50.1 Middle East and N Africa Jordan, Morocco, and West Bank and Gaza Strip 50.2 Baltic Republics Estonia, Latvia, and Lithuania 51.0 Asia Fiji, India, and Malaysia 52.3 Caucasus Armenia, Azerbaijan, and Georgia 52.6 Western South America Bolivia, Paraguay, and Peru 53.0 Visegrad Czech Republic, Hungary, Poland, and Slovak Republic 53.4 Western Central Africa Cote d'lvoire, Ghana, and Togo 53.6 Middle-lncome Africa South Africa and Mauritius 54.7 Western Africa Guinea, Guinea-Bissau, and Senegal 55.3 Black Sea and Balkan Albania, Bulgaria, FYR Macedonia, and Turkey 56.2 Eastern Africa Kenya, Tanzania, Uganda, and Zambia 56.3 Western and Central Africa Benin, Mali, and Nigeria 56.3 Central Africa Cameroon, Chad, and Congo 56.6 Central America Costa Rica, Jamaica, and Mexico 57.1 Central Asia Kazakhstan, Kyrgyz Republic, and Uzbekistan 57.4 Southern Africa Madagascar, Malawi, MGzambique, and Zimbabwe 57.5 Slavic Republics Belarus, Moldova, Russia, and Ukraine 58.3 NW South America Colombia, Ecuador, and Venezuela 61.5 Table 3: Ranking of Regions from Lowest to Highest: Total Obstacles Among 22 World Regions (1 = lowest obstacle rank; 22 = highest rank; the rating is the compound score of the six categories) How "easy" or "difficult" individual countries are perceived to be as trade and transport partners can be analysed in a number of ways. Trade and transport operations invariably involve numerous partners both in the public and the private sector, such as banking and insurance agents, in addition to various logistics service providers. In addition, the trading partners (buyers and sellers or consignors and consignees) evaluate the practicalities often on a case-by-case basis. This is illustrated in Figure 1., which exemplifies a transocean transport movement from an inland point-of-origin to an inland point-of-destination (for example, from East Asia to Europe or the US). Each point along the curve indicates separate cargo handling operations. At each point, the handling time or cost may deviate from the expected levels. Especially countries in transition face an imminent need to facilitate trade and transport through public and private sector initiatives. Public administration both at national and regional levels set in motion projects to facilitate trade and transport, and the business communities have also been keen to develop the operating environment in these areas (See e.g. Ojala and Queiroz 2001 ). 212 LRN Conference 2002, Birmingham

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5 ~ determined countries as to what extent he/she perceived the named country as logistically "friendly" or "unfriendly', The countries included in the questionnaire were based on the 90 countries included in the Corruption Perception Index (CPI) collected by Transparency International and Goettingen University (see- http-//\nww-gwdg-de/-uwvw/). Countries with the lowest level of perceived corruption were assigned 10, whereas countries with highest level of perceived corruption were assigned 1- For each country included in the CPI, the Gross Domestic Product (GDP) per capita figure for 1999 was collected using World Bank statistics. Relevant data was found for 88 countries, excluding Mauritius and the Former Republic of Yugoslavia. 100% 90% ~Lo9istics mor~ friendly" i Correlation coefficient = O % -: - 70% I I 60% -r-- Lith u a n ia Latvia 0 50%.. 0 / / 4 O % +-'-'-- 30% [. 20% 0'! 10% : G DP/capltkrn1999. ~:-" fl",. c,..~iq\! '--'LJ \'\.J~. """'OlvJj 1 0% 100 1,000 10, ,000 I, Figure 3: The ranking of countries in the logistics friendliness survey against their GOP/capita 1999, with indicative positions (EU, CIS, The Baltics). Between 7 and 12 independent respondents who were professional freight forwarding agents evaluated each country. For practical reasons, an individual respondent did not evaluate all the 90 countries in the CPI list. If the respondents did not have any exposure to the logistical and/or trade practices of a particular country, they were advised to leave a blank for that country. This procedure increases the reliability of the responses. About 65 percent of the respondents were from EU countries, some 20 percent from the US, 10 percent from Latin America and the rest from other parts of the world. There were no respondents either from the Baltic States or from the former Soviet republics. On the other hand, about 40 percent of the respondents were from Finland. The combined indicator for logistical friendliness in the survey is the percentage of the responses, which stated that a given country was either logistically "friendly" or "unfriendly". Hence, the percentage for Lithuania (71 percent) indicates that five respondents out of seven viewed Lithuania as a "logistically friendly" country, whereas two did not. By comparison, all the respondents regarded Russia as logistically unfriendly; consequently, that country's ranking is O percent in Figures 2. and LRN Conference 2002, Birminqham

6 The results are only indicative and somewhat anecdotal, since they are based on a small number of responses, all of which are highly subjective assessments based on hands-on experience. Countryby-country data is shown in Attachment 1. Despite the somewhat skewed distribution of the respondents, the small number of respondents, and the highly simplified concept used, the results show a striking correlation between on the one hand the logistics friendliness and the CPI, and on the other, the GDP per capita. This is a strong indication that the less perceived corruption there is in a country, the easier it is to trade and arrange the logistical practicalities with that country. Similarly, the higher the level of GDP per capita, the same occurs. This is no surprise as such, but the relatively strong correlation between the logistical friendliness and CPI (0.845); and GNP/capita (0. 784, respectively) is noteworthy. The results were compared with the so-called Economic Freedom rating of 1999, which was available for 77 countries included in the CPI data. (Attachment 1; http.// Correlation between logistical friendliness and the economic freedom score was also high (0.690), indicating the importance of economic freedom to trade and logistical operations. The correlation between the CPI and the Economic Freedom indicator is slightly higher at However, the two indicators rely partly on joint data, which may cause some degree of autocorrelation between them. The results also show that the Baltic States are perceived as fairly easy countries in a logistical sense. Compared against the CPI ranking and GDP/capita data, the three countries show exceptionally good performance, and they have received substantially higher marks than other former Soviet Republics. On the other hand, the Baltic States lag behind the typical EU countries. Conclusions The indicative results show a striking correlation between on the one hand the logistics friendliness and the CPI {correlation 0.845), and on the other, the GDP per capita {0. 784). This is a strong indication that the less perceived corruption there is in a country, the easier it is to trade and arrange the logistical practicalities with that country. Similarly, the higher the level of GDP per capita, the same occurs. The results also coincide well with the country ranks given by the Economic Freedom Network {correlation 0.690) and the results of the extensive survey conducted by Brunet ti et.al. {2001 ). An implication of the results for developing countries and countries in transition is that facilitation of trade and transport pays off, as was highlighted with the case of the Baltic States. This requires commitment to improve the institutional and regulatory framework across the private and public sector. The concept of logistics friendliness introduced by Murphy and Daley may be a relatively crude measure of a country's logistics capability and the private and public sector operations related to it. Used in a "yes or no" fashion, the concept was also criticised for being overly simplistic, and distant to everyday freight forwarding operations. It can nevertheless give a snapshot-type of indication of a country's logistics abilities or level of development. The authors are planning to conduct a more detailed survey with a larger number of responses to analyse the concept and reasons for its occurrence further. Such insight is believed to benefit the freight forwarding and logistics industry too. References Brunet ti, A., Kisunko, G. and Weder, A. (2001), How Businesses see Government Responses from Private Sector Surveys, IFC Discussion Paper No.33. Frankel, E.G. (1999), "The Economics of Total Trans-Ocean Supply Chain Management", International Journal of Maritime Economics, 1 (1 ), pp Murphy, P. R. and Daley, J. M. (1999), "Revisiting Logistical Friendliness: Perspective of International Freight Forwarders", Journal of Transportation Management, Spring, pp Ojala, L. and Queiroz, C. (2001 ), Transport Sector Restructuring in The Baltic States, The World Bank, U.S. ElectriCities members' areas website, CPI website of the Goettingen university, The Fraser Insititute website, Conference 2002, Birmingham 215

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