Trade Networks in Latin America: Spatial Inefficiencies and Optimal Expansions

Abstract

Using a spatial general equilibrium framework, we construct optimal transport networks and optimal expansions to existing networks in most Latin American countries, as well as within MERCOSUR and the Andean Community. The average annual welfare losses due to inefficient domestic transport networks in Latin America are around 1.6 percent, ranging from 2.4 percent in Argentina to 0.3 percent in El Salvador. Spatial misallocation of transnational transport networks is associated with annual welfare losses of 1.8 percent in MERCOSUR and 1.5 percent in the Andean Community. Optimal investments in existing networks can correct existing inefficiencies and reduce spatial inequality within countries. The optimal investments we identify correlate relatively well with World Bank infrastructure projects because both prioritize investments in high population areas. Optimal investments in transnational road networks benefit the most the least developed country in each trade bloc.

Keywords: transport network, spatial equilibrium, road infrastructure, trade costs, economic geography