Infrastructure, Competition Regimes, and Air Transport Costs: Cross-Country Evidence

Abstract

The relevance of transport costs has increased as liberalization continues to reduce artificial barriers to trade. Countries need to adopt policies to get closer to global markets. Can improvements in infrastructure and regulation reduce transport costs? Is it worthwhile to implement policies designed to increase competition in transport markets? Focusing on air transport, which has increased its share in U.S. imports from 24 percent in 1990 to 35 percent in 2000, Micco and Serebrisky quantify the effects of infrastructure, regulatory quality, and liberalization of air cargo markets on transport costs. During the 1990s, the United States implemented a series of Open Skies Agreements, providing a unique opportunity to assess the effect that a change in the competition regime has on prices. The authors find that infrastructure, quality of regulation, and competition matter. In their sample, an improvement in airport infrastructure from the 25th to 75th percentiles reduces air transport costs by 15 percent. A similar improvement in the quality of regulation reduces air transport costs by 14 percent. Open Skies Agreements further reduce air transport costs by 8 percent.

This paper - a product of the Finance and Private Sector Development Division, World Bank Institute - is part of a larger effort in the institute to increase understanding of infrastructure regulation.

Keywords: Infrastructure, transport costs, air transport liberalization, regulatory quality

JEL Classification: F4, L4, L9