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Dave Donaldson on barriers to better trade

Dave's portrait
Photo by Steve Castillo

Many economists have studied how reducing international trade barriers can benefit developing countries. Stanford associate professor of economics and SIEPR Senior Fellow Dave Donaldson also wants to understand internal trade barriers—things, like bad roads, that raise the cost of bringing goods to market. In Africa and other developing regions, shipping products from point A to point B can be grueling, especially when point B lies deep in the interior, far from a country’s more developed areas. Not only are roads often primitive and poorly maintained, but trucks may be on the verge of breaking down, checkpoints may slow progress, and proper depots may not exist. Donaldson says he is looking at how such barriers “make an economy less productive. If it costs large sums of money and resources to move goods, a country can’t make as efficient uses of its productive resources.”

Toronto-native Donaldson, a development specialist and economic historian who came to Stanford last year from the Massachusetts Institute of Technology, has pioneered more precise ways of estimating internal trade costs in developing regions. In “Who’s Getting Globalized? The Size and Implications of International Trade Costs,” a 2014 paper coauthored with economist David Atkin, Donaldson estimated that moving goods to market in Nigeria and Ethiopia costs about four to five times more than in the United States, equaling roughly 10 percent of a typical product’s value. Such accurate measures of trade costs are critical for development policy, Donaldson notes, pointing out that 20 percent of the World Bank’s spending goes to transportation infrastructure.

Researchers usually calculate trade costs by looking at price gaps between two locations. But that method is imprecise because products may not be identical, and neither a product’s origin nor the extent to which transport costs are passed through to consumers is taken into account. Donaldson and Atkins devised novel methods to overcome these problems. To make sure they were looking at the same products, the researchers chose packaged consumer goods such as soap and beer that could be identified by bar code. They surveyed producers and distributers to pinpoint were products originated. And, assuming distributors could vary their markups, they calculated how much of a product’s trade costs were reflected in its retail price.  “We were asking what is the real cost of distance,” Donaldson explains. “We found that the cost is substantially higher than in the U.S.

Questions like these come naturally to Donaldson, who combines an interest in trade theory, economic history, and transportation. He started his academic career in physics, but switched when he went to graduate school at the London School of Economics. Donaldson says he liked the mathematical rigor of physics, but wanted to work on social problems. He became a specialist in spatial economics, the study of the effects of distance between buyers and sellers. And he also became the economist equivalent of a rail enthusiast. He has written about the effects of railroads on American economic growth and his doctoral dissertation examined the rail network built in India during the British Raj—a fantastic system, he says, that raised incomes and boosted living standards.