Trade Networks in Latin America: Spatial Inefficiencies and Optimal Expansions

Using a spatial general equilibrium framework and a new discretization procedure to address the large spatial scale of countries such as Brazil, this study identifies optimal domestic and transnational transport networks and expansions to existing ones in Latin America. Most countries have underinvested in domestic road networks connecting their more populous and productive urban areas. The average annual welfare losses due to such inefficiencies are largest in Argentina and Brazil, averaging respectively 2.4 percent and 2.1 percent of consumption. The estimated welfare losses due to spatial misallocation of transnational transport networks are 1.8 percent in MERCOSUR and 1.5 percent in the Andean Community, but the losses of landlocked members of the bloc are more than double these averages. Optimal expansions of existing networks can correct existing inefficiencies and reduce spatial inequality within and across countries. World Bank transportation infrastructure projects correlate relatively well with the optimal investments in most countries.