Trade Networks in Latin America : Spatial Inefficiencies and Optimal Expansions

How do trade connectivity issues affect the efficient spatial distribution of economicactivity within and across countries in Latin America This paper uses a spatial general equilibrium framework toconstruct optimal transport networks and optimal expansions to existing networks in most Latin American countries, aswell as within MERCOSUR and the Andean Community. The paper assesses the average annual welfare losses due toinefficient domestic road networks in Latin America at 1.7 percent, ranging from 2.5 percent in Brazil to 0.2 percentin El Salvador. Spatial misallocation of transnational road networks is associated with annual welfare losses of 1.8percent in MERCOSUR and 1.6 percent in the Andean Community. Optimal investments in improvements and expansions ofexisting networks can correct these inefficiencies and reduce spatial inequality within countries. Theseinvestments correlate relatively well with World Bank road projects because both the model and the World Bankprioritize investments in high population areas. Transnational road improvements benefit the most the leastdeveloped country in each trade bloc. The results are robust to changes in data sources and model assumptions.