Introduction

This paper investigates the impact of cross-border transport infrastructure on the economies of the Greater Mekong Subregion (GMS).¹ Cross-border and domestic transport infrastructure together can reduce trade costs and lead directly to increased trade and investment. Reduced trade costs can also indirectly induce increased foreign direct investment (FDI) mainly through intra-firm vertical integration across borders that exploits the comparative advantages of each location, and in turn, such increases in FDI can further increase regional trade, adding to the direct effect of trade expansion. This defines a virtuous triangle of mutually reinforcing effects between cross-border infrastructure development, trade, and investment, the final effects of which are higher economic growth and—if necessary institutions and policies are in place to ensure the poor take part in this growth—poverty reduction. Increased trade and growth also expand the fiscal resources available to governments thereby enabling consideration of new policy options (e.g. investments in education, health, or social protection systems).

The intricate impacts of cross-border transport infrastructure investments and associated institutional efforts for trade facilitation cannot be adequately captured by traditional techniques of project accounting, which focus on first-order outcomes directly linked to infrastructure development. In addition, analysis of the international political economy and the distribution of benefits and costs associated with cross-border transport infrastructure projects across the two or more countries raise complexities not typically encountered in single-country projects, and making such projects prone to actual and perceived inequities between the parties. Inequalities in the incidence of benefits and costs across parties, in turn, call for transparent compensation schemes among the participating members or some self-enforcing mechanisms and third-party coordination in order for projects that cross national boundaries to be accepted by the countries involved. Attempts to devise such mechanisms must however be preceded by a clear understanding of the relationship between infrastructure development, trade, and FDI.

This paper seeks to contribute to the understanding of the economic impacts of cross-border infrastructure projects by investigating and quantifying trade creation and investment facilitation effects of cross-border infrastructure in the GMS. The motivation and more detailed background of this research are discussed in Fujimura (2004).

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