Asia's Extraordinary Transformation

Economic performance in developing Asia—defined as all 43 developing member countries of the Asian Development Bank (ADB)—has been impressive over the past few decades. The region has grown at an average annual rate of 7 percent since 1980. Poverty has declined rapidly: 300 million fewer people were living in poverty in 2003 than in 1990 (ADB, 2005a). The strong growth of exports and FDI has been an important driver for most Asian economies.

Trade, Investment, and Production Networks in Asia

Over the past two decades, developing Asia’s exports to the world have grown 12.5 percent a year, rising from $162 billion in 1980 to $2.3 trillion in 2005 (IMF, 2006). The region now accounts for a quarter of world exports. In recent years this strong export growth has been marked by a rapid increase in intraregional trade, which rose from 35 percent of total trade in 1980 to 55 percent in 2005 if Japan is included and from 22 percent to 45 percent of total trade if Japan is excluded. This share is higher than in the North American Free Trade Agreement (NAFTA) region, although it remains somewhat lower than the share in the original European Union (EU)-15 (Table 1 [ PDF 69.2KB | 1 pages ]).

The initial growth in trade that was sparked by Asia’s NIEs—Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China—and then by the middle-income members of the Association of Southeast Asian Nations (ASEAN) has continued as the People’s Republic of China (hereafter PRC) has become an important player in regional and global trade. As a result of its robust trade growth, the PRC now accounts for 30 percent of regional trade. Recently, there has been a surge in Asian trade from other exporters, such as India and Viet Nam.

Much of this increase has been the result of rapid trade liberalization in these economies since the 1980s—particularly since the 1990s—within the World Trade Organization (WTO) and Asia-Pacific Economic Cooperation (APEC) frameworks. Most economies not only reduced tariffs and nontariff barriers but also simplified customs rules and regulations (Dollar and Kraay, 2001). Notable is the fact that the expansion of East Asian trade has been accompanied by a rapid rise in FDI, reflecting liberalization of FDI regimes in the region’s economies and global strategies of multinational coorporations (MNCs). MNCs began to establish production networks across East Asia through FDI, generating trade in capital goods, parts, components, and semifinished and finished manufactures across East Asia.

FDI inflows to developing Asia rose more than 28 times between 1980 and 2005. In 2005 East Asian economies accounted for more than 59 percent of all FDI inflows in developing economies (UNCTAD, 2006). Today, one of the most important destinations of FDI remains the PRC: from a meagre $57 million in FDI in 1980, the PRC attracted more than $60 billion in 2005. Furthermore, in addition to middle-income ASEAN members, low-income countries such as Cambodia and Viet Nam have also begun to attract FDI (Table 2 [ PDF 66.6KB | 1 pages ]). Most FDI in Asia has been in new, greenfield investments concentrated in manufacturing, though there has also been an increase in cross-border mergers and acquisitions, largely in services.

The European Union, Japan, and the United States have been active investors in East Asia, forming production networks and supply chains. In the past 15 years, the four Asian NIEs have emerged as important sources of FDI in ASEAN and the PRC. Hong Kong, China is the largest investor in the PRC. More recently, middle-income ASEAN countries, such as Malaysia and Thailand, have actively invested in low-income ASEAN members and the PRC.

A web of FDI activities by global multinational corporations and regional firms, together with advances in information and communications technologies, have led to the growth of regional production networks and well-functioning supply chains in such sectors as textiles, electronics, and automobile parts.⁴ A key contributor to Asia’s industrial upgrading has been the participation of local enterprises in regional networks set up by MNCs. Through their roles as suppliers of parts and components, and as purchasers of specialized processing equipment, these local firms gain access to important production technology, process and management know-how, and global distribution systems. East Asia has thus been able to create a virtuous cycle of regional trade and investment through the medium of production networks (UNCTAD, 2005).

It is now recognized that there is no unique "correct" way to integrate economies with global and regional markets, as the speed and the primary drivers of integration vary across regions. The early architects of the European Union saw economic interdependence—rather than military coordination—as the most important factor for political cooperation. EU member countries sought to create a single market by policy-driven convergence of market rules. Strong regional institutions were created and granted powers in fields such as education, health, taxation, labor, employment, and transportation. Private sector activities—trade and investment—helped, but it was really the governments and their economic policies that drove the integration process in Europe. Creation of supranational institutions deepened this process further.

East Asia’s integration also started with the formation of regional institutions—ASEAN being one of the most important ones. This organization has, however, remained relatively weak: the political will that was so important in European integration was not present in the support provided to ASEAN by its members because of their inherent preference for national sovereignty. Compared with Europe, Asian economies had very different per capita incomes, industrial structures, market infrastructures, institutional and human capacities, and governance standards. As a result, Asia has chosen not to establish strong regional institutions that drive the integration process. East Asian integration has been driven largely by the private sector, assisted by strong market forces in trade and investment. This integration was strengthened by MNCs and Asian business houses, without much direct institutional support from regional governments.⁵

This market-driven integration has added pressures to distribution structures requiring complex logistics services. Rising demand for logistics is changing the conventional perspective of comparative advantage, implying that logistics and transportation are more closely integrated with supply chains than previously thought. What seems evident from the East Asian experience is that not only does a combination of abundant skilled labor, capital investment, and advanced technology but also transportation and logistics support determine the sustainability of decentralized production systems. Most East Asian economies invested significant amounts of resources in industrial and social infrastructure to improve connectivity within networks and with external markets, which such decentralized production systems demanded. These responses focused on improving national connectivity with foreign partners to serve the needs of outward-oriented industrialization.

Logistics, Infrastructure, and Software

Several complex factors determine overall transport and logistics costs. In the United States average transit time fell from 40 days in 1950 to about 10 days in 1980—one of the important factors in reducing logistics cost (Rodrigues, Bowersox, and Calantone, 2005). Technological advances have reduced overall logistics costs for the United States but not for the PRC, Europe, or India (Table 3 [ PDF 69.7KB | 1 pages ]). In the PRC and India, land transport costs remain high, as a result of inadequate national transport and communications infrastructure, uncompetitive transport and logistics sectors, and high fuel costs. Developing countries have yet to create efficient multimodal transportation networks and significantly improve the efficiency of existing road or rail systems.⁶ Unlike tariff and other trade barriers, domestic transport and logistics costs—key determinants of where production activities gravitate— vary widely across countries. Given the costs of logistics, a number of developing countries in Asia are actually closer to industrial countries in terms of economic distance than to their regional neighbors.

The deficiencies of Central Asian transport systems—high costs coupled with the low quality of transport and logistics services—have meant that 16–19 percent of the total value of exports and imports is absorbed by transport costs.⁷ In particular, the cost and availability of transport permits and visas for vehicle operators to travel cross-border are a major barrier in Central Asia, hampering regional connectivity: in addition to various other charges, such as road taxes, axel load charges, insurance, and visa charges, it can cost as much as $400 for a driver from a non–Commonwealth of Independent States (CIS) country to enter Uzbekistan.⁸ A multicountry study shows that a 20 percent reduction in logistics costs would increase the trade to gross domestic product (GDP) ratio by more than 10 percent in Cambodia, the PRC, and the Lao People’s Democratic Republic; by more than 15 percent in Mongolia; and by more than 20 percent in Papua New Guinea (Carruthers and Bajpai, 2002).

So far, these costs have not affected the overall competitiveness of Asian products, because some production clusters are located near ports and in coastal areas. Nonetheless, maintaining competitiveness will become a major challenge in the years to come, as manufacturing firms move inland, because of congestion and other factors. It is estimated that in the PRC, inland provinces such as Shaanxi would have to incur additional land transportation costs of more than $1,500 per 20-foot equivalent unit (TEU) of electronic goods to transport to Qingdao for export. Though no comprehensive databases are available on the land transport costs of traded goods, several studies provide location-specific information. Almost 63 percent of the cost of transporting goods from Chongqing in the PRC to the west coast of the United States is incurred before arriving at the port for export (Carruthers and Bajpai, 2002) (Box 1 [ PDF 70.5KB | 1 pages ]).

Given these logistics and transport challenges, there is potential for improving regional cross-border infrastructure to reinforce regional production and trade. Most of the initial production networks were supported by national governments, which invested in national infrastructure in their countries, with appropriate port linkages to the global and regional economy. The East Asian economies—the NIEs, middle-income ASEAN countries, and more recently the PRC and Viet Nam—have invested significant capital resources, building necessary national infrastructure to support these production networks. These networks enjoyed an initial comparative advantage, but there is not guarantee that this advantage will be maintained, as the efficiency of East Asia’s logistics lags that of other regions (ADB and others, 2005). Overall, quality and quantity of infrastructure in Indonesia, the Philippines, Thailand, and to some extent Malaysia may already be inadequate to remain competitive. With differing factor prices, technology levels, workforce capabilities, and logistics costs, most global investors will have much wider choices regarding the location of future production clusters or expanding existing ones.

It is possible to reinforce the region’s competitiveness through regional cooperation for cross-border infrastructure, because East Asian economies are still complementary. As Arndt (2001) notes, "The basic idea is to think of the region rather than the nation as the production base and to spread component production around the region in accordance with comparative advantage." (p. 5). Regional connectivity through cross-border infrastructure will be crucial in this case, because it supports complementarities in production across the entire region, going beyond national boundaries. Other parts of Asia—South Asia, Central Asia, and the Pacific—have even less national and cross-border infrastructure than East Asia. The need to reduce transport and logistics costs, by connecting production clusters in different countries and linking these clusters with markets, will be a major challenge for many developing countries in Asia in the next few decades.

In discussing infrastructure projects, it is important to focus on both "hardware" and "software" components. Several surveys and benchmarking studies indicate that hard infrastructure facilities are only a part of the overall determinants of cross-border connectivity. "Software" needs to be addressed to promote the smooth flow of people, services, and goods. "Software" aspects referred to here include legal, regulatory, procedural, and other supporting policy frameworks, as well as human and institutional capacities; "hardware" refers to physical infrastructure components that facilitate physical connectivity. In the power sector, for example, transmission lines and power plants represent hardware, whereas regulatory frameworks, tariff policies, power-trading agreements (grid code, settlement code, security, planning, and maintenance, among others), and harmonization of rules and regulations fall under software. Cross-border physical infrastructure can promote the movement of people, goods, services, and information only if accompanied by supporting software components that address various types of impediments related to policies, regulations, procedures, and standards.

An analysis of trade facilitation measures involving 75 developed and developing countries around the world concludes that if countries currently below the group average in relevant indicators individually cut their deficits to the mean by only 50 percent, total trade among the 75 would expand by 9.7 percent, or $377 billion (Wilson, Mann, and Otsuki, 2004). Initiatives involving customs and trade facilitation can remove procedural barriers to the cross-border movement of people and goods, thereby increasing efficiency, reducing transport costs, and maximizing the economic benefits of cross-border infrastructure. In this sense the infrastructure software component is inseparable from the hardware component.

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Comment(s)

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1. Cristela Goce Dakila
   (posted 08 October 2007 / 04:59:52 PM)
   
   Overall, the focus of the paper , which is cross-border infrastructure for Asian development is very timely, relevant and far-reaching in terms of perspective.
   
   The paper is rich with valuable insights which are useful for policy planners and implementors. It also provides academic researchers with a multidisciplinary framework useful in addressing the urgent concern for Asian regional cooperation.
   
   Among the infrastructure types mentioned,transport infrastructure investment, I think, is the most vital in establishing inter-country connectivity via trade in goods and services and investments.
   
   I wish to suggest the usage of a spatial computable general equilibrium model as an analytical tool to examine the impact of cross-border infrastructure investment on both producers(firms) and consumers (HHs) and other stakeholders in a specific Asian sub-region.