Introduction

The remarkable growth of developing Asia in recent decades owes much to the expansion of its international trade, including intraregional trade. To capitalize on the benefits of international trade, cooperative efforts in the region to lower transaction costs of international (and especially intraregional) trade and thereby contribute to greater growth, integration, and poverty alleviation have become more vigorous in recent years. Notably, international trade played an especially critical role as Asian countries pursued regional cooperation to ensure recovery from the 1997–98 financial crisis and prevention or mitigation of similar crises in the future.

Infrastructure development has been a major factor in reducing Asia's trade costs and thereby facilitating trade expansion (Brooks and Hummels forthcoming 2009). Expansion or improvement in quality of infrastructure services lowers marginal costs, raising the minimum efficient scale of production, transportation, or marketing. Lower costs and greater economies of scale raise the potential for increased or new sales in export markets, as well as domestically, as efforts to take advantage of economies of scale in production, procurement, or marketing lead firms to look beyond national borders for both trade and investment opportunities. Promoting efficient financial intermediation, coordinating regional public goods, reducing macroeconomic vulnerability to shocks, and strengthening security ties offer governments similar incentives to design, develop, and manage regional infrastructure cooperation and integration. In this context, infrastructure is one of the “three I's,” along with incentives and institutions, that are key determinants of overall growth and the magnitude and productivity of capital inflows to liberalizing economies (Hill 2004).

Infrastructure not only fosters economic growth, but can strengthen inclusiveness and reduce poverty, and a significant part of infrastructure's contribution to growth and poverty reduction in Asia comes through its facilitation of international and especially intraregional trade. Infrastructure services expand the scope for both domestic absorption and supply to export markets, while stimulating linkages with and between different sectors and industries and providing incentives for innovation and regional cooperation to internalize externalities associated with trade flows.

Efficient infrastructure services increase and expand linkages to global supply chains and distribution networks for producers by lowering transaction costs, raising value added and increasing potential profitability. The more deeply a country is involved in global production networks the more likely it will benefit from trade-related infrastructure investment. In a study incorporating threshold effects, Francois and Manchin (2007) find that infrastructure is a significant determinant not only of export levels, but also of the likelihood of exporting at all. Transport and telecommunications infrastructure are particularly important in this regard.

Clearly, Asia's trade expansion has been facilitated and stimulated by the development of supporting infrastructure, including both physical (hard) and institutional (soft) infrastructure. From 1975 to 1995, developing Asia's port capacity increased from 3 million to 62 million TEU, an average annual growth of over 15% and Asia now accounts for the bulk of port container traffic (Figure 1 [ PDF 85.3KB | 1 page ]).¹ Airfreight shipments in the region increased roughly 14% annually during the same period, from less than 2 billion to more than 30 billion ton-kilometers.

Asia's large trade and foreign investment flows have resulted from infrastructure development, market-driven integration, outward-oriented policies, and incorporation into international production networks and regional cooperation frameworks. Openness to foreign direct investment (FDI), often from within the region, has become the norm. As a result, investment in infrastructure to lower trade costs has been complemented and spurred by foreign and domestic investment in productive capacity as well as by structural and regional reforms that improve the environment for investment, production, and trade. Both Asian and non-Asian multinational corporations have been active in developing international supply chains linking different parts of the region. Financial integration has supported these developments by increasing access to credit and innovative financial instruments.

However, trade-related infrastructure in many Asian countries is still inefficient, if not inadequate. Inability to transport goods and people efficiently or an inadequate power supply to operate machinery and facilities smoothly leads to microeconomic as well as macroeconomic imbalances. While East Asia does relatively well in comparison of its infrastructure performance with that in other developing regions, comparison with high income countries shows there is still marked room for improvement, and even more so in South Asia (Figure 2 [ PDF 15.3KB | 1 page ]).

Tariffs and quotas have been reduced under successive rounds of multilateral negotiations under the General Agreement on Tariffs and Trade (succeeded by the World Trade Organization) and the recent plethora of bilateral and regional trade agreements, lowering a key component of trade costs. Anderson and van Wincoop (2004) suggest that such tariff barriers are on average between 10% and 20% of a traded product's factory-gate price in developing countries. In developing countries it may well be higher. Even so, in the current economic environment, infrastructure-induced reductions in trade costs have become relatively more important than direct policy barriers as potential sources of further cost savings (Brooks, Roland-Holst, and Zhai 2005). However, the political economy of policies to reduce transportation and other non-policy trade costs is very complex, particularly when addressing cross-border externalities.

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