Introduction

The rise in international trade in the world economy is a well documented phenomenon, with total exports of goods and services rising from 13% of world gross national product (GDP) in 1970 to 27% by 2005 (World Bank 2008b). Successive rounds of trade liberalization under first the General Agreement on Tariffs and Trade (GATT), then the World Trade Organization (WTO), have led to deeper and broader tariff reductions. However, as tariff reduction and reform have entered increasingly sensitive areas, leading to more protracted and contentious negotiations, attention has turned to reform in the rules of trade. Harmonization and simplification became recognized as sources of potential gains even as tariff reductions stalled. Indeed, recent studied have postulated that the potential gains from reforms in expanded access or trade facilitation may be even greater than those from tariff reduction (Organisation for Economic Co-operation and Development [OECD] 2003).

This move toward greater emphasis on process was demonstrated through the inclusion of trade facilitation to the Doha Round negotiations. These negotiations did not attempt to target the entire logistical supply chain but rather focused on how nations control the way in which goods move across their borders through various inspection and approval stages. Improving existing rules, providing less-developed countries with technical assistance and support, and improving coordination between customs authorities were identified as priority areas in these negotiations.

With further multilateral tariff reductions at a standstill, firms' access to international markets depends more and more on their ability to obtain efficient and low-cost trade services and logistics, including transparent and harmonized rules and regulations among markets. The crux of the trade and transport facilitation agenda is to maximize efficiency while safeguarding legitimate regulatory objectives. This is a challenge given that the concept of trade facilitation covers a broad range of obstacles, both deliberate and unintended, limiting market access.¹ These obstacles may comprise human and physical infrastructure, along with institutions including customs and trade related services. Physical infrastructure, especially transport infrastructure, is a fundamental piece of this puzzle.

As trade is an important driver of growth and infrastructure is a necessity for trade, infrastructure development has a key role to play in economic development. This has long been recognized in the Greater Mekong Subregion (GMS).² The transport sector was one of the first areas of cooperation under the GMS Cooperation Program which began in 1992.³ At the time, national boundaries in the region were, for all practical purposes, closed and most of the region's infrastructure was of a very poor quality (Ishida 2007). The program set out to open borders and improve connections to make trade easier, spur development, and strengthen the region's ability to compete in the face of globalization.

To further the Cooperative Program, in 1995, the GMS adopted the Transport Master Plan which identified priority transport links—mostly road projects—designed to generate the greatest and most immediate improvements in connectivity. This was seen as an important step in economic development, with improvements in transportation infrastructure boosting economic opportunities in the region by, for example, significantly reducing travel times and costs. As the GMS countries have moved away from a strategy of self sufficiency to one of regional cooperation, major efforts have been made to develop the infrastructure linking the GMS and beyond.

Once priority road networks were identified, the GMS turned its attention to other issues of trade facilitation. In 2003, the economies entered into a Cross-Border Transport Agreement (CBTA) which was developed to set up agreements between GMS countries to ease the movement of people and goods across borders. The CBTA covers facilitation of bordercrossing formalities, the exchange of commercial traffic rights, establishment of transit traffic regimes, and also the setting of infrastructure standards and requirements for road vehicles in cross-border traffic. As of March 2007, all GMS counties had signed the agreement. The CBTA, in conjunction with the transport corridor development, has the potential to significantly improve time and costs of goods transportation throughout the region.

The purpose of this study is to quantify the potential benefits of the development of the economic transport corridors, along with the implementation of the CBTA in the GMS. Some of the key linkages between the upgraded infrastructure, economic growth, and sectoral responses will be explored with a computable general equilibrium (CGE) framework. This framework is particularly well-suited to this task, since it explicitly accounts for all sectors within an economy, as well as the interactions between them. This framework can be used to quantify how the costs and benefits of improved infrastructure are transmitted between markets and how they impact on different sectors within markets. As well as highlighting trade-offs for particular sectors, CGE models can quantify the anticipated overall economic impact of infrastructure improvement.

We begin by outlining key economic and infrastructure issues in the GMS (section II), followed by discussion of currently available estimates of how the infrastructure development is likely to impact the region (section III). We then introduce a global trade model that will be used to generate insights into some of the likely impacts of improved trade facilitation and infrastructure development on GMS countries (section IV). This is followed by development and analysis of some specific scenarios that explore the potential impact of the improved infrastructure and trade facilitation measures (section V). We discuss some potential adverse impacts of the infrastructure development, before drawing some tentative conclusions (section VI).

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