Regional Infrastructure and Governance: Asia in the World

Investing in infrastructure facilities such as roads, railways, seaports, airports, electricity, and telecommunication requires a long period of time and an enormous amount of intragenerational resource transfers. The presence of such infrastructure facilities has a direct impact on production, and benefit a region by “crowding in” private investment (both domestic and foreign).The absence of such facilities in a region may result in lower “productive efficiency”; previous studies have shown that a decline in region's productivity is often preceded by a fall in infrastructure investment.²¹

In this study, I have constructed the physical infrastructure index (PII), a composite index comprised of six physical infrastructure indicators: (i) roadways; (ii) railways; (iii) airports; (iv) seaports; (v) telecommunications; and (vi) electricity. The index was calculated for 124 countries for the period 1995 to 2006. Appendix 3 [ PDF 10.9KB | 1 page ] provides a definition of these variables and their corresponding sources. Using Principal Component Analysis (PCA), the PII is constructed as a linear combination of the unit- and scale-free values of the individual facilities.²²

Table 4 [ PDF 12.6KB | 1 page ] presents a global ranking of the best and worst performing countries in terms of the PII for the year 2006. To check the relative robustness of the PII, Table 5 [ PDF 15.7KB | 1 page ] presents a similar ranking of countries using the World Economic Forum's (WEF) infrastructure index.

A number of results are worth noting. First, developed countries occupy the top 10 positions in the PII ranking, whereas the bottom 10 positions are occupied by least developed countries in Africa, with the exception of Cambodia. Except for a few cases, these results are largely consistent with the WEF rankings presented in Table 5 [ PDF 15.7KB | 1 page ].

Second, while some of the Asian countries saw improvements in their global rankings between 1996 and 2006 (Table 6 [ PDF 15.7KB | 1 page ]), on the whole, the stock of infrastructure in East Asian countries remains remarkable low, with the exception of Japan and Singapore. The disparities in regional infrastructure stock, both among East Asian countries as well as in relation to developed economies, are not only alarmingly high but also growing. While the PRC has made huge strides in improving its infrastructure, the poor performance of countries like Indonesia remains a matter of serious concern.

Third, there is clearly prima facie evidence of a positive association between infrastructure and per capita income (Figure 3 [ PDF 26.3KB | 1 page ]). This implies that although the ranking of countries has not changed much between 1996 and 2006 (given the high correlation of 0.972), countries with a higher stock of infrastructure have also enjoyed higher income over time.

Having seen the relative positions of the countries in the infrastructure-income plane, I now test the nature of the relationship between regional infrastructure and governance. Does improved governance help countries attain higher levels of infrastructure? The scatter diagrams in Figure 4 [ PDF 28.5KB | 1 page ] to 10 reveal the following correlations.

First, infrastructure is highly correlated with governance (Table 7 [ PDF 15.7KB | 1 page ]). Most of the governance indicators have partial correlation coefficients in the high range of 0.6 to 0.9, indicating that (i) the linkage between infrastructure and governance is based on a broader range of indicators; and (ii) this linkage does not vary considerably among the indicators.

Second, when represented by aggregate indices, governance and infrastructure continue to show a positive correlation, suggesting that good governance underpins infrastructure development (Figure 3). In general, rule of law, regulatory quality, government effectiveness, voice and accountability, control of corruption, and political stability do facilitate the development of both regional and national infrastructure.

Third, infrastructure also shows a positive association with most of the GI indicators: rule of law (Figure 5 [ PDF 28.5KB | 1 page ]), regulatory quality (Figure 6 [ PDF 37.6KB | 1 page ]), government effectiveness (Figure 7 [ PDF 37.6KB | 1 page ]), political stability (Figure 8 [ PDF 37.6KB | 1 page ]), and voice and accountability (Figure 9 [ PDF 26.1KB | 1 page ]). These can therefore be viewed as the basic ingredients of governance that a country should possess. Simply put, countries which lack good governance are likely to fail in improving infrastructure, regional or otherwise.

Fourth, contrary to popular belief, corruption (as represented by unofficial payments) does not have a positive association with infrastructure (Figure 10).²³ Both petty and grand forms of corruption do not facilitate the development of infrastructure. However, the congestion at origin in both Figure 10a [ PDF 26.1KB | 1 page ] and Figure 10b [ PDF 17.8KB | 1 page ] indicates that one cannot immediately discount the “thin” positive association between corruption and infrastructure development, perhaps at the initial stages of development, ceteris paribus.

Fifth, poor governance clearly ra ises uncertainty, leading private investors (both domestic and foreign) to increase the risk premium for investments in infrastructure; this, in turn, reduces overall investment and diminishes the prospects for economic development.

To sum up, the linkages between regional infrastructure and governance are multiple and complex. Governance reforms are therefore one of the important factors affecting infrastructure development. Without adequate governance, the provision of regional infrastructure will be suboptimal and unsustainable. But can governance alone determine regional infrastructure development? I attempt to answer this question next.

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