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Needs For and Benefits of Infrastructure Connectivity
Asia is playing an increasingly important role in global production, trade, capital formation, and productivity growth. It is also home to more than half of the world's population, spread across countries with a wide variety of sizes, income levels, stages of economic development, technical capacities, political regimes, population densities, resources, religions, cultures, languages, and ethnicities or races. This diversity, combined with some Asian economies being much richer and more developed than others, creates challenges as well as huge potential for trade and economic integration through increased connectivity. In particular, there is great potential for the development of production networks and supply chains that span the region to take advantage of countries' various comparative advantages—countries whose competitiveness depends on cost-effective, quick, and reliable infrastructure links. The rapid economic and population growth of Asian economies in recent years has put huge pressure on its existing infrastructure, particularly in transport and energy, but also in communications. Asia's infrastructure is world-class in parts, but is generally below the global average. This is a bottleneck to future growth, a threat to competitiveness, and an obstacle to poverty reduction.
Asian connectivity requires physical infrastructure connectivity across the regions as well as a facilitating or supporting framework consisting of effective policies, strategies and institutions at the national, subregional and regional levels (Kuroda et al. 2008). The concept of connectivity in this paper is the creation of physical and nonphysical facilitating linkages within the region through the development of required infrastructure to enable the free movement of goods, persons, and services across the region.
Physical connectivity is essential for the smooth and cost-effective flow of goods and services within Asian economies and across Asian borders. This will require physical, or “hard,” infrastructure, such as transport (roads, rail lines, airports, and seaports), energy (oil and gas pipelines, and electricity grids), and telecommunications (cross-border fiber optic cables); as well as facilitating, or "soft," infrastructure, such as appropriate policies (e.g., trade facilitation policies such as effective border and customs procedures for smooth flow of people , services and goods into and out of the country); and, effective laws and regulations, systems and procedures; and institutions to make hard infrastructure work properly.
Transport connectivity is not new to Asia. “Until the 13th century, the ancient silk route of Asia was the world's most important cross-border artery, when Asia was a major trade and economic center of the world. The Silk Road refers to an extensive pan-Asia interconnected network of trade routes across the Asian continent connecting East, South, Central, and Western Asia with the Mediterranean world, including North Africa and Europe” (Bhattacharyay and De 2009a). Regional transport infrastructure is considered to be one of the major determinants of the economic integration process (Vickerman 2002). It enhances international (and regional) connectivity through the free flow of goods and factors across borders, allowing countries to benefit from a more optimal allocation of resources. A transportation network linking neighboring countries increases market size and helps national economies to grow further through higher trade and production (Bhattaharyay and De 2009a). Decreasing communication and transport costs in conjunction with technological development could reshape countries' comparative advantages (Krugman 1991). In this globalized world, national comparative advantages may be wiped out unless complemented by regional advantages such as regional physical connectivity.
Various studies have shown that infrastructure investments can strongly influence agricultural productivity and non-agricultural employment particularly among the poor, which can lead to income and economic growth thereby reducing poverty (Ali and Pernia 2003). Empirical evidence also suggests that infrastructure projects help foster the growth of industrial clusters by lowering search costs and information asymmetries among product buyers and input sellers (Sonobe, Hu, and Otsuka 2004).
Connecting Asia's developing countries, particularly the smaller and land-locked economies, though enhanced physical connectivity to the production network and major markets and business centers of the larger economies, such as India and the People's Republic of China (PRC), can narrow the development gap among Asian economies. It also further promotes free trade with and investment in the least developed countries or subregions. Enhanced connectivity helps to increase standards of living—thereby reducing poverty, by connecting isolated places and people with major economic centers and markets—and can deepen economic integration, leading to an Asian common market.
Enhanced energy and transport connectivity would also help Asia to address environmental and energy security problems though properly designed regional infrastructure projects, such as greener transport connectivity and cross-border energy grids (e.g., railway connectivity and hydro-electric grids) across the region to efficiently facilitate the flow of goods and trade green energy, respectively. This could promote greater technological innovation and application and more efficient use of scarce regional resources. By working together for green connectivity through regional cooperation, countries in Asia could unlock their vast economic potential, achieve sustained and inclusive rapid growth, and reduce poverty. Collective regional initiatives would support trade and investment expansion, financial market development, and regional macroeconomic stability, as well as improved environmental, health, and social conditions.
The members of the Association of Southeast Asian Nations (ASEAN) strive to create an ASEAN Economic Community (AEC) by 2015. The AEC aims to establish ASEAN as a single market and production base with free flows of goods, services, investment, and capital, while striving to ensure balanced and inclusive economic development and poverty reduction (ASEAN 2008). On a similar front, at the most recent ASEAN summit in November 2009, the leaders of Australia, PRC, India, Japan, Republic of Korea, and New Zealand discussed a proposal to establish an East Asian community to unify the region. Infrastructure connectivity could play a significant role in the creation of an ASEAN, East Asian, or Asian Community, an integrated community that would seek to maximize the advantages of its diversity and capitalize on its potential for trade and market growth. To create a European Union-style Asian community that ensures a free flow in goods and services and establishes regional production bases for industry and services in Asia, connectivity needs to be enhanced and more focus put on becoming a seamless Asia. Improved infrastructure connectivity could help move the region toward the development of a common market or “Asian Economic Community” by accelerating regional cooperation and integration, facilitating regional trade integration via reduced costs and enhanced institutional linkages, and helping to narrow the development gap between Asian economies. Green (environmentally sustainable) Asian connectivity would also require promoting and strengthening the institutions, governance, and technical capacity of Asian economies.
Asia has become the world's production center for exporting manufacturing goods to advanced economies through a well integrated export platform. Traditionally, most Asian countries have prioritized exports to markets outside Asia, especially the US and Europe, and their current infrastructure reflects this. At present, Asian economies, especially East Asian economies are highly export dependent, and trade is more integrated with advanced economies than within East Asia, and even less with the rest of Asia. This excessive dependency on external demand in particular makes Asia more vulnerable to external shocks as recently evidenced by the global financial crisis and economic recessions in the West and the fall of growth in the East. Asia also has very high savings and international reserves most of which are invested with low returns in the markets of advanced economies such as the US and Europe. Hence, Asian savings are funding excess consumption of advanced economies.
The prospect of a prolonged downturn in major advanced markets as a result of the recent crisis and recession underscores the urgent need for a rebalancing of Asia's economies to make them less vulnerable to external shocks and thus would reduce global imbalances, Growth rebalancing should be geared to increasing demand and consumption within the region, increasing intra-regional trade to compensate for reduction in exports to advanced economies, and increasing investment by redirecting capital flows to Asia's productive sectors such as infrastructure. To achieve rebalancing would require many policy changes, especially prioritizing increased Asian infrastructure connectivity to promote expanded regional economic integration, which would assist in enhancing intraregional trade and demand. Asian connectivity could enhance competitiveness and productivity, speed up economic recovery, and help sustain growth in the medium- to long-term. Asian countries need to implement counter-cyclical policies and measures to compensate for lost export demand from advanced economies. Infrastructure financing could form an important part of fiscal stimulus packages, especially if the crisis is prolonged. Coordinated infrastructure financing by Asian countries could enhance regional connectivity through investment in regional infrastructure development, maximize the efficient use and application of resources, and contribute to a sustained, high-growth path in the medium- and long-terms.
As discussed earlier, connectivity needs corresponding soft infrastructure, including policies, institutions, systems, procedures, rules, and regulations, to make the physical assets that make up hard infrastructure work effectively. To successfully promote greater physical connectivity, it is necessary to develop effective national, subregional, and region-wide institutions in Asia taking into account its great diversities, as well as create an appropriate institutional framework for effectively identifying, designing, and implementing regional infrastructure projects through proper coordination among various stakeholders.
As Asia's integration has been primarily market-led and its institutional arrangements for infrastructure cooperation are fragmented at subregional levels, a regional Asian approach to pan-Asian connectivity is required with subregional cooperation institutions as building blocs. Bottom-up, market-driven cooperation needs to be complemented by top-down cooperation led by leaders at the highest level, and institutionalized. This chapter examines (i) the challenges facing connectivity, (ii) the role of governance and institutions and, (iii) the existing institutions for connectivity and proposes a new institutional framework for building Asian connectivity through regional cooperation in infrastructure development.
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