Gauging the Economy-Wide Gains of Regional Infrastructure

A global CGE model is utilized to investigate the economy-wide effects in Asia and the rest of the world of the development of regional infrastructure in Asia. The CGE model used is a recursive dynamic version of the global model developed by Zhai (2008). A key feature of the model is the incorporation of firm heterogeneity and the fixed costs of exporting—in addition to variable trade costs. This allows investigation of the intra-industry reallocation of resources and exporting decisions by firms, thereby capturing both the intensive and extensive margin of trade in the model. The dynamics of the model originate from exogenous population and labor growth, labor-augmented technological progress, as well as from capital accumulation driven by savings. The model is benchmarked on the Global Trade Analysis Project (GTAP) 7.0 database with base year of 2004, and is solved for subsequent years from 2005 to 2020 (GTAP 2009). First established is a baseline scenario, which assumes no reduction of trade costs from 2004 to 2020 and serves as a basis of comparison for counterfactual scenarios with policy shocks. Three scenarios of a seamless Asia are then considered. In the first scenario, the trade cost reductions expected from transport infrastructure investment in Asia are gradually introduced during 2010–2020. In the second scenario, the trade costs reductions expected from investment in both transport infrastructure and communication infrastructure are introduced over the same period. The third scenario combines the expected positive external effects from investment in transport, communication, and energy infrastructure introduced over the same period. The differences between the counterfactual scenarios and the baseline scenario reflect the impacts resulting from the development of regional infrastructure.

Table 4 [ PDF 24.8KB | 1 page ] presents the simulation results for real income gains (measured as equivalent variation) from regional infrastructure investment. It shows that global gains in real income from an expansion of regional transport infrastructure in developing Asia would amount to US$1,081.8 billion in 2020 (in 2008 prices), or an increase of 1.2% over baseline income. If the trade cost reduction effects of communication infrastructure investment are added, the global gains in 2020 increase to US$1,546.6 billion, or 1.7% over baseline GDP. When investment in regional infrastructure for transport, communication, and energy sectors are considered together, global income in 2020 would rise by US$1,781.5 billion over baseline income. Around 90% of the global gains would be captured by Asian developing economies. Developing Asia as whole would reap income gains of US$967.7 billion in 2020 under the scenario of investment in expanded regional transport infrastructure, US$1388.3 billion under the scenario of investment in both transport and communication infrastructure, and US$1616.3 billion from investment for development of regional infrastructure for transport, communication, and energy—equivalent to 6.0%, 8.6%, and 10.0%, respectively, of the baseline income for developing Asia.

The PRC and India would be the biggest beneficiaries of investment in regional infrastructure, with aggregate real income gains of about US$830 billion in 2020 under the scenario of expansion of regional infrastructure in transport, communication, and energy. In relative terms (i.e., gains as a share of baseline GDP), Southeast Asian countries such as Malaysia, Thailand, and Viet Nam would be the major winners, mainly due to their high level of trade dependence and large infrastructure investment. Their real income gains in 2020 would be about 30% of their baseline GDP that year under the scenario of investment in all three infrastructure sectors. Real income gains in 2020 from regional transport infrastructure investment would be relatively small for south Asian and central Asian economies, ranging from about 4% to 7% of their baseline GDP levels. However, due to the relative low level of existing telecommunication infrastructure, demand for communication infrastructure investment in these countries is enormous. These investments thus tend to generate large welfare gains. When the benefits of investment in regional communication infrastructure are added to those of regional transport infrastructure, the real income gains in 2020 for Bangladesh, India, Sri Lanka, and central Asia would more than double to 12% to 16% of their baseline GDP levels. The benefits of energy infrastructure are relatively evenly distributed across countries, mainly reflecting our assumption of a uniform gain of 20% in energy efficiency across countries.

Although it is assumed that there is no infrastructure expansion in Japan and NIEs, those countries would benefit from investment in regional infrastructure in the developing economies of Asia. This spillover effect is especially strong in NIEs, which would gain US$89.3 billion (2.9% of their aggregate GDP) in 2020 relative to the baseline scenario. Non-Asian economies would also gain slightly from the development of regional infrastructure in Asia. These results highlight the nondiscriminatory nature of regional infrastructure, which could not only serve as an important tool to stimulate regional integration in Asia, but also facilitate the global participation of the region's economies.

Trends in simulated real income gains for developing Asia over 2010–2020, by country and country group, are plotted in Figure 3 [ PDF 80.2KB | 1 page ]. Aggregate annual gains for the region would vary from US$87.8 billion (2008 prices) in 2011, to US$515.3 billion in 2015, to US$1,616.3 billion in 2020. On average, aggregate annual gains in the second half of the period (2016–2020), at around US$1,113.0 billion, would be much larger than in the first half (2011–2015), at about US$284.4 billion. The higher growth rate after 2016 can be explained by the effects of cumulative infrastructure investments made during 2011–2015. This trend is visible in every country in the analysis. It is worth noting that there are also large benefits after 2020, when no new or replacement investments take place. However, these benefits decline over time with the depreciation of infrastructure stock.

To get a sense about the overall gains generated by investment in regional infrastructure, the present value (in year 2008) of annual real income gains accumulated over 2011–2020 and beyond are calculated for selected countries and regions, assuming an annual discount rate of 5% (Table 5 [ PDF 24.3KB | 1 page ]). The present value of such income gains for developing Asia as a whole from the expansion of regional transport infrastructure would be US$7,840 billion; US$11,240 billion from the investments in both transport and communications; and US$12,980 billion from the investments in transport, communications, and energy. The PRC and India would gain US$3,549 billion and US$3,142 billion in income, respectively.

Finally, the impact of investment in regional infrastructure in Asia on the region's trade pattern is examined (Table 6 [ PDF 21.8KB | 1 page ]). The simulation shows that the significant expansion of regional infrastructure in developing Asia would boost both global and regional trade. Global exports would expand by 21.1%, while developing Asia's exports and imports would both jump by more than 70%. The countries with low levels of foreign trade and low-quality infrastructure, such as Bangladesh and India, would experience the largest increases in trade. It is not surprising that the expansion of intra-Asia trade would be larger than extra-Asia trade, in that the development of regional infrastructure in Asia is simulated. As a result, the share of intra-regional trade in Asia in 2020 would rise by 6.6 percentage points from 47.5% in the baseline to 54.7% in the scenario of development of transport, communication, and energy infrastructure.

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