Introduction

Rapid trade expansion has been a key driver of the economic success of east and southeast Asian countries over recent decades. Substantial reform has liberalized trade and foreign direct investment regimes, and rapid technological progress has lowered transportation and communications costs. In addition, the development of infrastructure in Asian countries has made an important contribution to their integration into the world economy. The level of infrastructure development in most developing Asian countries is still relatively low, however. The significant dependence on foreign trade and bright long-term growth prospects of these countries suggest the potential for substantial gains from investment in regional infrastructure in Asia. Moreover, the development of regional infrastructure which strengthens the links between Asian economies and their links with the rest of the world is likely to stimulate wider economic participation of the poorest economies in the region.

This paper explores quantifying the welfare effects of developing regional infrastructure in Asia. It aims to answer the following questions: What are the external effects of the development of regional infrastructure in Asia? How much benefit to the region's economy can be expected from the development of regional infrastructure? A global computable general equilibrium (CGE) model is used to simulate the scenario of infrastructure expansion in developing Asian economies. The major conclusion of the simulations is that developing Asian economies would gain significantly from the expansion of regional infrastructure in transport and communication. With annual investment of around US$800 billion in transport, communication, and energy infrastructure during 2010–2020, developing Asia is likely to reap welfare gains of US$1,616.3 billion (in 2008 prices) in 2020, or 10% of its projected aggregate gross domestic product (GDP) that year. These benefits are expected to be particularly strong in two types of economies in the region: those with a high level of dependence on external trade, and those where conditions require expeditious investment to upgrade their infrastructure. Consistent with some previous studies (e.g., Roland-Holst 2009), our quantitative analysis suggests that investment in regional infrastructure holds great promise for Asia's long-term development. By facilitating greater market participation of the poorest economies in the region, regional infrastructure could act as an effective catalyst to spur greater regional integration and economic convergence.

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