Introduction

The current global financial crisis has exposed the vulnerability of East Asia's growth model, which is heavily dependent on exports. Faced with the present global economic downturn, East Asian countries have adopted the same approach as the United States (US) and European Union (EU), which is to use the public sector, through fiscal stimulus programs, to expand domestic economic activities and replace losses resulting from fewer exports to the US and EU. In most East Asian countries, fiscal stimulus programs are large to compensate for the decline in domestic production as a result of the steep shortfall in exports. The measures to expand the domestic economy include both direct fiscal expenditure and other indirect measures such as bank credit guarantees.

The fiscal stimulus introduced in response to the global financial crisis by East Asia was unprecedented in terms of size and coverage. The scale of the stimulus package reflects the severity of the crisis and as a result many countries are likely to incur significant fiscal deficits in 2009. Low national public debt and sufficient domestic liquidity have helped in financing these stimulus packages. Some measures are targeted to the most affected groups—the poor and unemployed. Some East Asian countries are also using these measures to strengthen their foundation for long-term economic growth particularly through green and efficient technology. However, quantitatively evaluating the effectiveness of these measures is not easy because the effects are indirect and will only be felt in the long term.

In most East Asian countries, a substantial portion of the fiscal stimulus packages are dedicated to infrastructure projects because of the projects' extensive multiplier effects and ability to meet the countries' developmental needs. The infrastructure investments made were in physical facilities such as roads, bridges, ports, and airports, and in other basic needs such as the provision of water, a more efficient energy supply, and sustainable environmental management.

The fiscal stimulus programs have been geared primarily towards reviving the slumping East Asian economies in the immediate term. However, the crisis has also highlighted the region's need to create long-term sources of growth and to reduce its dependency on the US and EU by increasing its own final demand, strengthening regional production links, and expanding intra-regional trade. Thus, the fiscal stimulus packages also include long-term measures to build capacity such as by building infrastructure and developing efficient and environmentally sustainable technologies. Developing regional infrastructure is essential for this purpose because less developed countries in East Asia can be connected to the more developed ones. In this way, the economically depressed areas of East Asia, most of which have relatively large populations, can also enjoy higher development by being linked to growth centers. The economically depressed areas will in turn provide a future market for the region's goods and services, which will ensure balanced regional growth that is not just concentrated in a few countries or areas. Each East Asian country can invest in its own national infrastructure project that can be then linked to form a regional infrastructure network. Alternatively, national or regional infrastructure projects could fill in missing links to complete existing unfinished networks.

There are already some cross-border regional infrastructure investments, such as those initiated by the Asian Development Bank (ADB) and the Government of Japan. Both of these institutions support the development of the Greater Mekong Sub-region (GMS). The Japanese Official Development Aid (ODA) programs have been an early initiator of national infrastructure in the region especially in the Association of Southeast Asian Nations (ASEAN) countries. More recently, roads have been built to link the southern part of the People's Republic of China (PRC) with the Lao People's Democratic Republic (PDR), Thailand, and Viet Nam.

Cross-border regional investment will call for innovative measures to overcome a variety of challenges because by nature these investments are generally huge and their gestation period is long. Raising the necessary funds is a major challenge for these infrastructure projects. Generally, infrastructure is financed from public funds or by multilateral institutions, but since the amount of financing needed is large, the private sector may have to do their part and support the two traditional sources of financing. The recycling of East Asia's international reserves and savings has also been considered as an additional source of funding. In addition, the funding mechanism is also an important consideration—should new, specialized financial institutions be created, or should the roles of existing arrangements and institutions be expanded?

Since these infrastructure investments involve a number of countries, effective implementation, including regulatory compatibility, is critical. The structure surrounding decision-making and implementation should be efficient, and yet it must allow all parties concerned to be involved, particularly at the local level. The relevant governments should be ready to smooth the implementation process, anticipate and avert conflicts and delays, and generally “grandfather” these complicated projects.

This paper continues in Section 2 by summarizing the impact of the present global crisis. An assessment of the East Asian fiscal response follows in Section 3, and Section 4 examines the sustainability of the fiscal stimulus. Section 5 discusses the benefits of East Asian infrastructure investment, while Section 6 covers the region's infrastructure needs. The challenges of regional infrastructure investment are covered in Section 7. Section 8 discusses the regional infrastructure investment funding mechanism and the conclusion is given in Section 9.

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