Modeling Improved GMS Infrastructure and Trade Facilitation

The scenarios modeled in this study aim to provide insights into the impacts of selected infrastructure improvements in the GMS. Poor infrastructure can be a significant cost factor in economic activity. As shown by Henderson, Shalizi, and Venables (2001), transport costs in many developing regions of the world are far from negligible. For example, costs measured by the cost, insurance, and freight/free on board (CIF/FOB) ratio can be as high as 40% in landlocked countries. The crude measure of transport costs introduced earlier (Appendix 4) shows that these values can be significant in the GMS, for example in exports of crops, other foods, and textiles.

Road infrastructure improvements reduce transport costs through a number of channels. They reduce vehicle operating costs including maintenance and prolong the life of the asset. They reduce transport time, resulting in labor cost benefits. They make for better inventory management and improvement in the overall productivity associated with transport as the same resource base provides more services (i.e., the same truck and driver make more deliveries). Economy-wide, better transport systems lead to economies of scale and different patterns of agglomeration; improved access to markets; network externalities; more efficient market clearing; and enhanced competition as a result of improved information flows (see, for example, Jensen 2007; Hulten, Bennathan, and Srinivasan 2005). Improved infrastructure connecting the GMS economies is also necessary for the realization of many of the benefits of trade facilitation efforts.

4.1 GMS Infrastructure Improvements

Since 2005, nine economic corridors have been proposed for the region and these are currently at varying stages of implementation (Figure 2 [ PDF 214.8KB | 1 page ]). The goal in developing these economic corridors is to enhance regional linkages among neighboring countries in order to facilitate trade and develop logistics for better access to global markets. The development of economic corridors goes beyond improvements in physical infrastructure to include enhanced trade facilitation and institutional and regulatory linkages.

To date, evaluations of the benefits of economic corridor development in the GMS have tended to be qualitative. However, several attempts at more quantitative measures have been made. Fujimura and Edmonds (2008) estimated the impact of road infrastructure on trade and foreign direct investment (FDI) flows in the GMS. They found a positive relationship between trade in major goods (both exports and imports) but results for FDI were inconclusive. Menon and Warr (2006) examined the relationship between road improvement and poverty in the Lao PDR. They reported that reducing transport costs through rural road improvements generates significant reductions in poverty incidence, though the type of road was shown to be a major factor in the results. Finally, ADB conducted three case studies covering border provinces in Cambodia, Lao PDR, and Viet Nam. The studies found that poverty incidence is higher in “less integrated areas” compared with “more connected areas.” The benefits of integration included improved job opportunities, greater access to high quality goods and health facilities, and the acquisition of better farming techniques (Singh and Mitra 2006).

While these studies provide broad linkages between economic impacts and infrastructure investment, few have estimated the actual cost reductions associated with these investments. This is due to a lack of reliable, comprehensive data. Nonetheless, some attempts to estimate cost savings and other benefits have been made. For example, ADB produced estimates of reduced travel times and transportation costs expected from the full implementation of the East–West Economic Corridor Project.¹³ The East–West Corridor is a road link of almost 1,500 kilometers; it will be the only direct land route between the Indian Ocean and the South China Sea, with great potential to accelerate economic development in the region. The route runs from Mawlamyine–Myaddy in Myanmar, through Mae Sot–Phitsanulok–Khon Kaen–Mukdahan in Thailand, though Savannakhet–Dansavanh in the Lao PDR, to Lao Bao–Hue–Dong Ha in Viet Nam. This route also intersects a number of north–south arterial links, facilitating improved transportation throughout the region. Full implementation of the route is expected to reduce transport costs by between 25% and 30% (ADB 2005b).

The Japan International Cooperation Agency (JICA) also prepared a report including estimates of cost savings from several cross-border GMS projects (JICA 2007). The report provides some data for the route from Hanoi to Bangkok via the Second Mekong International Bridge, which was completed in December 2006. Reductions in transit costs were estimated to be between 25% and 50% (JICA 2007). In addition, the Japanese External Trade Organization has developed an ASEAN Logistics Network Map. This map estimates costs and travel time in the region, based on surveys of Japanese companies.¹⁴

4.2 North–South Economic Corridor

The corridor that has progressed farthest in the GMS is the North–South Economic Corridor (NSEC), which links Kunming in Yunnan Province of the PRC to Bangkok and the Gulf of Thailand. This corridor is expected to provide access to the shipping routes of the South China Sea for output from Yunnan and Northern Thailand.

As shown in Figure 2, the NSEC is made up of three branches: Kunming–Bangkok; Kunming–Hanoi–Haiphong; and the Nanning–Hanoi transport corridors. The Kunming–Bangkok branch travels either through Myanmar, Lao PDR, or via the Mekong River. Some basic characteristics of the Kunming–Bangkok routes are shown in Table 7, with the shortest route in distance remaining via the Mekong River. In 2006, ADB undertook a study to estimate the impact of both the physical infrastructure developments along the NSEC and the effect of the Cross Border Transport Agreement (CBTA) that began to be implemented in December 2003. This agreement aims to streamline regulation and reduce institutional barriers to the movement of goods and people among the GMS countries. The CBTA is a multilateral instrument that covers all the relevant aspects of cross-border transport facilitation along certain agreed-to routes, including the NSEC. Provisions of the CBTA include one-stop customs inspection; improved cross-border movement of persons (i.e., visas for persons engaged in transport operations); transit traffic regimes, including exemptions from physical customs inspection, bond deposit, escort, and phytosanitary and veterinary inspection; exchange of commercial traffic rights; and infrastructure, including road and bridge design standards, road signs, and signals.¹⁵

In undertaking analysis of the NSEC, Banomyong (2007) constructed a model based on a detailed logistical activity map of certain identified products moving along the corridor. The model describes the cost and time components of these movements and highlights delays at borders and other inspection points. Based on the characteristics described in Table 7 [ PDF 22.5KB | 1 page ], projections of cost and travel time were made assuming full implementation of the CBTA. Figure 3a [ PDF 41.7KB | 1 page ] and Figure 3b [ PDF 41.7KB | 1 page ] illustrate some of these projections for the years 2006 and 2015. ¹⁶

As shown in Table 8 [ PDF 26.8KB | 1 page ], the estimated cost reductions across all three routes for the Bangkok–Kunming corridor are substantial. Via the Route No. 3 West (R3W), costs per ton are reduced by 26.5% between 2000 and 2006, and by almost 43.0% between 2006 and 2015. Transit times for the R3W are expected to drop almost 35% between 2006 and 2015. Via the Lao PDR route, reductions in costs and transit time are even greater, with estimated reductions of 30% and 35% between 2000 and 2006. By 2015, costs on this Lao PDR route should fall by a further 46% and transit times by 41%. For the route via the Mekong, reductions in costs are even higher, at 33% between 2000 and 2006, with a further 61% by 2015.

4.3 Scenarios Modeled

While the importance of transport infrastructure is clear, measuring the impact of changes made to it is no simple task. Modeling infrastructure improvements is fraught with difficulty, going beyond the basic problem of obtaining a satisfactory measure of infrastructure services. Physical proxies may be relatively bad proxies for the services they are meant to capture. For example, measuring the impact of improved pavement capacity does not necessarily capture the changes in the economic value of the goods transported along this pavement. Measures of public or private investment spending also have difficulty capturing service flows. In developing countries, the problem is even more acute as official costs of investment are often disconnected from their effective value. In an effort to rise above these challenges, modelers have applied a variety of proxies to attempt to capture the key impacts of transport and infrastructure services. Traditional measures use simple proxies such as distance, ad valorem shares of trade volumes, or real freight expenditures such as vehicle operating costs. Indeed, Straub (2008) points out that simple time and distance measures do relatively well in cross-section settings.

In the current study, to model the gains from physical investment in transport infrastructure, we reduced transport margin costs. This approach captures reductions in real freight expenditures in the same vein as Menon and Warr (2006). Applying a reduction to the land transport margin has the benefit of impacting the variable most relevant to the question at hand: how do improvements in road transport affect economic activity? However, as alluded to above, the measurement of this variable is problematic. First, in GTAP, these transport margins apply to traded goods only and are based on the ratio of CIF/FOB prices rather than the actual cost of transport. Using CIF/FOB ratios means these measures only account for inter-country trade and do not allow for intra-country trade. Using the land transport margin as a proxy for road improvements in the GMS has another difficulty. It does not allow for the specification of any particular route or region within a country. That is, there is no ability to measure the spatial dimension. Finally, the land transport value reported in the GTAP database comprises road, rail, and pipeline. Singling out roads, let alone a particular road, is all but impossible.

Our focus is on exploring the region-wide impacts of infrastructure improvement, based on estimated cost reductions along those GMS routes where implementation is relatively advanced. We include cross-border physical road infrastructure and trade facilitation measures that will lower the costs of transporting goods between GMS countries. Improvements in both transport infrastructure and trade facilitation can bring substantial gains to the region. Some estimates suggest that indirect costs from time delays can have a greater impact than direct costs on trade volumes (OECD 2003). As discussed above, we can adjust the direct costs of transport through the international transport margins. Within the model, however, it is also possible to capture the impacts on trade costs from improvements in trade facilitation through the CBTA. Both aspects are captured here in our “medium-run” scenario, which examines the impact of reducing transport costs and improving trade facilitation in the GMS.

The first component of this scenario attempts to capture improvements in the physical connectivity associated with the GMS Transport Strategy. Estimates of the cost savings through reduced vehicle operating cost, improved efficiency of trucks and drivers, and other cost savings are proxied by a reduction in the international land transport costs. Based on estimates of land transport cost reductions resulting from the NSEC as presented above (see also studies reviewed in Stone and Strutt 2010), we applied a reduction in land transport costs of 45%.¹⁷ We endeavored to capture the broader linkages of the transport corridor network by taking account of the other GMS economic corridors that intersect with the North–South Corridor, helping to improve land transportation linkages within the entire GMS. Therefore, we modeled the impact of a reduction in land transportation costs for all intra-GMS trade. For the PRC, we assumed that the 45% reduction in land transport costs related to the GMS would be equivalent to a 25% reduction in the PRC's transport margins. While Yunnan and Guangxi make up a relatively small part of the overall PRC economy, much of the trade with the GMS for goods transported by land is likely to enter and exit the PRC through these provinces. However, given the relative uncertainty of the overall reduction of transportation costs with the PRC, we take some care when analyzing the results to separate out these impacts.

The second component of this scenario encompasses the benefits of implementation of the CBTA. Through improved border crossing, harmonization of registration processes, and other bureaucratic matters, trade facilitation should improve throughout the GMS. Many studies have found that the ensuing price reductions have the potential to surpass the benefits of tariff reductions over time. To include the effects of an improvement in trade facilitation measures, we implemented an approach introduced in Hertel, Walmsley, and Itakura (2001) and also used by Minor and Tsigas (2008). The approach allows for a region-specific shift in the Armington demand function, effectively lowering the foreign market price. Based on the studies of expected time savings if the CBTA were to achieve improved facilitation to world standards, we assumed a reduction in effective import prices of 25%. For the reasons discussed above, we need to differentiate the shock for the PRC; we assumed a 5% cost reduction between the GMS and the PRC as a whole.

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