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ADB participates in the Nation newspaper Conference on the GMS

Statement of
Mr. Khalid Rahman, Director, Infrastructure Division
at the Nation Conference

12-13 June 2003, Bangkok, Thailand

Introduction

Distinguished participants, ladies and gentlemen: good afternoon.

It is a great pleasure for me to be with all of you here today. On behalf of the Asian Development Bank, I would like to express my thanks to the Nation Multimedia Group for providing ADB this opportunity to discuss infrastructure development in the Mekong region in the broader context of regional development and cooperation.

This afternoon, I will first talk about regional cooperation and ADB's role, then about the place of infrastructure, followed by what has been achieved, where we would like to be and lastly, what is needed to make it happen.

Significance of Regional Economic Cooperation

Regional cooperation helps eliminate physical and nonphysical barriers among neighboring countries. It amplifies domestic development by widening the options available to participating countries through expanded markets and access to key factors of production, and leads to lower transaction costs, greater market efficiency, and improved allocation of resources. Regional cooperation enhances complementarities among neighboring countries. Development of common economic and trade interests lead to enhanced mutual trust and confidence which leads to regional peace and security. One only has to look at the European Union to appreciate this.

The globalization of economies in recent years has intensified the need for closer regional economic cooperation. Some developing countries have responded to the challenges of globalization by working with their neighbors to ensure that human resources, capital, and natural resources are more effectively employed, and common issues jointly addressed. If one takes the ADB's developing member countries or DMCs as a region, it is worth noting that the share of interregional trade among them doubled from 1980 to 1999. During the same period as much 38.7% of DMC exports were destined to other DMCs.

The promotion of economic cooperation among its developing member countries is embedded in the ADBs long and medium term strategies for achieving its overarching goal of reducing poverty. Consistent with its Charter, ADB has, therefore, been active in supporting and financing regional and subregional initiatives.

The GMS Program is at the forefront of ADB's support for regional economic cooperation. It has served as a model for other regional cooperation initiatives. These include: the Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area; the Indonesia-Malaysia-Thailand Growth Triangle; the South Asia Subregional Economic Cooperation Program; the Central Asian Regional Economic Cooperation Program; and the subregional cooperation initiatives in the Pacific.

What Is the GMS?

Consisting of five countries in mainland Southeast Asia and one province in the People's Republic of China, the Greater Mekong Subregion is an area of immense potential. Covering a land area of 2.3 million square kilometers and home to some 250 million people, the GMS is rich in both human and natural resources. It has a huge pool of young, industrious, and trainable labor. It is a natural economic area with tremendous potential for exploiting complementarities in natural resources, labor, and capital. The GMS is strategically located at the confluence of the expanding economies of Southeast Asia, the PRC, and South Asia.

Favorable political and economic developments over the last decade have created the environment for forging closer economic cooperation among GMS countries. The GMS Program, which ADB has been supporting since 1992, aims to promote sustainable growth and economic development by fostering closer relations among the six GMS members. The Program is highly pragmatic, activity-driven, and results-oriented. It covers nine sectors where the GMS countries believe benefits can flow from cooperative undertakings. These are transport, energy, telecommunications, environment and natural resource management, human resource development, tourism, trade, investment, and, more recently, agriculture.

GMS Achievements

With the strong ownership and commitment of the participating members, significant progress has been achieved under the GMS Program in four areas:

• Establishment of institutional arrangements to facilitate project implementation and to sustain long-term cooperation
• Mobilization of financial and technical resources from development partners and the private sector
• Formulation of a 10-year strategic framework to accelerate the momentum of subregional cooperation, and broaden its benefits, especially for the poor

The Role of Infrastructure

Let me now turn to the role of infrastructure in economic development and cooperation.

There is enough empirical evidence to support the assertion that efficient and adequate infrastructure is one of the prerequisites for economic growth and for reducing disparities in income between regions. Poor infrastructure undermines economic growth, stifles linkages between and among countries, and frustrates attempts to improve living standards. Good infrastructure is a "force multiplier". On the one hand, it invites investment as it lowers transaction costs and increases the comparative advantage of a location. On the other, it links labor and capital, producers and markets and enhances access to knowledge and information. It provides the poor greater access to education and health services, water and sanitation. Infrastructure reduces vulnerability of the poor to economic shocks and natural disasters, which enhances their well-being and encourages investment in human capital. By improving the comparative advantage of investment locations within a country and region it enables jobs to be created in areas with surplus labor, thereby reducing labor migration and urbanization with its accompanying problems. Development of efficient and effective telecommunications network bridges not just the "Digital Divide," but actually helps overcome the physical divide. Rural electrification could stimulate the creation of livelihood opportunities for the poor in remote rural areas.

The improvement of transport links connecting neighboring countries is the most obvious and perhaps the most important area for economic cooperation. Development of such links not only facilitates regional and international trade, but also assists in serving important domestic needs. As far back as the 1960s, architects of African integration, for example, agreed that infrastructure was vital to lubricate the wheels of intra-African trade. A regional approach to infrastructure development can improve the economic viability of projects. Regional cooperation and infrastructure development are indeed mutually reinforcing.

The ADB's regional economic cooperation strategy may be described as a "building block" approach. A series of independent stand-alone investment decisions were made that eventually coalesced into larger modules. These investments were part of a long term strategy. As a result, we could show early results and success, rather than start with trying to get political acceptance of a large roadmap. This is why the GMS Summit last year, the first one since the GMS Program started 10 years ago, was held to celebrate concrete achievements rather than having one at the launching of the program. Under the GMS Program, infrastructure was selected as the initial building block. Highest priority was accorded to the development of the road corridors, which largely involve the rehabilitation and improvement of existing alignments, instead of new construction. Transnational road links that existed throughout the subregion, but were degraded by war, conflicts, and general lack of maintenance, were given particular attention. It was felt that roads would provide the best means of stimulating domestic and subregional economies. All these initiatives are structured so that they interlock in a building block and complementary manner.

The road corridors are destined to be more than just transportation corridors. Initiatives are being put in place to better link the infrastructure improvements to trade, investment and production opportunities which will upgrade these corridors to economic corridors . These include policy, regulatory and financing initiatives required to transform the transportation corridors into complex but more rewarding economic corridors.

Considerable work is under way in implementing crucial infrastructure investments in the GMS. Five of the eleven so-called flagship programs designed to operationalize the GMS Strategy for the next ten years, are focused on infrastructure development. Three GMS economic corridors will form a highly efficient system - allowing for goods and people to circulate or travel around the Mekong subregion with minimum impediment, cost, or delays - which will form the basis of corridors of economic growth and social development in the subregion, attracting investment and skills. When completed, the North-South economic corridor will transform Northern Lao PDR and Yunnan Province into vital gateways between the PRC and Southeast Asia. Another north-south route will be provided by the planned rehabilitation of the Kunming-Haiphong transport corridor and the improved Highway 1 in Viet Nam. The 1,500 km long East-West Economic Corridor will form a bridge between Mawlamyine, Myanmar on the Andaman Sea and Da Nang, Viet Nam on the South China sea, and will be the only land route that traverses mainland Southeast Asia on an east-west Axis. It will inaugurate east-west trade linking Viet Nam, Lao PDR, Thailand and Myanmar. The Southern Corridor that stretches from Bangkok to Ho Chi Minh City via Cambodia is already at an advanced stage of implementation, and will enhance trade among southern Viet Nam, Cambodia, and Thailand. These growth corridors will facilitate trade in the subregion and broaden trade reach to other ASEAN members and South Asia.

In the power sub sector the main thrust of the Regional Power Interconnection and Trading Arrangements flagship is to interconnect the national grids of the countries to minimize regional reserve requirements, improve system stability and reduce overall costs. This Program entails many components, notably development of the physical infrastructure, the enabling rules and regulations and mobilization of investments. Besides this initiative the first subregional power project, the Theun Hinboun project has been completed and is operating successfully. It provides a model of how public private partnerships can work in developing subregional infrastructure.

A project to develop the telecommunication backbone infrastructure is in progress. It will expand the subregional network and increase coverage and access to voice and data, including the internet.

Physical Facilities are Not Enough

Having the physical infrastructure is important. But it is only a necessary component, not sufficient by itself. Just as with computers, the physical facilities need the right software for computing to take place, infrastructure facilities need to be supported with "software" to get the full benefit. This software is the policy framework and institutional mechanism needed to remove the nonphysical barriers. The ADB and the GMS members have been addressing this need as well. To enable the roads to act as engines of subregional trade, it is necessary to ensure smooth cross border movement of goods and traffic. Majority of GMS members have signed a landmark agreement to facilitate this, and work is ongoing to finalize the annexes and protocols, which will provide the implementing guidelines for the cross-border pact in time for the opening of the first cross border road. In addition, to make border crossings smooth and efficient, GMS members will soon pilot-test, single-stop customs facilitation arrangements at selected border crossings. Joint control by countries' customs authorities through shared facilities or mutual recognition of harmonized customs inspection procedures will help reduce transportation costs associated with delays at border controls.

In the area of power trade, the GMS members signed in November 2002 an inter-Governmental agreement that will promote regional power trade in the subregion, enabling them to coordinate and cooperate in the planning and operation of their power systems. In telecommunications, in addition to investment in "backbone" facilities, the flagship program includes important policy reforms, and much-needed capacity building initiatives expected to pave the way for private sector participation.

Infrastructure as an Instrument of Change

The broad scope and multi-sectoral nature of the GMS Program and the commitment to sustainable development have enabled the infrastructure projects to be the vehicle for introducing many policy changes and best practices specially those related to mitigating negative environmental and social impacts of development.

The regular consultative process among GMS governments has increased awareness and underscored the need to address these concerns through policy changes, legislation, and programs. Regional cooperation in the environment is increasingly focused on broader transborder issues, in addition to careful environmental scrutiny of individual projects. On the social development side, human resource initiatives include capacity building, improvements in training standards, program accreditation and skill certification and the fight against communicable diseases, such as HIV/AIDS.

If all the subregional infrastructure initiatives are implemented as scheduled, by 2008, all mainland Southeast Asian countries would be interconnected with each other as well as with the PRC, by a series of all-weather roads. Together with improvements in power and telecommunications, this infrastructure will provide the platform for raising regional cooperation to a new level.

The Road Ahead

A lot has been achieved and a good foundation laid. So where do we go from here?

Let us view these developments in a wider perspective. As indicated earlier, the GMS corridors will play a strategic role in linking Southeast Asia with South Asia and East Asia. A new subregional economic cooperation scheme involving India, Myanmar, and Thailand has already been initiated, which could provide a natural westward extension of the GMS East-West economic corridor. On a wider scale, the GMS corridors also form part of the Asian Highway and Trans-Asian railway projects. Launched in 1959 by the then ECAFE, the forerunner of UNESCAP, the Asian Highway network comprises highway routes of international importance within Asia, crossing more than one subregion, such as East and Northeast Asia, South and Southwest Asia, Southeast Asia, and North and Central Asia.

Energy cooperation in the GMS is also broadly consistent with regional initiatives aimed at improving energy security in the Asian region. The ASEAN's proposal for a "Trans-ASEAN Gas Pipeline" covering Myanmar, Thailand, Singapore, Indonesia, Malaysia, and the Philippines is designed to catalyze cross-border linkages connecting national gas grids. It recognizes the superior fuel qualities of natural gas as well as the logic of linking ASEAN's natural gas production centers with markets in neighboring countries. Over the long term, countries in East and South Asia would need to develop alternative land routes for transportation of oil and gas from Central and Western Asia to the consumption centers in the PRC, India, Japan, and the Republic of Korea. Linking India to the gas resources of Iran and Turkmenistan is very topical these days as are the prospects of connecting the Indian gas grid with the Myanmar gas pipelines. At the same time there are concrete projects to tap the hydropower potential of the Himalayas for India. The renovation of the gas pipeline from Turkmenistan and Uzbekistan through Kyrgyz Republic to Almaty is being supported by an ADB loan and technical assistance.

Where are we headed? We see strong trade and economic cooperation growing between South and East Asia on one hand, and South Asia, Central Asian Republics, and the PRC on the other. This of course is not possible without good infrastructure links and the first steps are already being taken in the regional countries.

The Next Phase

How do we get there? What is required?

Building this infrastructure requires significant resources. The estimated financing needs of the 11 GMS flagship programs amount to some US$14-15 billion over the next ten years. The region's needs, of course, is much larger. It has been estimated that infrastructure investment required over the next decade to sustain Asia's growth will be between one and a half and two trillion US dollars.

Resource mobilization, therefore, is a most pressing challenge. This leads me to the final part of my presentation. How do we address the massive investment needs of developing the regional infrastructure?

The immediate region of attention needs investment in infrastructure while there are countries within the region with surplus funds and idle capacity looking for investment opportunities. We believe that the Asian and Pacific region has enough savings and productive capacity to finance regional infrastructure development. Several countries in the region have a large part of their savings deposited in nonregional centers where the rate of return is several percentage points below what the regional borrowing countries have to pay to the lenders from outside the region. There is clearly a need for an institutional mechanism to enable the utilization of a greater proportion of the region's savings for regional investment needs. The development of a viable domestic and regional bond markets could be one possible means of putting the savings of the region to productive uses within the region. The recently announced plan to establish a US$1 billion fund by the Executives' Meeting of East Asia-Pacific Central Banks to invest in Asian bonds could be a first step in this direction.

The moot question is whether, given these resources and surplus capacity, one can invoke the policies of depression economics at the regional level. Resource-surplus countries such as Japan, Hong Kong,China, Republic of Korea, Singapore, and Taipei, China could transform their excess savings into loans for regional infrastructure projects. In the context of excess capacity in the construction industry in the region's resource-surplus countries, the Asian Highway projects could present an ideal opportunity for regional pump-priming, benefiting the investors and the recipients of their investment.

Financing of regional infrastructure projects, therefore, presents a new dimension of economic cooperation in the Asian and Pacific region. In a small way, this is already happening in the GMS. For example, the more prosperous members, Thailand and the PRC, have provided assistance to Lao PDR and Cambodia, on a bilateral basis, to upgrade critical sections of GMS road corridors. In addition, the ADB has helped forge a financing arrangement among the ADB and the Governments of the PRC and Thailand to finance the Lao PDR section of the North-South Economic Corridor running from Kunming to Bangkok.

Distinguished participants, ladies and gentlemen:

It is obvious that for the next leap forward in economic cooperation, we have to look at financial infrastructure for physical infrastructure to happen. For any progress towards this kind of objective, the developing countries will have to move to a higher level of regional economic cooperation among themselves and also with the developed regional economies. Deeper cooperation and understanding will be required for realigning policies, standards and governance issues that go beyond simply trading merchandise with each other.

In conclusion, allow me to reiterate that regional economic cooperation and infrastructure development are vital to long-term economic development of the region. As the regional development bank for the Asian and Pacific region, ADB views these two activities as key pillars of its operations in the years to come.

Clearly, given the vast financing needs for infrastructure and limits to what ADB can fund directly, we recognize that to be truly effective, we must become more of a catalyst for development than a project financier.

We in ADB believe that the Asian and Pacific region, in general, and the GMS, in particular continue to be frontiers of growth and development.

Is our vision of a prosperous, equitable, and integrated Asian and Pacific region just a dream?

Well, you have to have a dream to make it come true.

Thank you.