Regional Infrastructure Connectivity: What, how and when?

Back in 1776, the famous economist Adam Smith penned a quote which rings as true today as it did when it was first published.

“Good roads, canals, and navigable rivers, by diminishing the expense of carriage, put the remote parts of the country more nearly upon a level with those of the neighborhood of the town. They are upon that, the greatest of all improvements.”

This quote, from Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, captures the two most critical benefits of connectivity: efficient and cost-effective mobility and reduced inequality, within and between, countries. Trade has been at the heart of Asia’s emergence as the world’s most dynamic economic region, and it is increasingly centered within the region itself.

Intra-regional trade now accounts for more than 50% of Asia’s total trade. With the global economy currently undergoing a significant rebalancing, the world is now looking increasingly to Asia to play a central role in sustaining global growth. Its ability to play this role will inevitably depend on further growth in intra-regional economic activity, and this in turn will of course hinge on improvements in physical connectivity. In a nutshell, that means much more efficient transport systems, along with simpler, smoother border and customs procedures for getting people and goods from point A to point B and beyond, quickly and without difficulties.

Yet, as most people who have travelled in the region know only too well, there are substantial deficiencies in both the quality and quantity of infrastructure across Asia and the Pacific. This is particularly true in the transport and energy networks.

The numbers tell the story. Most countries in the region invest less than 3%, and even 1%, of GDP per year in public and private spending on infrastructure.

It should be noted that these shares were in the 2% to 5% range prior to the Asian financial crisis but have yet to return to these levels—even 15 years later. Infrastructure bottlenecks remain a key obstacle to region-wide integration, and regional connectivity projects account for only a fraction of the total spending. Providing intra-regional connectivity for a continent as large and as diverse as Asia is not easy. Nor is it a simple matter of identifying projects. Planning, ownership, support and resource mobilization need to be built up at local, national, subregional, and regional levels.

An integrated transport approach—linking roads, rail, and sea routes to cover the vast distances as well as diverse geography within Asia¯is absolutely critical. At the same time, resource requirements for regional connectivity are large, and immediate cost recovery may not always be feasible, calling for a judicious combination of various sources of financing.

The region of course hasn’t been idle in working for closer links. Efforts to establish transport networks across Asia go back at least 50 years, when conceptual work began on the Asian Highway and Trans-Asian Railway. While there are other connectivity initiatives on the table, these two—which envisage a network of over 250,000 kilometers of roads and railways, with links between capital cities, major commercial centers, industrial parks and export processing zones, as well as ports—have been critical in shaping the intra-regional connectivity agenda.

Challenges ahead

With this ambitious program in mind, we need to look at some of the questions and challenges that stepped-up regional connectivity poses.

First, given the considerable geographic and other forms of diversity in Asia, how should infrastructure development be guided to enhance cooperation at both the regional and subregional levels, and do we need new or additional initiatives to boost connectivity?

Second, what will be the most appropriate financing modalities, and what needs to be done to attract private sector financing?

Third, how much “software” is enough?

Forms of cooperation

Asia has made considerable progress in regional cooperation in general, and in infrastructure in particular. We can clearly see the concrete achievements of many subregional programs such as the Central Asia Regional Economic Cooperation (CAREC) program, Greater Mekong Subregion (GMS) regional economic cooperation program, and the Bay of Bengal Initiative on Multi-Sectoral Technical and Economic Cooperation (BIMSTEC).

What’s needed now, however, is a second generation of cooperative initiatives, which focus on greater connectivity between existing subregions and subregional programs.

From this perspective, the recent opening up of Myanmar provides us with a golden opportunity to connect South Asia with Southeast Asia and the GMS region. There are also possibilities to boost connectivity between South Asia and Central Asia.

While we look with some satisfaction on the improved physical connections, we should not, however, forget that despite better links, several parts of Asia have yet to benefit from growing regional production networks and value chains which have helped lift some countries to middle income status.

ADB, for its part, is optimistic about the future, and does see a way forward for making cross-border connections more efficient and inclusive. Working with other development partners such as the United Nations Economic and Social Commission for Asia and the Pacific, we are supporting a “pan-­Asian platform” for knowledge sharing and cooperation. This of course is not a bricks and mortar solution, but right now the issue for the region is not just about more physical links but more about boosting cooperation between subregional institutions.

Financing modalities

Now let me turn to the big question of financing. Our estimates show that the region needs at least about $500 billion per year until 2020 for regional connectivity projects. It has to be noted that crossborder projects are inherently more complex and risky than single country investments, so there is an ongoing need for governments and others involved to come up with innovative structures which make the projects bankable and attractive to the private sector.

What is the best system for achieving effective regional connections then? One approach has been the creation of cross border economic corridors. While conceptually not new, the region is yet to fully embrace this idea. The GMS region was an early pioneer in this and has made some progress.

But to really succeed with this approach, Asia needs to look to Europe and other parts of the world, and emulate their successful efforts at creating quality logistics, dry ports, industry clusters and economic zones, within corridors.

Not all is gloom though. At the local level we are encouraged by the efforts of People’s Republic of China and India, where transport corridors are being innovatively structured as full trade and economic corridors. If sufficient revenue generating opportunities can be bundled together with road or other modes of transport, private sector financiers will become much more interested.

Balance between software and hardware

Finally, there is the balance between software and hardware. The old dictum “If you build it, they will come” may not work in regional connectivity projects, unless government policies, procedures and business practices are modernized and simplified.

Despite the progress made in trade liberalization, Asia and the Pacific still lags in reforms of its systems of approvals and clearances behind, and at, borders. There are still several subregional road corridors that do not have a single cross-border trans-shipment agreement signed, or the signed agreements are not effectively enforced.

Far more can be done on the “software” aspects of connectivity. For example, boosting transport and trade facilitation measures; intensifying skills and capacity building; controlling the cross-­border  spread  of diseases; and increasing research and database development. Building institutions for closer cooperation and coordination in specialized areas, such as railways and power development, are also vital.

These issues are particularly critical for landlocked countries and subregions to maintain their competitiveness.

While I concede that the challenges are formidable, the benefits the region stands to gain from closer connections are immense. If countries succeed in building effective national road, energy and urban infrastructure systems which then feed into broader subregional  infrastructure networks, the fruits of Asia’s growth can be shared much more broadly across borders. Just as critically, it will help address growing inequality within countries, particularly between peripheral and interior areas which are not well connected.

Clearly, this vision of an interconnected and prosperous world is what Adam Smith had in mind when he was mulling over the wealth of nations all those years ago.