Presentation by ADB Vice President for Operations 2 Stephen P. Groff at the OECD Southeast Asia Regional Forum: Fostering Regional Competitiveness and Sharing the Benefits of Sustained Growth on 26 March 2014 in Bali, Indonesia (as drafted).
H.E. Muhammad Chatib Basri, Minister of Finance of the Republic of Indonesia; Mr. Angel Gurria, Secretary General of the OECD; distinguished guests, ladies and gentlemen.
Good morning. I am very pleased and honored to join all of you today to discuss the importance of strengthening connectivity to enhance the competitiveness of Southeast Asia.
Let me begin with the premise that connectivity is a necessary precondition for increased competitiveness in the global economy. Strengthening connectivity, both within countries and between countries, has been the cornerstone of ADB’s support for three subregional cooperation programs in Southeast Asia, namely:
- the Greater Mekong Subregion Economic Cooperation Program (GMS);
- the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT); and
- the Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA).
Connectivity also underpins the realization of the ASEAN Economic Community in 2015, as emphasized in the ASEAN Master Plan on connectivity.
The word “connectivity” has many meanings, but in the context of competitiveness I will focus on two definitions: physical connectivity and “software” connectivity. By physical connectivity, I refer to the physical infrastructure that links countries and/or regions together. Road, rail, air and maritime transport are all sources of physical connectivity, as are telecommunications, power and other energy transmission/distribution networks.
While Southeast Asia is more physically connected than ever, large infrastructure deficits remain, both in terms of the quality and quantity of infrastructure. Most countries in the region invest less than 3%, and some as low as 1%, of GDP per year in public and private spending on infrastructure, far behind the 2% to 5% range prior to the Asian financial crisis of 1997/98. Estimates suggest that over the next decade, ASEAN nations will require approximately $60 billion a year to fully address the region’s infrastructure needs.
The competitiveness of Southeast Asia as a whole is only as strong as its weakest links, and it is critical to address the significant infrastructure disparities within the region. The World Economic Forum’s recent Global Competiveness Report ranks Singapore as 2nd in terms of infrastructure coverage and quality, but the CMLV countries fall far behind - Cambodia ranking 101st, Myanmar 141st, Lao PDR 84th and Viet Nam at 82nd.
Responding to the vast need, under the GMS Program, ADB has mobilized more than $20 billion for physical infrastructure projects, primarily in the transport and energy sectors. The majority of these projects have contributed to domestic and subregional connectivity. However, challenges remain significant, with cross-border projects being inherently more complex and risky than single country investments, resulting in a corresponding need to mitigate these risks and ensure the projects are bankable.
While physical connectivity is a necessary condition for increased regional competitiveness, it is not alone sufficient. Physical infrastructure needs to be complemented with “software” aspects of connectivity, and by software I mean government policies, institutions, procedures, capacities and systems behind, and at, borders. Despite efforts by ADB and other development partners to support transport and trade facilitation in the GMS, there are still several subregional road corridors that do not have a single cross-border trans-shipment agreement signed, and some corridors that do have signed agreements do not effectively enforce them. More remains to be done on the “software” aspects of connectivity. For example, (i) boosting transport and trade facilitation measures and related capacity building; (ii) controlling the cross-border spread of communicable diseases; and (iii) increasing research and database development. Building institutions for closer cooperation and coordination in specialized areas, such as railways and power development, are equally vital. ADB’s recent support to establish the Greater Mekong Railway Association and the GMS Regional Power Coordination Center are two examples of efforts to build institutional connectivity in the GMS.
Strengthening software connectivity is particularly critical for landlocked countries and subregions to maintain their competitiveness, and to promote intra-regional trade. Currently one-fourth of ASEAN’s trade is conducted within the region. By comparison, intra-regional trade within the European Union is over 55%, and it is about 52% in the case of the North American Free Trade Agreement. Improvements to software connectivity are the key to unlocking ASEAN’s full intra-regional trade potential. Evidence demonstrates that reducing supply chain barriers can have a larger effect than removing tariffs. At the global level, reducing supply chain barriers to trade could increase global GDP by nearly 5% and trade by 15%. In Southeast Asia, if countries raise their performance halfway to global best practice, GDP could be increased by 9.3%, exports could be increased by 12.1%, and imports by 18.4%.
Connecting with the private sector
In addition to being a potential source of financing for transport, energy and other connectivity infrastructure, private sector participation is essential for many “second generation” connectivity projects such as quality logistics centers, ports, industrial clusters and special economic zones. In order to promote public private partnerships (PPPs) for connectivity projects in Southeast Asia, ADB helped to establish the ASEAN Infrastructure Center of Excellence (AICOE), cofinanced by the Government of Singapore and Government of Canada. This facility helps prepare regional infrastructure projects with private sector participation, and provides transaction advisory support to the public sector in the areas of risk-sharing and viability gap financing. At the national level, ADB is also supporting project development facilities for PPPs in Indonesia, Philippines and Viet Nam.
Connecting with sources of financing
As I have mentioned, the private sector is an important source of cooperation and finance but there are other sources as well. Within ASEAN, ADB worked with all ASEAN members to establish the ASEAN Infrastructure Fund (AIF). The AIF provides financing for key regional infrastructure projects to promote connectivity. The AIF commenced lending operations in December 2013 through a $25 million loan to cofinance a $224 million loan from ADB for the Java-Bali 500-Kilovolt Power Transmission Crossing Project. The commencement of lending by the AIF opens a new era in ASEAN-led investments, providing ASEAN nations the means to direct and leverage resources for their own development needs. In 2014, AIF is targeting on the order of $300 million in project financing, and Myanmar is expected to become a full-fledged member of AIF.
Connecting subregions with ASEAN
ASEAN has a market of 600 million people, and the region is positioned as an important economic player. Each country and subregion in Southeast Asia holds certain comparative advantages - whether in raw materials, labor, shipping, manufacturing, agriculture, or as a financial hub. Pulling these comparative strengths together makes the region’s whole far greater than the sum of its parts.
Connecting the subregions in Southeast Asia is also essential, and ADB will continue to support the integration of the GMS, IMT-GT and BIMP-EAGA into the greater ASEAN Economic Community. The opening up of Myanmar also provides ASEAN with a golden opportunity to connect South Asia with Southeast Asia. Strengthening regional connectivity is also a stepping stone for poorer countries to move up the value chain, boost their growth potential, and gradually converge as their economies become more integrated at the subregional, regional and global levels.
On the positive side, Southeast Asia does show signs of progress, both in terms of its connectivity and its competitiveness. This trend is reflected in implementation of the ASEAN Economic Community (AEC) Blueprint. By the end of July 2013, nearly 80% of measures were implemented, with significant results across the four pillars of the AEC.
Distinguished guests, ladies and gentlemen, despite all its benefits, increased regional connectivity will also bring some formidable challenges to Southeast Asia. A key challenge will be to avoid replacing disparities between countries with internal disparities, such as rising domestic inequality. And this is where national authorities need to embrace more inclusive growth strategies. We also know that a side effect of economic integration is that the more integrated markets become, the more likely they will be affected by global or regional shocks. So, there is a need to build regional financial safety nets, as well as to design appropriate mitigation measures to contain the cross-border spread of diseases, the trafficking of goods and people, and addressing environmental impacts across borders.
In conclusion, OECD’s Southeast Regional Programme is a most welcomed initiative - the Regional Programme will provide us with the knowledge, expertise and experience needed to help us respond to the many challenges and opportunities of greater regional connectivity. From the financing of physical infrastructure, to facilitating cross-border transport and trade, to structuring public-private partnerships, to mitigating the potential negative financial, social and environmental impacts of integration, we do need to learn from others. We welcome this Regional Forum and look forward to deepening our partnership with OECD to achieve our mutual goal of making Southeast Asia a more connected, integrated, competitive and prosperous region.