Estimating Infrastructure s s Potential as a Catalyst for Asian Regional Integration, Growth, and Economic Convergence David Roland-Holst, UC Berkeley joint work with Ifzal Ali and Fan Zhai,, ADB presented at the ADB/ERD Experts Meeting on Long Term Scenarios of Asia s Growth and Trade November 10, 2005 Manila, Philippines
Contents 1.Introduction and Motivation 2.Overview of Initial Conditions 3.Estimation Strategies 4.Discussion 10 November 2005 Roland-Holst 2
1. Introduction As Asia s economic growth process matures, regional integration offers important opportunities: Geographic diversification/new markets Superior growth rates Structural differentiation more rapid evolution from established North-South patterns of trade and specialization Propagating growth linkages across this diverse region will also facilitate economic convergence. Infrastructure commitments will be an essential guarantor of this process. 10 November 2005 Roland-Holst 3
Motivation Infrastructure s contribution can be seen from plays three roles: 1. Keynesian Aggregate demand and employment stimulus. 2. Ricardian Reducing trade margins and intensifying comparative advantage. 3. Neoclassical Endogenous growth benefits. 10 November 2005 Roland-Holst 4
Keynesian Stimulus Infrastructure spending is a popular means of direct long term or transitory employment stimulus Examples: WPA (US), Work Relief (PRC), Japan (heavy counter-cyclical and recurrent fiscal commitments) Because of its generality, this kind of spending can be targeted across a wide spectrum of regions and socio economic groups For public good infrastructure multiplier effects are generally quite substantial 10 November 2005 Roland-Holst 5
Ricardian Stimulus By reducing trade margins, infrastructure: 1. Intensifies comparative advantage + M 1 M + M 2. Improves international terms of trade M P P 3. Improves rural terms of trade (pro-poor) P P P P M + M H F PWE M PWM + M and P D P D R R D D ρ = = and = 2 R 2 M ( P M ) U D D + 4. Extends the horizon of profitable investment and marketing (falling MC means economies of scale) 10 November 2005 Roland-Holst 6 ρ P
Neoclassical Stimulus Modern economic theory recognizes many endogenous growth factors, and these can be greatly facilitated by infrastructure: Productivity enhancement Technology diffusion Information diffusion Supply chain articulation and other network externalities Human capital development (migration) 10 November 2005 Roland-Holst 7
2. Overview of Initial Conditions Infrastructure conditions across Asia are highly variegated, even between neighboring countries. Infrastructure expansion trends have been dramatic, but only in a few countries. Public investment needs to extend its development leadership, increasing returns to market participation and private investment across the region. Public and private capital commitments must be complementary if the former is to be effective. 10 November 2005 Roland-Holst 8
Paved Road Systems I Paved Road Length / Land Area 6 5 4 3 2 1 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 Bangladesh China Hong Kong India Indonesia Japan Korea Laos Malaysia Mongolia Nepal Pakistan Philippines Singapore Thailand 10 November 2005 Roland-Holst 9
Paved Road Systems II Paved Roald Length per Capita 8 7 6 5 4 3 2 1 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 Bangladesh China Hong Kong India Indonesia Japan Korea Laos Malaysia Mongolia Nepal Pakistan Philippines Singapore Thailand 10 November 2005 Roland-Holst 10
Electrification Electric Capacity / Capita 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 Bangladesh China Hong Kong India Indonesia Japan Korea Laos Malaysia Mongolia Nepal Pakistan Philippines Singapore Thailand 10 November 2005 Roland-Holst 11
Mobile Telephony Mobile Users per Thousand Population 900 800 700 600 500 400 300 200 100 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Bangladesh China Hong Kong India Indonesia Japan Korea Laos Malaysia Mongolia Nepal Pakistan Philippines Singapore Sri Lanka Thailand 10 November 2005 Roland-Holst 12
Income and Infrastructure Normalized to Maximum 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 Pavement/Area Elec/Cap Mobile 0 0 10000 20000 30000 40000 50000 Income per Capita Domestic private and public savings pose a serious constraint. 10 November 2005 Roland-Holst 13
Regional Public and Private Investment (Asian inbound Aid and FDI, USD Billions) Clearly, we have entered an Age of Complementarity. 160 140 120 100 80 60 40 20 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 0 ODA-Asia FDI-Asia 10 November 2005 Roland-Holst 14
Infrastructure and Trade Trade has been a primary driver of Asian growth. Infrastructure is an essential complement to trade. Past reliance on demand outside the region was facilitated by maritime expansion, with higher income countries leading and limited spillovers. To support greater regional trade/integration, more diverse infrastructure will be needed, financed collaboratively and propagating growth externalities. This approach will facilitate economic diversification, growth, and convergence. 10 November 2005 Roland-Holst 15
Asian Trade Flows, 2005 (percent of total Asian trade) Extra-regional demand remains a primary economic driver. 22.1 0.5 East and Central Asia 0.4 14.2 4.6 5.0 29.3 Asian regional trade is far from reaching its potential. 2.4 2.0 South Asia 0.1 0.4 0.2 Southeast Asia 3.2 8.8 6.9 10 November 2005 Roland-Holst 16
Baseline Per Capita GDP Growth (annualized percent change, 2005-2025) On a global basis, Asia continues to represent superior growth. -1 0 1 2 3 4 5 6 7 8 PRC Sri Lanka Philippines Thailand Viet Nam Hong Kong, China Malaysia India Korea Indonesia Bangladesh Taipei,China Singapore Australia, NZ United States Latin America Rest of World Europe 17 Japan Sources: DRI, Oxford Econometrics, IMF. Real GDP/Cap 10 November 2005 Roland-Holst 17 Pop
Trade Distribution 100 Japan 90 Cumulative Percent of Asian GDP 80 70 60 50 40 30 20 10 India Bangladesh Sri Lanka Philippines Thailand China Indonesia 0 Viet Nam Korea Malaysia Singapore Trade capacity and income are linked, particularly for regional trade. Infrastructure is a primary reason. 0 20 40 60 80 100 Cumulative Percent of Trade All Trade Equality Asian Imports Asian Exports 10 November 2005 Roland-Holst 18
Notes on Soft Infrastructure Much emphasis is given to infrastructure goods, but there is also a broad universe of infrastructure services. Concentrated in national and multilateral public institutions, they constitute an essential element of trade facilitation. Trade negotiating institutions are only the most conspicuous members of a large family of institutions promoting more coherent market linkages and policy dialogue. 10 November 2005 Roland-Holst 19
Soft Infrastructure Our recent research indicates that structural barriers to trade are now much more important regional growth impediments than formal trade barriers. For this reason, more determined initiatives for both hard and soft infrastructure are essential. In the latter category, an Asian OECD could make important contributions. 10 November 2005 Roland-Holst 20
3. Estimation Strategies To assess the role of Asian infrastructure empirically, and economywide and regionwide approach is needed. For this reason ADB/ERD has developed multi-country macro and CGE models in parallel. Appropriate use of these tools depends on the kind of infrastructure issues to be addressed. 10 November 2005 Roland-Holst 21
Keynesian Effects This category of effects focuses on fiscal commitments and aggregation demand and employment linkages. At the national level, a standard macromodel can capture most of this. For more targeted (sector and area) policies, project analysis or partial equilibrium estimates are serviceable. Without a GE framework, however, many indirect effects may be omitted. 10 November 2005 Roland-Holst 22
Ricardian Effects Any policies that significantly influence margins will induce extensive market spillovers. Distribution effects are likely to be at least as prominent as growth effects. In this context, only an economywide and regionwide GE model will suffice. 10 November 2005 Roland-Holst 23
ERD Research on Structural Barriers to Trade An example of estimating Ricardian effects is our recent work on structural barriers to regional trade. We found, among other things, that reducing trade margins within the region achieved dramatically larger growth benefits than removing nominal protection. 10 November 2005 Roland-Holst 24
Income Growth (incremental percentage change from Baseline) East and Central Asia 80% 70% 60% 50% 40% 30% 20% - WTO with Facilitation - AFT with Facilitation -WTO 10% 0% 2005 2010 2015 2020 2025 Southeast Asia GBL0 AFTA2 GBL2 South Asia 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 2010 2015 2020 2025 80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 2010 2015 2020 2025 GBL0 AFTA2 GBL2 GBL0 AFTA2 GBL2 10 November 2005 Roland-Holst 25
Neoclassical Effects This is a vast area, that by definition is well suited to GE analysis. Some issues are more prominent than others: 1. Economies of scale a primary driver of modern regionalism 2. Productivity growth 3. Network externalities, including supply chains. 4. Migration and Human Capital 10 November 2005 Roland-Holst 26
Economies of Scale Ricardian comparative advantage emphasizes national differentiation, but modern regionalism is increasingly driven by shared characteristics, especially two catalysts for economies of scale: Multinational marketing: aggregating regional consumer groups Supply chains: aggregating regional component markets 10 November 2005 Roland-Holst 27
Economies of Scale We are currently working with an increasing returns, differentiated product specification of the global GE model. Initial results confirm the importance of market extensification to efficiency and growth. The main challenge is to improve empirical information for calibrating scale effects. 10 November 2005 Roland-Holst 28
Productivity Growth Infrastructure contributes to productivity growth in two ways: Direct increases in productivity for trade, transport, and other wholesale and retail distribution services. Indirect increase via technology diffusion. The former can be modeled directly, and the results are significant in terms of both extensive an intensive trade facilitation. The latter process is very diverse and best studied on a case by case basis. In some cases, such as telecoms, benefits are pervasive and obvious. In others, such as public health, economic benefits are more complex. 10 November 2005 Roland-Holst 29
Network Externalities Supply chain decomposition has been a salient trend in recent Asian growth The corresponding intermediate trade linkages are increasingly responsible for the majority of value creation The foreign capital, technology, and demand allocation accompanying this propagates growth and, because of wage competition, can promote convergence Infrastructure is a prerequisite for effective participation in this regional production sharing 10 November 2005 Roland-Holst 30
A Regional Example - Bamboo Capitalism Network externalities in local production and finance allow complete markets to sprout from nodes in a global root system of intermediate supply. This culminating aspect of global supply chain decomposition has created a diverse and vibrant population of independent local industries around the East Asian region. Many emergent enterprises are still bound to their roots by ownership or contracts But increasingly they arise independently, promoting the dynamics of global competitiveness and innovation. 10 November 2005 Roland-Holst 31
Estimating Network Externalities Evidently, this is an important issue for regional trade generally and elucidating the role of infrastructure in particular. Multiplier decomposition can shed some light, but has conceptual limitations To model these effects more convincingly, requires attention at all levels: data, specification, and experimental design. 10 November 2005 Roland-Holst 32
Discussion 10 November 2005 Roland-Holst 33
Overview of Conclusions Regional trade and integration offer Asia great potential for more rapid and sustained growth. Indeed, much of Asia s benefits from global trade liberalization can be realized by regional initiative alone. Structural barriers to trade are now more important than tariffs. Policies and investments that facilitate trade can accelerate regional growth dramatically. Regional integration can promote Asian economic convergence, raising average growth rates and benefiting poorer countries. 10 November 2005 Roland-Holst 34