The time is ripe for enhancing economic integration between South Asia and Southeast Asia. The new “normal” era of slow growth in advanced industrial economies following the global financial crisis suggests that Asian economies will need to rely more on domestic and regional demand to secure inclusive growth. The recent slowdown in growth in the People’s Republic of China suggests further grounds for tapping growth opportunities between South Asia and Southeast Asia
By Peter Morgan, Ganeshan Wignaraja and Michael Plummer
The time is ripe for enhancing economic integration between South Asia and Southeast Asia. The new “normal” era of slow growth in advanced industrial economies following the global financial crisis suggests that Asian economies will need to rely more on domestic and regional demand to secure inclusive growth. The recent slowdown in growth in the People’s Republic of China suggests further grounds for tapping growth opportunities between South Asia and Southeast Asia.
The move toward an
Association of Southeast Asian Nations (ASEAN) Economic Community (AEC) in 2015
and beyond will provide for a large and more integrated market with notable
purchasing power and scale economies. This will facilitate the deepening of
foreign direct investment-driven production networks and strengthen the role of
ASEAN as a conductor of Asian regional integration. A new pro-business Indian
government signals impetus for advancing India’s new Act East Policy, enhancing
cross-border infrastructure investments and deepening domestic economic
reforms. Negotiations are underway for the mega-regional Trans-Pacific
Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP)
but most South Asian and Southeast Asian economies are excluded at this point.
Recent political and economic reforms in Myanmar—a key land bridge between the
two subregions—has made possible closer economic ties and connectivity that
were not feasible a few years ago. Yet, there is still little research on the
role of hard and soft connectivity in deepening economic ties between South
Asia and Southeast Asia.
Accordingly, the
Asian Development Bank (ADB) and the Asian Development Bank Institute (ADBI)
conducted a comprehensive study of how improved physical connectivity and
associated soft infrastructure can foster closer economic ties between the two
subregions. Physical connectivity here relates to transport and energy, while
associated soft infrastructure includes the critical areas of financing of
infrastructure, trade facilitation, reforms, and institutions for coordination.
The study concludes that relatively modest investments in physical connectivity
can significantly enhance regional integration between South Asia and Southeast
Asia. Furthermore, the benefits of such physical connectivity-led integration
are likely to far outweigh the costs. Some noteworthy findings from the
ADB/ADBI study are discussed below.
Assessing
economic ties and cross-border connectivity
First, economic
ties between these two subregions, while making progress, have been limited,
hindered by bottlenecks in infrastructure, financial markets, trade
facilitation, trade barriers, and limited regional cooperation. South Asia and
Southeast Asia cross-subregional trade increased 23 times from $4 billion to
$90 billion over 1990–2013. But Southeast Asia’s share of South Asian trade
rose from 6% to only 10%, while South Asia’s share of Southeast Asian trade
just doubled from about 2% to only 4%. The same story applies to
cross-subregional investment and cross-subregional financial flows. This
suggests that there is significant potential for growth of economic ties
between the two subregions. In particular, foreign direct investment-driven
production networks and parts and components trade, which are a key drivers of
trade expansion in Southeast Asia, have yet to take firm root in South Asia.
Second,
improving transport and energy connectivity is a crucial building block for
greater economic integration between the two subregions. Key land barriers to
cross-subregional transport are located mainly in Myanmar while other gaps are
identified in Bangladesh, Cambodia, India, the Lao People’s Democratic
Republic, Thailand, and Viet Nam. Although road connections exist, many
segments need to be upgraded, especially in Bangladesh, India, and Myanmar. In
contrast, there are no existing railway links between the Greater Mekong
Subregion (GMS) countries and South Asia, or between the GMS countries
themselves, with the exception of a connection between the People’s Republic of
China and Viet Nam. Moreover, the incompatibility of railway gauges (track
widths) between the regional border countries of India, Bangladesh, Thailand,
and Myanmar and other technical differences mean that transshipment will be
required even after through rail links are developed.
The bulk of
cross-subregional trade still moves by ship. However, important seaports for
South Asia–Southeast Asia trade—notably Kolkata Port in India, Chittagong Port
in Bangladesh, and Yangon Port in Myanmar—suffer from problems relating to
limited accessibility for large ships, gaps in facilities, variable operational
efficiency, and gaps in connectivity between seaports and rail and road
networks.
Energy trade
between South Asia and Southeast Asia, except for conventional shipments of
coal, gas, and other fuels, does not occur, yet there is much unexploited
potential to be tapped. The main opportunities for cross-subregional energy
trade lie in electric (mainly hydro) power and gas pipelines, plus pooling and
interconnection of electric power grids. Myanmar has an important potential
role to play in energy trading, given its substantial capacity for hydro-power
and reserves of natural gas, plus its critical position as a gas pipeline
location.
Costing and
financing cross-border connectivity projects
Third, the total
investment costs for projects to enhance cross-subregional connectivity (in
highways, railroads, ports, and energy trading) are estimated at $73 billion.
This figure includes $18 billion for roads, $34 billion for railways, $11
billion for port projects, and $11 billion for energy trading projects2. The
total costs for priority investment projects in transport are estimated at $8
billion (including $1 billion for roads, $5 billion for railroads, and $2
billion for ports).
Road corridor
options to connect South Asia to Southeast Asia have been evaluated and the
best option is the 4,430 kilometer Kolkata–Ho Chi Minh City Corridor. Rail
connectivity comes as a second priority after road connectivity due to much
higher costs, more extensive gaps, and incompatibilities between national networks.
Priority seaport projects include the construction of new deepwater ports or
floating container transshipment terminals at Chittagong and Kolkata, and
improvement of the road infrastructure linking Thilawa Port with Yangon. The
promotion of more frequent visits by large-scale container ships is the key to
lowering transport costs and supporting development of supply chain networks.
Fourth,
financing cross-subregional infrastructure projects remains challenging.
Traditional sources of infrastructure financing, including public finance and
bank loans, are becoming more constrained. The development of Asian financial
markets and related initiatives is needed to strengthen access to
infrastructure finance. Bond markets can play a greater role in channeling Asian
savings toward infrastructure projects. Guarantees for project bonds may help
foster demand for these products by long-term institutional investors.
Infrastructure funds, both domestic and international, are valuable, especially
if the ASEAN Infrastructure Fund is extended to a Pan-Asian infrastructure fund
covering South Asia as well. Measures to integrate regional financial markets
and ease restrictions on international capital flows can also contribute.
Future collaboration, including co-financing infrastructure projects between
development banks—ADB, the emerging Asian Infrastructure Investment Bank, and
the World Bank—would contribute to increasing the supply of infrastructure
finance in Asia.
Public–private
partnerships (PPPs) provide an important top-up for infrastructure funding, but
are not a panacea. Improving the transparency, regulatory framework, and
governance of PPP projects, together with the addition of political risk
guarantees, can increase the attractiveness of this asset class. Furthermore,
support from multilateral development banks and international coordination for
cross-border projects can help ensure success in PPPs.
Trade
facilitation and coordination
Fifth, improving
trade and transport facilitation would make trading between the two subregions
easier and more stable, with lower transaction costs. Businesses complain about
excessive documentation requirements for customs clearance and there has been
limited adherence in the subregions to international best practices for customs
modernization. The ASEAN Single Window Initiative is presently being
implemented and will eventually provide for a notable reduction in trade costs.
There is a need to consider development of a regional single window initiative
covering South Asia as well. The lack of cross-border transit agreements in the
two subregions is another major obstacle that needs to be addressed.
Sixth, closing
coordination gaps in South Asian and Southeast Asian cooperation and
integration may require retooling existing institutions and creating new
institutions to facilitate economic links. The current institutional landscape
for regional connectivity is populated by several—at times
overlapping—institutions under ASEAN, South Asian Subregional Economic
Cooperation (SASEC), South Asia Subregional Economic Cooperation (SAARC), GMS,
or Bay of Bengal Initiative for Multi-Sectoral Technical and Economic
Cooperation (BIMSTEC) arrangements. It may be productive to explore linking
SASEC with the GMS through officials participating in each other’s meetings as
observers and then focusing on specific regional connectivity projects.
Improving capacity building for land infrastructure connectivity in economies
such as Myanmar, Bangladesh, and India is also important.
Estimating gains
from closer integration
The potential
gains from connectivity-led closer South Asian–Southeast Asian integration are
potentially large. The ADB/ADBI study used a modern computable general
equilibrium model to explore the potential economic effects of alternative integration
schemes involving South Asian and Southeast Asian economies. The policy
scenarios are conservative and are likely to reflect lower-bound estimates of
what true results can be expected. The best-case deep integration scenario
involves (i) removal of all tariffs associated with South Asian and Southeast
Asian trade, (ii) a 50% reduction in inter-regional non-tariff barriers, and
(iii) a 15% reduction in trade costs reflecting improved trade facilitation and
investment in infrastructure. The model results show that this scenario would
raise welfare by $375 billion (8.9% of gross domestic product) in South Asia
and $193 billion in Southeast Asia (6.4% of gross domestic product). Most
participating countries show large gains, especially the smaller countries in
South Asia.
Certainly, the
process of closer intra-regional economic integration generates potential
benefits but may entail some additional costs that need serious review and
mitigation measures. For instance, some sectors will lose due to greater
competition, and there may be increases in regional inequalities. Also, closer
intra-regional economic ties and faster growth may entail pollution,
environmental degradation, and migration issues. Regional economic integration
may also hasten the spread of disease and crime. In addition, the process may
exacerbate fears of migration, ethnic tensions, and other security-related
issues. However, our analysis suggests that the overall benefits substantially
outweigh the costs, so it should be feasible to develop compensating mechanisms
to address these costs. As cross-regional integration progresses, countries and
regional institutions will need to conduct research on the economic
implications of these challenges and formulate appropriate policy remedies.
About The Authors:
Peter Morgan
Senior Consultant for Research ADB Institute
Ganeshan
Wignaraja Advisor, Economic Research and Regional Cooperation Department, Asian
Development Bank
Michael Plummer, Director, SAIS Europe and Eni Professor of International Economics
This article was originally published at ADB Institute's Blog under Creative Commons License. Download The Joint Study by ADB and ADB Instritute - LINK
