estimating infrastructure’s potential as a catalyst for...

Estimating InfrastructureEstimating Infrastructure’’s Potential as a s Potential as a Catalyst for Asian Regional Integration, Catalyst for Asian Regional Integration,

Growth, and Economic ConvergenceGrowth, and Economic ConvergenceDavid RolandDavid Roland--Holst, UC BerkeleyHolst, UC Berkeley

joint work withjoint work withIfzalIfzal Ali and Fan Ali and Fan ZhaiZhai, ADB, ADB

presented at theADB/ERD Experts’ Meeting on Long Term Scenarios

of Asia’s Growth and TradeNovember 10, 2005Manila, Philippines

10 November 2005 Roland-Holst 2

Contents

1.Introduction and Motivation2.Overview of Initial Conditions3.Estimation Strategies4.Discussion


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.


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.


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


Ricardian Stimulus

By reducing trade margins, infrastructure:

1. Intensifies comparative advantage

2. Improves international terms of trade

3. Improves rural terms of trade (pro-poor)

and

4. Extends the horizon of profitable investment and marketing (falling MC means economies of scale)

1⎯⎯⎯ →⎯++

∞→MF

H

MPMP

↓+

↑−

⇒↓DD P

MPWMandP

MPWEM

MPMP

PP

D

DR

U

RR

+−

==ρ 2)(2

MPP

M DD

+−=

∂∂ρ


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)


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.


Paved Road Systems I

0

1

2

3

4

5

6

1960 1965 1970 1975 1980 1985 1990 1995 2000

Pave

d Ro

ad L

engt

h / L

and

Area

BangladeshChinaHong KongIndiaIndonesiaJapanKoreaLaosMalaysiaMongoliaNepalPakistanPhilippinesSingaporeThailand


Paved Road Systems II

0

1

2

3

4

5

6

7

8

1960 1965 1970 1975 1980 1985 1990 1995 2000

Pave

d R

oald

Len

gth

per C

apita



Electrification

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1960 1965 1970 1975 1980 1985 1990 1995 2000

Elec

tric

Capa

city

/ C

apita



Mobile Telephony

0

100

200

300

400

500

600

700

800

900

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Mob

ile U

sers

per

Tho

usan

d Po

pula

tion

BangladeshChinaHong KongIndiaIndonesiaJapanKoreaLaosMalaysiaMongoliaNepalPakistanPhilippinesSingaporeSri LankaThailand


Income and Infrastructure

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0 10000 20000 30000 40000 50000

Income per Capita

Nor

mal

ized

to M

axim

um

Pavement/AreaElec/CapMobile

Domestic private and public savings pose a serious constraint.


Regional Public and Private Investment(Asian inbound Aid and FDI, USD Billions)

0

20

40

60

80

100

120

140

160

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

ODA-Asia FDI-Asia

Clearly, we have entered an Age of Complementarity.


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.


Asian Trade Flows, 2005(percent of total Asian trade)

Extra-regional demand remains a primary economic driver.

Asian regional trade is far from reaching its potential.

SoutheastAsia

South Asia

East andCentral Asia

14.2

4.6

0.5

29.3

5.0

3.2

0.4

0.4

0.2

0.1

22.1

6.9

2.0

2.4

8.8


Baseline Per Capita GDP Growth(annualized percent change, 2005-2025)

-1 0 1 2 3 4 5 6 7 8

PRC

Sri Lanka

PhilippinesThailand

Viet NamHong Kong, China

Malaysia

IndiaKorea

Indonesia

BangladeshTaipei,China

Singapore

Australia, NZUnited States

Latin AmericaRest of World

Europe 17

Japan

Real GDP/Cap Pop

On a global basis, Asia continues to represent superior growth.

Sources: DRI, Oxford Econometrics, IMF.


Trade Distribution

Trade capacity and income are linked, particularly for regional trade.

Infrastructure is a primary reason.BangladeshViet Nam

IndonesiaIndia Sri Lanka

PhilippinesChinaThailand

Malaysia

Korea

Singapore

Japan

0

10

20

30

40

50

60

70

80

90

100

0 20 40 60 80 100

Cumulative Percent of Trade

Cum

ulat

ive

Perc

ent o

f Asi

an G

DP

All TradeEqualityAsian ImportsAsian Exports


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.


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.


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.


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.


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.


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.


0%

10%

20%

30%

40%

50%

60%

70%

80%

2005 2010 2015 2020 2025

GBL0 AFTA2 GBL2

East and Central Asia

0%

10%

20%

30%

40%

50%

60%

70%

80%

2005 2010 2015 2020 2025

GBL0 AFTA2 GBL2

Southeast Asia

0%

10%

20%

30%

40%

50%

60%

70%

80%

2005 2010 2015 2020 2025

GBL0 AFTA2 GBL2

South Asia

Income Growth(incremental percentage change from Baseline)

- WTO with Facilitation

- AFT with Facilitation

- WTO


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 regionalism2. Productivity growth3. Network externalities, including supply

chains.4. Migration and Human Capital


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


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.


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.


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


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.


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.


Discussion


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.

Estimating Infrastructure’s Potential as a Catalyst for Asian Regional Integration, Growth, and Economic Convergence Contents1. IntroductionMotivationKeynesian StimulusRicardian StimulusNeoclassical Stimulus2. Overview of Initial ConditionsPaved Road Systems IPaved Road Systems IIElectrificationMobile TelephonyIncome and InfrastructureRegional Public and Private Investment�(Asian inbound Aid and FDI, USD Billions)Infrastructure and TradeAsian Trade Flows, 2005�(percent of total Asian trade)Baseline Per Capita GDP Growth�(annualized percent change, 2005-2025)Trade DistributionNotes on “Soft Infrastructure”Soft Infrastructure3. Estimation StrategiesKeynesian EffectsRicardian EffectsERD Research on Structural Barriers to TradeIncome Growth�(incremental percentage change from Baseline)Neoclassical EffectsEconomies of ScaleEconomies of ScaleProductivity GrowthNetwork ExternalitiesA Regional Example - Bamboo CapitalismEstimating Network ExternalitiesOverview of Conclusions

estimating infrastructure’s potential as a catalyst for...

Documents