Infrastructure and Trade in Asia

Infrastructure and Trade in Asia

Author(s): Douglas H. Brooks and Jayant Menon (eds.)

ISBN:          978-1847209412

Publisher: Edward Elgar Publishing Ltd, Cheltenham, UKK and Asian Bank Institute

Year:          2008

Price:        £59.95/$115.00

Reviewed by Antonella Viola PhD, CHAM – Centro de História de Além-Mar, Universidade Nova, Lisbon, Portugal.

Growth, trade expansion and economic integration are high-priority issues for many Asian countries. During the Singapore meeting in November 2009,  APEC members economies stated that a new economic paradigm based on a significant expansion of trade and  an investment agenda will strengthen economic integration and co-operation in the region. On their side, ASEAN member states debated and implemented, since the Doha Round in 2001, the creation of a free trade area known as AFTA (ASEAN Free Trade Area), whose main goal was the reduction of intra-regional tariffs in order to favor trade. The implementation of different measures aiming to boost up trade and curtail trade costs and tariffs show how important trade is for the development of Asian countries. However, tariffs are not the only trade barriers which prevent countries from getting maximized gains from trade exchanges. As the book Infrastructure and Trade in Asia clearly shows, trade expansion is linked to and dependent upon a wide-range of factors, among which infrastructure is crucial.

The book is divided into nine chapters which deal with different aspects of the interrelation between trade and infrastructure. Infrastructure, both hard and soft, is seen as a key-factor in the expansion of trade in Asia. Throughout the book an axiom seems to emerge: in Asia infrastructure must be implemented in order to reduce trade costs. The ensuing corollary is that the reduction of trade costs encourages the expansion of trade, which in turn fosters economic growth.

The book departs from the consideration that in most Asian countries, some of which are undergoing fast economic growth, infrastructure services are inefficient and insufficient. The inadequateness of infrastructure negatively affects trade in the region, thwarting trade expansion, discouraging foreign investment, cooperative trade agreements and reducing prospective gains from trade.

Some chapters are particularly enlightening in showing the key function played by infrastructure, through the reduction of trade cost, in the economy of Asia. The contribution by J. Weiss, for instance, tackles the impact of infrastructure implementation on trade costs, showing in a clear and exhaustive way that it is possible to lower such costs. The reduction of trade costs leads to closer links between cooperating countries in the same region. Moreover, facilitation of trade by means of infrastructure investments leads to a significant reduction of trade barriers and therefore boosts up trade.

The contribution by Dee, Findlay and Pomfret provides a good insight into how infrastructure concretely impact on the physical movement of products across international borders in Asia. In this study inefficient infrastructure, especially hard infrastructure, is considered as a type of trade barriers which inhibits trade between countries. Therefore, implementation of better transport, roads, ports and more in general the betterment of services related to the international movement of goods significantly enhance trade. The econometric model used to measure the effect of non-trade barriers is helpful in showing how negative can be the repercussions of ineffective infrastructure on trade in a given region.  However, the most interesting part of the contribution by Dee, Findlay and Pomfret- especially for a non-specialized reader- is that dealing with practical implementation of infrastructure. Co-operation agreements, international institutional arrangements which bind co-operating countries in Asia to undertake measures to ameliorate infrastructures are illustrated by considering the major international cooperative organizations, such as APEC and ASEAN.

The high impact of trade costs is also dealt with by P. De in his work on empirical estimates of trade costs for Asia. The authors demonstrate how high the influence of trade costs can be in six specific sectors (electronics, automobile, machinery, textiles and clothing, steel and metal and chemicals) which are strategic for many Asian economies.

While the positive impact of hard infrastructure on trade can be self-evident –better roads and ports facilitate and make faster to move a product from a producing country to another country where the same product has to be marketed- the role of soft infrastructure such as, for instance, legal frameworks conducive to trade is not always intuitively obvious. The relationship between soft infrastructure, trading costs and regional co-operation is insightfully analyzed by H. A. Khan. The author highlights the importance of institutions in delivering hard infrastructure and promoting economic policies favorable to trade enhancement.   The role of soft infrastructure institutions is also studied by P.B. Anand. He analyzes the function that soft infrastructure plays in providing access to water in Asia. Regional co-operation, enforced by stable agreements between countries, emerges as an important factor in simplifying and making more efficient the use of available water resources.  

The contribution by H. Brooks and Fan Zhai devoted to infrastructure financing is perhaps one of crucial issues related to infrastructure implementation. It is certainly a sensitive theme which has been accurately illustrated by the two authors. Their contribution answers a number of essential questions relating to the need of raising capital to finance infrastructure. When confronted with this need governments are left with different options, some are more practicable and cost-effective, other are less feasible and sometimes require resources far beyond the possibilities of developing countries. The intervention of the private sector, though not always practicable, seems a desirable alternative to face the increasing need for capital to be invested in infrastructure implementation.

Despite the high level of analysis and coherence displayed in each chapter and the expertise of  book’s contributors, some aspects of the relationship between infrastructure, trade expansion  and other crucial phenomena which affect Asian economies remain only partially explored. One example is provided by J. Menon and P. Warr in their work on roads and poverty in the context of Lao PDR. The authors investigate the quantitative relationship between roads improvement and the reduction of poverty in the country’s rural areas by employing a general equilibrium model purposely constructed. The authors come to the conclusion that the upgrading of roads would improve the income earning opportunities of rural people through the reduction of the costs of the goods they consume. This would result in a reduction of the incidence of poverty in rural, isolated areas. While there is a direct correlation between the conditions of the road network and the poverty of areas which have no vehicular access, in order to demonstrate that a massive upgrading of roads would benefit local rural people by lowering the incidence of poverty, a qualitative analysis of the multiple factors which determine poverty is also needed. Moreover, when the authors argue that the improvement of the country’s road network would reduce the costs of the goods that the local population consumes, they do not provide enough information about what these goods are. Probably the lack of this information is to be ascribed to the data constraint the authors had to face. There is little doubt that many villages with no access to roads are cut off the market and social facilities such as schools and hospitals. But the effective reduction of poverty in Lao PDR rural areas, especially some regions in Upland Lao, goes far beyond the mere implementation of better roads. Perhaps, the econometric analysis should be combined with a broader approach  within which more factors are taken into consideration.

The upgrading of roads, though from another standpoint, is also dealt with by Ch. Edmonds and M. Fujimara in their work on the road infrastructure, trade and foreign direct investments (FDI) in the Greater Mekong Subregion. The direct connection between the implementation of better roads, -which results into a reduction of transports coasts- and the improvement of both domestic and cross-border trade is very well exposed. What seems less convincing is the link drawn by the authors between better road infrastructure and FDI flows.

In spite of some hasting conclusions and little convincing connections , the book  as a whole has the merit to draw attention on a crucial issue which most countries in Asia have to cope with, providing accurate and clearly exposed  information.