Asia Needs Infrastructure Investments To Shift To Intra-Regional Trade Focused Economy

As the global economy slows down, Asian nations that have for the past decades relied on exports to drive growth are shifting inward to an economic model that places greater emphasis on domestic and intraregional activity. The move will require huge investments in both hard infrastructure, like roads and railways, as well as soft institutional infrastructure, but the shift will make a difference for the region’s continued growth in the long run.

Many of these Asian countries have concentrated on trading with the European Union and the United States, and since most of these trading activities relied on maritime transport, the region’s infrastructure development have been focusing on seaports, said Dongwoo Ha, the Director of the Transport Division at the United Nations Economic and Social Commission for Asia and the Pacific (U.N. Escap), according to the Bangkok Post.

“Their economies therefore very much concentrate on coastal areas, neglecting many developments that could happen inland. The development of dry port areas would help cluster logistics services, manufacturing and processing around them,” said Ha.

The development of dry ports would also bring development to inland regions, Ha said.

Currently, inland connectivity in the region is less than ideal. According to the Asian Highway Database, around 12,000 kilometers (7,456.45 miles), or 8 percent of the total highway network is still below the minimum standard and requires improvement. The long-planned Trans-Asian Railway, meanwhile, has 10,500 kilometers of “missing links,” most of them in Southeast Asia, which equates to 9 percent of a total length of 117,000 kilometers. Filling in the missing links will cost an estimated $25 billion, according to Escap, a figure that many countries in the region may not be able to afford.

“The biggest challenge at the moment for transport connectivity in the region is financing of infrastructure. There are huge investment requirements, but the developing countries do not have the money to do so,” said Ha, according to the Bangkok Post.

In addition, some of the less developed countries lack the financial mechanisms to attract infrastructure investment, according to the Asian Development Bank (ADB), which prevents sufficient funds from flowing into developing physical connectivity.

“Many countries in the region have been accumulating reserves, but they don’t have a way to actually invest or reinvest those accumulated reserves into the region,” said Alfredo Perdiguero, principal economist of the ADB. “Therefore many of them have decided to use some of their money in the other ways, such as buying U.S. dollar reserves.”

For governments that cannot afford these big-ticket projects, a workable model needs to be created to bring in the private sector, but often a lack of transparency, waste and corruption characterize many governments in the region. In addition, infrastructure development requires long-term investment, and many businesses are more focused on short-term gains.

“One way to have long-term financing is to issue private-sector (corporate) bonds,” said Perdiguero. “We need to have a guarantee mechanism to minimize the risks and to ensure that the cost of their investment will be paid off. The corporate bond market should be developed to become wider with better liquidity.”

In addition to investment in hard infrastructure, appropriate policy reforms and effective regional coordination are necessary to facilitate effective connectivity. Currently, there are many agencies that has often led to confusion in jurisdiction.

“U.N. Escap is trying to create a harmonized framework for the region by providing international conventions and treaties relating to the facilitation of trade and transport,” said Ha. “Once similar regulations are being used in different sub-regions, Asia can be better connected.

Though a lot of progress has been made in terms of increasing connectivity and productivity in Asia, wide gaps still exist between developed and underdeveloped areas. More than 800 million people in Asia are still living in absolute poverty.

In order to make Asia more economically sustainable and resilient in the face of external shocks, increased regional connectivity will have to play a larger role in rebalancing regional economies toward more regional demand and trade-driven growth, the Bangkok Post reported.