2015 Seoul Conference on Trade & Industry:A New Paradigm for the World Trading System

(@Seoul, Korea on November 10, 2015)

“The Impact of ‘One Belt, One Road’ Initiative

on Changes in the Trading Environmentin East Asia”

Fukunari KimuraChief Economist, Economic Research Institute

for ASEAN and East Asia (ERIA)Dean, Graduate School of Economics, Keio University

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1. The impact of AIIB and “One-belt One-road”

• The context of politics and economics• Opportunity to review the existing system of

infrastructure development• For infrastructure development, “money” is not an

ultimate bottleneck.– Just needs infrastructure investment at the level of 5-8% of

GDP.• The issue is

– How to find projects with large economic impacts and– How to design a bankable portion of a project when the

whole project is financially unviable.

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2. Projects with large economic impacts

• Production networks or the second unbundling calls for logistics/economic infrastructure of different grades.– Just to come into slow global value chains– To participate in production networks– To form industrial agglomerations– To create innovation hubs

• Appropriate quality is needed for infrastructure.• A case: Comprehensive Asia Development Plan 2.0

for ASEAN and East Asia by ERIA

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A new development strategy for ASEAN and East Asiaand the quality of infrastructure

Connectivity

Medium grades High grades Turnpike connectivity

Innovation

Process innov. Product innov.

Under-developed economy before industrialization

Hock up with global value chains (the 1st unbundling):resource-based/labor-intensive industries

Participate in production networks (the 2nd unbundling:Jump-start industrialization with machinery industries

Form industrial agglomeration:Accelerate technology transfer/spillover

Create innovation hub:Urban amenitiesAttract/nurture human resources

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Tier 3Tier 2

Tier 1aTier 1b

[Cambodia, Laos, Myanmar]

[Vietnam, Philippines, Indonesia]

[Thailand, Malaysia, Singapore]

Time

Benefits

Costs

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Life cycle cost policy

Lowest installed cost policy

Appropriate grades forhard and soft infrastructurein Tier 3, Tier 2, and Tier 1

while thinking ofthe life cycle coststructure in time horizon

Positive effects/externalities:e.g., technology transfer,human resource developmentNegative effects/externalities:e.g., environmental/socialImpacts, disaster prevention

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0.854

0.856

0.858

0.860

0.862

ASEAN EAS 16 Source: IDE/ERIA-GSM simulation result.

Economic Impacts of All -All Improvements (2030, Impact Density)

Economic Impacts on GINI (2030)

Geographical simulation model• Economic impacts of

All-All improvements (infrastructure development, NTB reduction, and SEZ development) will be huge.

• Regional disparity will be reduced.

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3. How to design bankable projects

• Infrastructure projects– Market failure due to positive externalities, the

existence of public goods, …– The whole project is often financially unviable.– The public sector should create a bankable project

by taking care of unprofitable portions while keeping market competition.

– Public money will not last; should not leave financially unviable operation/maintenance.

• Discipline for development partners7

Price competitiveness

Non-price competitiveness

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The pool of private players

Community indifference curve II

Community indifference curve I

A

BMinimumtechnicalstandard

Competitive bidding:Should take care of both price andnon-price competitiveness

Operation and maintenance:Built-in mechanism for financingmaintenance fees

Macro discipline for development partners (bilateral, international):At least the disclosure of information on lending activitiesto keep fiscal sustainability, check consistency with development plans, and respect“ownership.”

Micro disciplines on the partnership between public and private:Public private collaboration while keeping a playing field flat for private. - Public entities: SOEs, sovereign wealth funds, governmental financial institutions, … - “Subsidized” investment? (cf. competition in TPP) - Discipline on concessionality (out of DAC rule)

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Discipline imposed on development partners

4. Disseminate a novel development strategy to the world

• East Asia leads the establishment of a novel development strategy with a new international division of labor (production networks, the second unbundling).

• Fully utilize the private dynamism.

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