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Growing Together - Economic Integration for an Exclusive and Sustainable Asia-pacific Century

Book by ESCAP, 2012

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The Asia-Pacific region’s rapid growth since the 1950s has been supported by a favourable external economic environment and opportunities arising from globalization. But in a dramatically altered post-global financial crisis scenario, the region’s dynamism, which is crucial for the elimination of poverty and hunger and the realization of the Asia-Pacific century, will critically depend on its ability to harness the potential of regional economic integration. Chapter one of the study gives an overview of the key issues in the context of regional economic integration in Asia and the Pacific. The following chapters deal with the process of a broader integrated market. Chapter three looks therefore at the aspect of connectivity, while chapter four is focussing on the financial cooperation aspect. The final chapter concludes with looking at the future - towards an inclusive and sustainable Asia-Pacific century.





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Photo by Warren Field




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FOREWORD


For the global economy, these are difficult times. The world is emerging from a crisis
whose aftershocks continue to resonate – trapping some of the richest economies in
recession and shaking the foundations of one of the world’s major currencies.


Here at ESCAP, there are historical echoes. What is now the Economic and Social
Commission for Asia and the Pacific was founded more than 60 years ago – also in
the aftermath of a global crisis. The countries of Asia and the Pacific established their
new Commission partly to assist them in rebuilding their economies as they came
out of the yoke of colonialism and the Second World War. The newly established
ECAFE, as ESCAP was called then, held a ministerial conference on regional economic
cooperation in 1963 that resolved to set up the Asian Development Bank with the
aim of assisting the countries in the region in rebuilding their economies. Fifty years
later, the Asia-Pacific region is again at a crossroads, on this occasion seeking ways
and means to sustain its dynamism in a dramatically changed global context in the
aftermath of a global financial and economic crisis.


An important change is the fact that, burdened by huge debts and global imbalances,
the advanced economies of the West are no longer able to play the role of engines of
growth for the Asia-Pacific region that they played in the past. Hence, the Asia-Pacific
region has to look for new engines of growth. The secretariat of ESCAP has argued
over the past few years that regional developmental challenges, such as poverty and
wide disparities in social and physical infrastructure, can be turned into opportunities
for sustaining growth in the future. Our “bottom billion”, if lifted out of poverty and
allowed to join the mainstream of the region’s consumers, could help sustain growth
in Asia and the Pacific – and the world at large – for decades to come. Capabilities and
resources vary across countries, giving rise to complementarities and opportunities
for mutually beneficial exchanges which could be unlocked by enhancing regional
economic integration, the topic chosen by the Commission for its sixty-eighth session,
in 2012.


Photo by Warren Field




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Noeleen Heyzer
Under-Secretary-General of the United Nations and
Executive Secretary, United Nations Economic and


Social Commission for Asia and the Pacific


Growing Together articulates a number of proposals that can help the region
exploit its huge untapped potential for regional economic integration.
I hope that they will provide useful inputs for deliberations by ESCAP
members at the sixty-eighth session of the Commission and beyond. With an
integrated regional market complemented by seamless connectivity, mechanisms
for redeploying the region’s savings to close its development gaps, and coordinated
regional responses to address shared vulnerabilities, including those arising from
growing resource scarcities and shrinking carbon space, the Asia-Pacific region
will be in a stronger position not only to sustain its dynamism but also to embrace
a more inclusive and sustainable pattern of development. A dynamic Asia-Pacific
region capable of wiping out the scourge of poverty, hunger and disease will
also provide an effective locomotive for the world economy and an anchor of
stability. The resulting shared prosperity and increased interdependences will foster
peace, turning the twenty-first century into an inclusive and sustainable Asia-Pacific
century.


I believe that this is an important agenda for the region to move ahead with. I know
that many visionary leaders and statesmen from the region have already articulated
similar views over the past few years. The time may have come to move towards action.
As the secretariat of an intergovernmental body representing the Asia-Pacific region,
ESCAP stands ready to assist the region in building a prosperous, inclusive, harmonious,
resilient and sustainable Asia-Pacific century.


I hope that Growing Together will prove valuable not only to the members of the
Commission but also to readers around the world interested in this dynamic region
and its likely future direction.




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Under the overall direction and guidance of Noeleen Heyzer, Under-Secretary
General of the United Nations and Executive Secretary of ESCAP, the preparation
of this study was led by an inter-divisional taskforce of the ESCAP Secretariat,
chaired by Nagesh Kumar, Chief Economist and Director of the Subregional Office
for South and South-West Asia. Other members of the taskforce were Aynul
Hasan, Officer-in-Charge, a.i. of the Macroeconomic Policy and Development
Division; Hongpeng Liu, Chief of the Energy Security and Water Resources Section,
Environment and Development Division; Yuichi Ono, Chief of Disaster Risk Reduction
Section, Information and Communications Technology and Disaster Risk Reduction
Division; Mia Mikic, Economic Affairs Officer, Trade and Investment Division; Iosefa
Maiava, Head of the ESCAP Pacific Office; Nikolay Pomoshchnikov, Director of the
Subregional Office for North and Central Asia; A.S.M. Quium, Economic Affairs
Officer, Transport Division; Kilaparti Ramakrishna, Director of the Subregional Office
for East and North-East Asia; K. V. Ramani, Senior Regional Advisor, Office of the
Executive Secretary; Vanessa Steinmayer, Social Affairs Officer, Social Development
Division; and Jan Smit, Chief of the Statistical Development and Analysis Section,
Statistics Division.


The core team of drafters was coordinated by Nagesh Kumar and Alberto Isgut and
included the following ESCAP staff members: Masato Abe, Witada Anukoonwattaka,
Sudip Ranjan Basu, Tiziana Bonapace, Abhijeet Deshpande, Yann Duval, Preminda
Fernando, Clovis Freire, Maren Jimenez, Mia Mikic, Margit Molnar, Aneta Nikolova,
Yuichi Ono, A.S.M. Quium, Krishnamurthy Ramanathan, Heini Salonen, Vanessa
Steinmayer, Donovan Storey, Yusuke Tateno, Sergey Tulinov, Katinka Weinberger,
Upali Wickramasinghe, and Jenny Yamamoto. The following ESCAP staff members
provided inputs and made comments and suggestions: Shuvojit Banerjee, Pierre
Chartier, Sytske Claassen, Jeong Dae Lee, Kohji Iwakami, Nobuko Kajiura, Srisakul
Kanjanabus, Jorge Martinez-Navarrete, Lys Mehou-Loko, Kenan Mogultay, Oliver
Paddison, Pisit Puapan, Hitomi Rankine, Raj Jain Sandeep, Patcharin Sequeira, Harumi
Shibata, Vatcharin Sirimaneetham, and Charlotte Young. The team in charge of the
production process of the volume included the following ESCAP staff members:
Sopitsuda Chantawong, Metinee Hunkosol, Achara Jantarasaengaram, Chawarin
Klongdee, Pannipa Ongwisedpaiboon, Anong Pattanathanes, Kiatkanid Pongpanich,
Woranut Sompitayanurak, Amornrut Supornsinchai and Sutinee Yeamkitpibul.


ACKNOWLEDGEMENTS




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The following experts prepared technical background papers for the study:
Suthiphand Chirathivat, Associate Professor, Faculty of Economics, Chulalongkorn
University, Thailand; John Gilbert, Professor, Department of Economics & Finance,
Utah State University, USA; Saman Kelegama, Executive Director, Institute of
Policy Studies of Sri Lanka, Sri Lanka; Galina Kostyunina, Professor of International
Economic Relations, Moscow State Institute of International Relations, Russian
Federation; Satoru Kumagai, Director, Economic Integration Studies Group, Institute
of Developing Economies, Japan; Lim Mah-Hui, Senior Fellow, Socio-economic &
Environmental Research Institute, Malaysia; Biman Prasad, Professor of Economics
and Dean of the Faculty of Business and Economics, University of the South Pacific,
Fiji; Shujiro Urata, Professor, Waseda University, Japan.


The report benefited from comments and suggestions from participants to the
Expert Group Meeting held in Bangkok on 9 March 2012: Ramgopal Agarwala,
Distinguished Fellow, Research and Information System for Developing Countries,
India; Rashid Amjad, Vice Chancellor, Pakistan Institute of Development Economics,
Pakistan; Suthiphand Chirathivat, Associate Professor, Chayodom Sabhasri, Associate
Professor and Piti Srisaengnam, Faculty of Economics, Chulalongkorn University,
Thailand; Saman Kelegama, Executive Director, Institute of Policy Studies of Sri
Lanka, Sri Lanka; K. Kesavapany, Director, Institute of Southeast Asian Studies,
Singapore; Vladimir Krasnogorskiy, Head of International and Regional Programmes,
Department of the International Institute of Energy Policy and Diplomacy, MGIMO
University, Russian Federation; Latifah Merican-Cheong, Advisor, Chairman’s Office,
Securities Commission Malaysia, Malaysia; Biman Prasad, Professor of Economics and
Dean of the Faculty of Business and Economics, University of the South Pacific,
Fiji; Mohammed Rahmatullah, Senior Visiting Fellow of Centre for Policy Dialogue,
Bangladesh and Former Director of Transport Division of ESCAP; Hermanto Siregar,
Professor, Faculty of Economics and Management, Bogor Agricultural University,
Indonesia; Craig Warren Smith, Senior Fellow, Centre for Ethics of Science and
Technology, Chulalongkorn University, Thailand; Jin Kyo Suh, Senior Research
Fellow, Korea Institute for International Economic Policy, Republic of Korea; Naoyuki
Yoshino, Professor, Department of Economics, Keio University, Japan; Wang Yuzhu,
Associate Professor, Institute of Asia-Pacific Studies, Chinese Academy of Social
Sciences, China; Kazunobu Hayakawa, Researcher, Bangkok Research Center, Japan
External Trade Organization, Thailand.


Substantive editing of the manuscript was performed by Peter Stalker. Alan Cooper,
Editorial Unit of ESCAP edited the manuscript. The graphic design was created
by Marie-Ange Sylvain-Holmgren, layout by Salapol Ansusinha, and printing were
provided by Advanced Printing Service.




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Page


Foreword ......................................................................................................................................................................... iii


Acknowledgements .................................................................................................................................................. v


Contents .......................................................................................................................................................................... vii


Abbreviations ............................................................................................................................................................... xiii


Explanatory notes .................................................................................................................................................... xvii


Executive Summary ................................................................................................................................................. xix


Chapter One. The case for regional economic integration in Asia and the Pacific 2


Re-emerging Asia and the Pacific ........................................................................................................ 2
A challenging new context for the region ................................................................................... 4
Regional integration for an inclusive and sustainable Asia-Pacific century .................. 7
Conditions for fruitful integration ......................................................................................................... 9
Lessons from global experience ............................................................................................................ 10
Emerging regional economic integration in Asia and the Pacific ..................................... 12
Strengths, weaknesses, opportunities and threats of broader regionalism .................. 15
Key elements of regional economic integration .......................................................................... 16


Chapter Two. Towards a broader integrated market ................................................... 20


Trading opportunities ................................................................................................................................... 20
Barriers to trade ........................................................................................................................................... 26
Expanding trade in commercial services ........................................................................................ 29
Movement of people ................................................................................................................................... 33
Foreign direct investment ......................................................................................................................... 37
A fragmented region ................................................................................................................................... 40
In search for a broader framework for regional integration ................................................ 49
Reaching out across the region ........................................................................................................... 57


Chapter Three. Building seamless connectivity ............................................................. 62


Transport .............................................................................................................................................................. 63
Connectivity for energy security ............ ............................................................................................... 72
Information and communications technology and digital connectivity ........................ 80
Moving towards an integrated regional infrastructure ........................................................... 85


CONTENTS




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CONTENTS (continued)




Chapter Four. Enhancing regional financial cooperation ............................................ 92


Financial cooperation ................................................................................................................................... 93
Financing infrastructure development ................................................................................................ 95
Initiatives for regional financial cooperation in Asia and the Pacific ............................... 99
Towards a development-friendly regional financial architecture for Asia
and the Pacific ............................................................................................................................................. 104


Chapter Five. Economic Cooperation for addressing shared vulnerabilities
and risks ....................................................................................................... 112


Food security .................................................................................................................................................... 112
Dealing with disasters .................................................................................................................................. 117
Pressures on natural resources and sustainability ....................................................................... 123
Addressing sustainability risks through technological cooperation ................................... 128
Addressing social risks ................................................................................................................................. 129


Chapter Six. Towards an inclusive and sustainable Asia-Pacific century ................ 136


Institutional architecture ............................................................................................................................. 137
Secretariat ........................................................................................................................................................... 138
The way forward ............................................................................................................................................ 138


Annex: Technical notes ........................................................................................................ 140


References ............................................................................................................................ 146


Page




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FIGURES


Page


I.1. Asia-Pacific leaders’ statements on broader regionalism ........................................................ 14
II.1. Key RTAs in each of the five subregions of Asia and the Pacific .................................... 40
II.2. Trans-Pacific Partnership ............................................................................................................................. 44
II.3. ASEAN Single Window project implementation .......................................................................... 48
II.4. Achieving paperless trade in Asia and the Pacific ..................................................................... 49
II.5. The Greater Mekong Subregion (GMS) Agreement on Facilitation of
Cross-Border Transport of Goods and People .......................................................................... 50
II.6. Central Asia Regional Economic Cooperation (CAREC) Transport and
Trade Facilitation Strategy ..................................................................................................................... 51
III.1. Regional Strategic Framework for Facilitation of International Road Transport ......... 71
III.2. SAARC Energy Ring ....................................................................................................................................... 75
III.3. Asian and Pacific Energy Forum ........................................................................................................... 80
III.4. Asian Energy Highway ................................................................................................................................. 81
III.5. Intraregional connectivity in Europe ................................................................................................... 86
III.6. Sharing railway and telecommunications infrastructure in India ........................................ 87
V.1. Climate change and disasters ................................................................................................................. 119
V.2. Regional cooperation on early warning systems for disaster risk reduction .............. 122
V.3. Innovation and technology transfer .................................................................................................... 126


BOXES




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Page


I.1. Real rates of growth of GDP, Asia-Pacific economies and advanced economies .... 3
I.2. Country groups on and off track for the MDGs ......................................................................... 5
I.3. The Asia-Pacific share of the developing world’s deprived people ................................. 6
I.4. Infrastructure index, selected economies ......................................................................................... 8
I.5. Performance indicators of Cambodia, Lao People’s Democratic Republic
and Viet Nam, in comparison with ASEAN, 1992-2010 ........................................................ 12
II.1. Destination of Asia-Pacific exports, 2002-2016 .............................................................................. 21
II.2. The ten most promising export markets for Asia-Pacific countries ................................. 23
II.3. Export opportunities, by country .......................................................................................................... 25
II.4. Policy-related factors in trade costs .................................................................................................... 27
II.5. Agricultural and manufacturing non-tariff comprehensive trade costs
between selected economies and Japan .................................................................................... 29
II.6. Exports of commercial services and merchandise, Asia-Pacific, 2000-2010 .................. 30
II.7. Changes in the share of commercial services exports, Asia and the Pacific
and the world, 2000-2010 ..................................................................................................................... 31
II.8. Number of international students in selected Asia-pacific economies, 2009 ............. 33
II.9. Top recipients of FDI inflows in Asia and the Pacific in 2010 and
FDI outflows from these countries .................................................................................................. 38
II.10. Network of trade agreement between countries in Asia and the Pacific ................... 46
II.11. Scenarios A and B for trade liberalization in AFTA, SAFTA, ECOTA
and PACER-Plus ........................................................................................................................................... 52
II.12. Long-run welfare gains for four subregional agreements, including trade
facilitation ........................................................................................................................................................ 53
II.13. CEPEA as a potential nucleus of a broader integrated market .......................................... 54
II.14. Potential benefits of expanding ASEAN Free Trade Area to ASEAN+6 (CEPEA) ....... 55
II.15. Starting afresh through the broadest and most comprehensive
possible agreement ................................................................................................................................... 55
II.16. Welfare gains from region-wide liberalization ............................................................................... 56
III.1. UNCTAD liner shipping connectivity index, 2006 and 2011 ................................................. 64
III.2. Asian Highway network .............................................................................................................................. 67
III.3. Trans-Asian Railway network .................................................................................................................... 69
III.4. Energy trade in the Asia-Pacific region ............................................................................................. 74
III.5. The proposed Trans-ASEAN gas pipeline grid .............................................................................. 77
III.6. Proposed ASEAN Power grid .................................................................................................................. 78
III.7. Relationships between connectivity, usage prices and income,
selected economies, 2009 ..................................................................................................................... 83
III.8. Submarine telecommunications cables landing in Asia and the Pacific ........................ 84
IV.1. Credit spreads and bond premia for five-year term loans or issues,
for different ratings of borrowers or issuers, January 2012 .............................................. 98


FIGURES




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TABLES


IV.2. Public-private partnerships as a percentage of fixed capital formation,
selected countries ...................................................................................................................................... 100
IV.3. A possible scheme of revenue bonds ............................................................................................... 101
IV.4. Returns on selected infrastructure assets and major treasury bonds
over 2002-2007 ............................................................................................................................................ 106
V.1. Fiji, annual fluctuations in GDP relative to the incidence of disasters,
1980-2008 ....................................................................................................................................................... 120
V.2. Primary energy use in Asia and the Pacific and the rest of the world,
1971-2008 ........................................................................................................................................................ 123
V.3. Availability of water resources per capita, by region and subregion, 2008 ................ 124
V.4. Domestic material consumption in Asia and the Pacific and
the rest of the world, 1970-2005 ...................................................................................................... 125
V.5. Shares of main material categories in Asia and the Pacific, 1970 and 2005 ............. 125
V.6. Social exclusion in 1990 and foreign direct investment over 2003-2010 ...................... 131


FIGURES (continued)


Page




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Page


I.1. Transitions from middle-income to advanced-country levels ............................................... 11
II.1. Distribution of merchandise exports, by region, 2000 and 2010 ...................................... 21
II.2. Distribution of Asia-Pacific merchandise exports, by subregion,
2000 and 2010 ............................................................................................................................................ 22
II.3. Export opportunities indicator, for the average country in Asia-Pacific
subregions and selected regions of the world ........................................................................ 24
II.4. Non-tariff intraregional and extraregional trade costs in Asia and the Pacific,
2007-2009 ........................................................................................................................................................ 28
II.5. Intraregional trade in commercial services, selected exporters and
importers, 2008 ........................................................................................................................................... 31
II.6. Tourism arrivals, selected Asia-Pacific countries, 2010 ............................................................... 32
II.7. Bilateral remittances received by the Asia-Pacific subregions, 2010 ................................. 35
II.8. Average FDI flows to and from Asia-Pacific countries and their global shares,
1996-2000 and 2006-2010 ..................................................................................................................... 37
II.9. CEPEA in relation to the EU and NAFTA in 2011 ....................................................................... 54
II.10. Summary of welfare gains in the simulations .............................................................................. 56
III.1. Liner shipping connectivity index and container traffic for selected countries ........ 65
III.2. Missing links in the Trans-Asian Railway network, end 2011 ............................................... 68
III.3. Status of accession of ESCAP regional members to the seven international
conventions related to land transport facilitation listed in Commission
resolution 48/11, as of 14 February 2012 ..................................................................................... 70
III.4. Simulation model of benefits from three Asian Highway routes ...................................... 73
IV.1. Interdependence in portfolio capital investment in Asia and the Pacific .................... 94
IV.2. Comparison of selected regional and national development banks ............................... 97
IV.3. Access to funds under the Chiang Mai Initiative Multilateralization and
short-term liabilities, 2010 ...................................................................................................................... 102
IV.4. Investing in infrastructure through funds and listed assets .................................................. 107
V.1. Deaths and economic damages and losses due to recent mega-disasters in
Asia and the Pacific .................................................................................................................................. 118


TABLES




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ABBREVIATIONS


ABF Asian Bond Fund
ABMI Asian Bond Market Initiative
ACD Asian Cooperation Dialogue
ACRAA Association of Credit Rating Agencies in Asia
ACU Asian Clearing Union
ADB Asian Development Bank
ADBI Asian Development Bank Institute
AERR ASEAN Emergency Rice Reserve
AFAS ASEAN Framework Agreement on Trade in Services
AFTA ASEAN Free Trade Area
AH Asian Highway
AIA ASEAN Investment Area
AICO ASEAN Industrial Cooperation
AIF ASEAN Infrastructure Fund
AIFS ASEAN Integrated Food Security Framework
AMRO ASEAN+3 Macroeconomic Research Office
APAARI Asia-Pacific Association of Agricultural Research Institutions
APCTT Asian and Pacific Centre for Transfer of Technology
APEA Asia-Pacific Economic Area
APEC Asia-Pacific Economic Cooperation
APES Asia-Pacific Economic Summit
APTA Asia-Pacific Trade Agreement
APTEC Asia-Pacific Trade and Economic Cooperation Agreement
APTECH Asia-Pacific Technology Development Council
APTERR ASEAN+3 Emergency Rice Reserve
ASEAN Association of Southeast Asian Nations
ASEM Asia-Europe Meeting
ASW ASEAN Single Window
ATIGA ASEAN Trade in Goods Agreement
BIBF Bangkok International Banking Facilities
BIMSTEC Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation
BIS Bank for International Settlements
BNDES Brazilian Development Bank
BRICS Brazil, Russian Federation, India, China, and South Africa
BTA bilateral trade agreement
CAC Central Asia – Center
CAF Development Bank of Latin America
CAREC Central Asia Regional Economic Cooperation
CARICOM Caribbean Community
CBTA Cross-border Transport Agreement
CDM Clean Development Mechanism




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CEPA Closer Economic Partnership Agreements
CEPEA Comprehensive Economic Partnership for East Asia
CEPT Common Effective Preferential Tariff
CGE Computable general equilibrium
CGIF Credit Guarantee and Investment Facility
CIS Commonwealth of Independent States
CISFTA CIS Free Trade Agreement
CMIM Chiang Mai Initiative Multilateralization
COMESA Common Market for Eastern and Southern Africa
CSIRO Commonwealth Scientific and Industrial Research Organisation
EAERR ASEAN East Asia Emergency Rice Reserve
EAFTA East Asia Free Trade Agreement
EAS East Asia Summit
EBRD European Bank for Reconstruction and Development
ECAFE Economic Commission for Asia and the Far East
ECFA Economic Cooperation Framework Agreement
ECO Economic Cooperation Organization
ECOTA Economic Cooperation Organization Trade Agreement
EIA Energy Information Administration
EIB European Investment Bank
EIU Economist Intelligence Unit
EMEAP Executives Meeting of East Asia Pacific Central Banks
ENEA East and North-East Asia
EPS Employment Permit System
ESCAP United Nations, Economic and Social Commission for Asia and the Pacific
ESMAP Energy Sector Management Assistance Program
EST environmentally sustainable technologies
EU European Union
EurAsEC Eurasian Economic Community
FAO Food and Agriculture Organization of the United Nations
FDI foreign direct investment
FTA free trade agreement
G-20 Group of Twenty
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
GCC Gulf Cooperation Council
GDP gross domestic product
GHz gigahertz
GMS Greater Mekong Subregion
GMS-FRETA Greater Mekong Subregion Freight Transport Association
HIV human immunodeficiency virus
IATA International Air Transport Association
ICAO International Civil Aviation Organization


ABBREVIATIONS (continued)




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ICT information and communications technology
IDE Institute of Developing Economies
IDI ICT Development Index
IEA International Energy Agency
IFA Intergovernmental Framework Agreement
IFC International Financial Corporation
IFSL International Financial Services London
IMF International Monetary Fund
INSTC International North-South Transport Corridor
IPB ICT Price Basket
IPCC Interngovernmental Panel on Climate Change
IRRI International Rice Research Institute
IT information technology
ITU International Telecommunication Union
KIEP Korea International Economic Policy Institute
kW kilowatt
LCS Land Border Customs Station
LCT Low Carbon Technology
LDC least developed country
LLDC landlocked developing country
LNG liquefied natural gas
Mbit/s mega bits per second
MDG Millennium Development Goals
MERCOSUR Common Market of the South
MFN most favoured nation
MNE multinational enterprise
Mtoe million tons of oil equivalent
NAFTA North American Free Trade Agreement
NCPCSL National Cleaner Production Centre of Sri Lanka
NDF non-deliverable forward
NESDB National Economic and Social Development Board of Thailand
NIE newly industrializing economy
NSW National Single Window
NTM non-tariff measure
OCD Office of Civil Defense
OCR ordinary capital resources
OECD Organisation for Economic Co-operation and Development
PACER Pacific Agreement on Closer Economic Relations
PICTA Pacific Island Countries Trade Agreement
PICTs Pacific island countries and territories
PIF Pacific Islands Forum
PPP purchasing power parity
PPPs public-private partnerships


ABBREVIATIONS (continued)




xvi


RCM Regional Coordination Mechanism
REITs real estate investment trust funds
RGDP regional gross domestic product
RIMES Regional Integrated Multi-Hazard Early Warning System for Africa and Asia
RMB Chinese yuan
ROO rules of origin
RTA regional trade agreement
SAARC South Asian Association for Regional Cooperation
SAARCFINANCE Network of Governors and Finance Secretaries of the SAARC region
SADC Southern African Development Community
SAFTA South Asian Free Trade Area
SARSO South Asian Regional Standards Organisation
SATIS South Asia Agreement on Trade in Services
SDF SAARC Development Fund
SDR special drawing right
SDT special and differential treatment
SEACEN Southeast Asian Central Banks
SEANZA Southeast Asia, New Zealand, Australia
SIDS small island developing States
SKRL Singapore-Kunming Rail Link
SMEs small- and medium-sized enterprises
SPA-FS Strategic Plan of Action on Food Security
SPC Secretariat of the Pacific Community
SREX Special Report on Managing the Risks of Extreme Events and Disasters to


Advance Climate Change Adaptation
TAGP Trans-ASEAN Gas Pipeline Project
TBT technical barriers to trade
TNC transnational corporation
TPP Trans-Pacific Partnership
TTFS transport and trade facilitation strategy
UNCSD United Nations Conference on Sustainable Development
UNCTAD United Nations Conference on Trade and Development
UNDP United Nations Development Programme
UNEP United Nations Environment Programme
UNESCO United Nations Educational, Scientific and Cultural Organization
UNISDR United Nations International Strategy for Disaster Reduction
UNNexT United Nations Network of Experts for Paperless Trade for Asia and the Pacific
UNWTO United Nations World Tourism Organization
WB World Bank
WMO World Meteorological Organization
WTO World Trade Organization


ABBREVIATIONS (continued)




xvii


EXPLANATORY NOTES


The designations employed and the presentation of the material in this publication
do not imply the expression of any opinion whatsoever on the part of the Secretariat
of the United Nations concerning the legal status of any country, territory, city or
area, or of its authorities, or concerning the delimitation of its frontiers or boundaries.


Mention of firm names and commercial products does not imply the endorsement
of the United Nations.


The term “ESCAP region” in this publication refers to the group of countries and
territories/areas comprising Afghanistan; American Samoa; Armenia; Australia;
Azerbaijan; Bangladesh; Bhutan; Brunei Darussalam; Cambodia; China; Cook Islands;
Democratic People’s Republic of Korea; Fiji; French Polynesia; Georgia; Guam; Hong
Kong, China; India; Indonesia; Iran (Islamic Republic of ); Japan; Kazakhstan; Kiribati;
Kyrgyzstan; Lao People’s Democratic Republic; Macao, China; Malaysia; Maldives;
Marshall Islands; Micronesia (Federated States of ); Mongolia; Myanmar; Nauru;
Nepal; New Caledonia; New Zealand; Niue; Northern Mariana Islands; Pakistan;
Palau; Papua New Guinea; Philippines; Republic of Korea; Russian Federation; Samoa;
Singapore; Solomon Islands; Sri Lanka; Tajikistan; Thailand; Timor-Leste; Tonga;
Turkey; Turkmenistan; Tuvalu; Uzbekistan; Vanuatu; and Viet Nam.


The term “developing ESCAP region” in this publication excludes Australia, Japan,
New Zealand and North and Central Asian economies from the above-mentioned
grouping. Non-regional members of ESCAP are France, Netherlands, United Kingdom
of Great Britain and Northern Ireland and United States of America.


The term “East and North-East Asia” in this publication refers collectively to China;
Hong Kong, China; Democratic People’s Republic of Korea; Japan; Macao, China;
Mongolia and Republic of Korea.


The term “North and Central Asia” in this publication refers collectively to Armenia,
Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Russian Federation, Tajikistan,
Turkmenistan and Uzbekistan.


The term “Central Asian countries” in this publication refers collectively to Armenia,
Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and
Uzbekistan.




xviii


The term “Pacific” in this publication refers collectively to American Samoa, Australia,
Cook Islands, Fiji, French Polynesia, Guam, Kiribati, Marshall Islands, Micronesia
(Federated States of ), Nauru, New Caledonia, New Zealand, Niue, Northern Mariana
Islands, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu and
Vanuatu.


The term “South and South-West Asia” in this publication refers collectively to
Afghanistan, Bangladesh, Bhutan, India, Islamic Republic of Iran, Maldives, Nepal,
Pakistan, Sri Lanka and Turkey.


The term “South-East Asia” in this publication refers collectively to Brunei
Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia,
Myanmar, Philippines, Singapore, Thailand, Timor-Leste and Viet Nam.


The term “Countries with Special Needs” in this publication refers collectively to least
developed countries (LDCs), landlocked developing countries (LLDCs) and small
island developing States (SIDSs) in the Asia-Pacific region. It includes (i) 13 LDCs:
Afghanistan,* Bangladesh, Bhutan,* Cambodia, Kiribati,** Lao People’s Democratic
Republic,* Myanmar, Nepal,* Samoa,** Solomon Islands,** Timor-Leste,** Tuvalu**
and Vanuatu** (*also LLDC, **also SIDS); (ii) 12 LLDCs: Afghanistan,* Armenia,
Azerbaijan, Bhutan,* Kazakhstan, Kyrgyzstan, Lao People’s Democratic Republic,*
Mongolia, Nepal,* Tajikistan, Turkmenistan and Uzbekistan (*also LDC); and (iii) 16
SIDSs: Cook Islands, Fiji, Kiribati,* Maldives, Marshall Islands, Micronesia (Federated
States of ), Nauru, Niue, Palau, Papua New Guinea, Samoa,* Solomon Islands,*
Timor-Leste,* Tonga, Tuvalu* and Vanuatu* (*also LDC).


Values are in United States dollars unless specified otherwise.


The term “billion” signifies a thousand million. The term “trillion” signifies a million
million.


Reference to “tons” indicates metric tons.


In the tables, two dots (..) indicate that data are not available or are not separately
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Executive Summary


Growing together – Economic integration for
an inclusive and sustainable Asia-Pacific century


The Asia-Pacific region’s rapid growth since the 1950s has been supported by a favourable
external economic environment and opportunities arising from globalization. But in a
dramatically altered post-global financial crisis scenario, the region’s dynamism, which
is crucial for the elimination of poverty and hunger and the realization of the Asia-Pacific
century, will critically depend on its ability to harness the potential of regional economic
integration.


In the light of the many complementarities arising from its diversity, the region, a late starter in
regionalism, has many underexploited opportunities for mutually beneficial regional integration.
Regional economic integration can also assist in making regional development more balanced,
with the lagging economies receiving a boost through a stronger connectivity and integration with
economic growth poles, such as China and India. Apart from fostering peace, such cooperation
could also help the region address shared vulnerabilities and risks and exercise its influence in
global economic governance in a way that is commensurate with its rising economic weight.


Though the economic rise of Asia and the Pacific may seem to be a modern phenomenon, it is in
fact a re-emergence. The Asia-Pacific region accounted for 56 per cent of global gross domestic
product (GDP) up to 1820, but its share declined to 16 per cent by 1950. Subsequently, it started to
regain its position in the world economy, first through Japan’s rapid growth, later through the rise
of East and South-East Asia’s newly industrializing economies, and more recently by the rise of its
two most populous countries, China and India. As a result of this dynamism, long-term projections
suggest that the region’s share in the global economy could exceed 50 per cent by 2050, as it was
until 200 years ago.


Such an optimistic outlook, however, must be viewed with caution. In a dramatically altered global
context, Western markets face an uncertain outlook and are unlikely to remain the region’s main
engines of growth in the wake of the 2008-2009 financial crisis. Sustaining growth in the region
will thus require Asia-Pacific economies to rely more on domestic and regional sources of demand.


One of the most promising reservoirs of domestic demand is the region’s “bottom billion” people
currently living in poverty. But if they are to join the mainstream of Asia-Pacific consumers, their
purchasing power must be boosted. This will require faster progress towards achieving the
Millennium Development Goals through broad-based investments in education, health services,
social protection and basic infrastructure, which will facilitate access to employment and business




xx


opportunities for all social groups besides generating new aggregate demand to sustain growth
and inclusive development.


The Asia-Pacific region has a number of advantages that should help it accelerate economic
integration. One is a shared history and culture. Economies in the region are also characterized
by complementarities arising from their very different levels of development, endowments
of natural resources, capital, and workforces. But the most important factor for the success of
regional economic integration is the presence of large and growing markets. The emergence of
vast middle classes with growing incomes and purchasing power in the most dynamic Asia-Pacific
economies is leading to the creation of the world’s largest markets for a growing range of products
and services, from mobile telephones to motor cars to jet airplanes. Such increasing demand is
leading to rapid growth in intraregional trade in Asia and the Pacific, making regional economic
integration not only increasingly viable but also highly desirable.


Emerging patterns of regional economic integration


Regionalism became a dominant trend in the world economy after the formation of the Single
European Market in 1992 and the implementation of the North American Free Trade Agreement in
1994. These regional trade agreements (RTAs) were followed by many others. Currently, some 300
RTAs, including bilateral free trade agreements (FTAs), are in force worldwide, and a significant part
of world trade is conducted on a preferential basis rather than on a most-favoured-nation basis.


Despite two early initiatives – the Asia-Pacific Trade Agreement (APTA), signed in 1975, and the
Asian Clearing Union, set up in 1974 – both under the auspices of ESCAP, the Asia-Pacific region is a
late starter in regional economic integration. However, the rise of regionalism as a dominant trend
in the world economy in the 1990s and the Asian crisis of 1997, which highlighted the regional
economic interdependence, led to a profound rethinking about the importance of regional
economic cooperation. Since then, the Chiang Mai Initiative for monetary cooperation and a
number of other initiatives towards regional economic integration have been taken.


Examples of initiatives to foster regional economic integration in Asia and the Pacific include the
ASEAN Free Trade Agreement (AFTA), which advanced its year of implementation to 2002 from
2008, and the establishment of the ASEAN Economic Community planned for 2015. Similarly,
the South Asian Association for Regional Cooperation (SAARC) adopted in 2004 the Agreement
on South Asian Free Trade (SAFTA), which is to be implemented over 10 years from 2006. Other
initiatives include the Economic Cooperation Organization Trade Agreement (ECOTA) of 2003 and
the Pacific Island Countries Trade Agreement (PICTA) of 2001. These subregional groupings are
complemented by numerous bilateral FTAs.


Another indication of the growing recognition of broader regional economic integration in Asia
and the Pacific is the fact that many leaders and statesmen of the region have articulated their
visions of a broader Asia-Pacific community.


Key elements of a regional economic integration scheme


Regional economic integration will require a long-term vision of building an economic community
of Asia-Pacific supported by the necessary frameworks and institutions. This would involve four
key elements:


• An integrated Asia-Pacific market – This would involve coalescing numerous bilateral and
subregional agreements into broader arrangements open to all Asia-Pacific countries.


• Seamless physical connectivity – Through better transport, energy and information and
communications technology (ICT) links and the adoption of best practices in trade.




xxi


• Financial cooperation – To ensure the optimal use of the region’s resources for mutual benefit.


• Addressing shared vulnerabilities and risks – Mutual cooperation will enable countries to
respond more effectively to concerns about energy and food security, disasters, pressures on
natural resources, social exclusion and rising inequality.


Towards a broader integrated market


Asia and the Pacific is the world’s most dynamic trading region. Between 2000 and 2010, global
trade increased by an annual average of 9 per cent, while trade within the region expanded by12
per cent. Intraregional exports have far outpace those to Europe, North America and the rest of
the world, and between 2010 and 2016, they are expected to rise from $3.1 trillion to as much
as $6.8 trillion. If current trends continue, Asia and the Pacific would become the world’s largest
market in 2012.


Assessing export opportunities


Growing markets provide opportunities for both current and new exporters across the world. In
order to assess the prospects and desirability of further trade liberalization within the Asia-Pacific
region, a new “export opportunities indicator” developed by ESCAP identifies the most promising
export markets in the world for each country. The results show that China is among the top 10
export markets in the world for all the countries in Asia and the Pacific. Other top 10 export markets
for countries in the region include India (for 44 countries), the Republic of Korea (for 39 countries),
the Russian Federation (for 32 countries) and Turkey (for 28 countries). It should be noted that
the opportunities within Asia and the Pacific are greater than those in Europe and North America
combined. This indicator also shows that, with the exception of East and North-East Asia, Asia-
Pacific countries have greater export potential in other subregions than in their own subregion.
This observation contrasts with the approach to regional economic integration adopted so far,
which remains essentially subregional and fails to recognize the often greater potential of trade
expansion across the subregions. Furthermore, intraregional trade has not been able to exploit
the benefits of geographical proximity as the costs of intraregional trade are often much higher
than those of exporting to the traditional markets in the West.


Trade in services


Exports of commercial services are becoming increasingly important for Asia and the Pacific.
Between 2000 and 2010, the region increased its contribution to world services exports from 22
to 29 per cent. In addition, available data suggest that the region is becoming a major market for
itself. This is to be expected, partly, as the result of the increasing purchasing power of the region’s
emerging middle class, which can increasingly afford, for instance, the expense of travelling to
other countries for tourism or study. In fact, recent data show that about two thirds of the arrivals
to the top 10 tourism markets in the region originate from other countries within the region and
that the large majority of international students studying in the region’s universities also come
from the region.


Movement of people


Another aspect of growing trade in services is migration. Migration flows between countries in the
region could be very effective in tackling structural demand-supply imbalances between countries
of the region, contributing to economic growth and a reduction in region-wide disparities in
the distribution of labour income. International migration also provides a source of income for
members of the migrant’s household left behind, as well as a source of foreign exchange for the
sending countries. In fact, the share of remittances originating in the region itself is significant,
averaging about 34 per cent of the total remittances received by countries in the region in2010.




xxii


Many of the labour flows within the region are irregular, reflecting the absence of adequate legal
frameworks to enable migration through formal channels. The absence of such formal channels
leads to increases in the costs of migration, for instance, through more onerous recruitment
processes. In order to regularize migration flows and maximize the benefits of labour migration,
a number of countries have concluded bilateral agreements covering recruitment, conditions of
employment and measures to protect the migrants.


Foreign direct investment


Foreign direct investment (FDI) flows to the Asia-Pacific region have grown tremendously, with
the region now accounting for a quarter of global inflows, but FDI outflows from the region have
expanded even more impressively with the emergence of economies such as China, India, Malaysia
and Singapore joining conventional sources of FDI, such as Australia, Japan and the Republic of
Korea.


A fragmented region


The extent of non-tariff and behind-the-border barriers to trade suggests that there is still
considerable scope for further trade liberalization in the region, but in the light of the limited
progress in multilateral trade negotiations since the conclusion of the Uruguay Round in 1995,
most countries in the region have turned to bilateral or subregional free trade agreements. Asia-
Pacific economies are parties to more than 140 agreements and are contemplating many more.
This activism signals a preference for deeper integration among countries in the region. However,
the overall effect is a tangle of overlapping agreements which has been likened to a noodle bowl.
Its complexity adds to the cost of trade and does not provide a seamless or integrated regional
market.


Bilateral and subregional agreements help boost trade, but because of their different scope,
coverage and rules, they do not create a seamless, region-wide market and do not allow synergies
to be exploited. What is needed is not to deepen integration within subregions but to foster trade
links across subregions.


Towards broader regionalism


This study suggests three routes for achieving a broader integrated market of Asia-Pacific region.


An Asia-Pacific Economic Area (APEA): The first option is to create APEA as a framework to join
existing subregional groupings to exchange trade preferences between members, in the manner
of the European Economic Space Agreement that combines the Single Market of the European
Union with members of the European Free Trade Association. The major subregional groupings
that could be covered in APEA are: (i) ECOTA, (ii) AFTA, (iii) SAFTA, and (iv) the proposed Pacific
Agreement on Closer Economic Relations-Plus, which encompasses PICTA plus Australia and New
Zealand. Overall, these four trade agreements include 43 of the 51 Asia-Pacific economies.


A modelling exercise conducted by ESCAP suggests that member countries would gain substan-
tially if the four groupings were joined in APEA. However, this approach may be complicated by
the fact that the four subregional groupings are at different stages of their evolution. Furthermore,
a major limitation of this approach is that some of the region’s largest markets, such as China,
Japan and the Republic of Korea, would remain excluded. In any event, there is a tremendous
potential of mutual learning across the subregional groupings of the region and sharing their
best practices. Hence, a consultative committee of subregional groupings could be constituted
to facilitate that mutual learning.




xxiii


Building on the ASEAN+ approach: The ASEAN dialogue process has contributed towards a
discussion of broader regional arrangements. Two key proposals are the ASEAN framework include
an East Asia Free Trade Area (EAFTA) among ASEAN+3 countries, and the Comprehensive Economic
Partnership for East Asia (CEPEA) originating in the East Asia Summit which additionally includes
Australia, India and New Zealand (ASEAN+6). CEPEA, the more inclusive of the two approaches,
could be treated as the nucleus of an incipient Asia-Pacific RTA to which other countries could
accede to.


The advantage of this approach is that a feasibility study and some subsequent exploration in
ASEAN+ working groups have been completed. All six dialogue partners have concluded ASEAN+1
free trade agreements that can be easily multilateralized with common rules of origin. Combining
the region’s growth poles, China and India, with the advanced economies of Japan and Australia
and the Republic of Korea and those of ASEAN could produce a regional grouping comparable in
stature with the European Union and North America Free Trade Agreement but outclassing them
in terms of dynamism by a wide margin. Simulation results found substantial welfare gains for
CEPEA.


A new Asia-Pacific Trade Agreement (APTA II): As a new agreement unencumbered by prior
commitments, it would be easier for APTA II to include all the desirable features, including
a comprehensive scope based on negative lists, trade facilitation, investment, economic
cooperation. Most importantly, it would include special and differential treatment and support
for poorer countries, so that they could take advantage of the opportunities to become available
to them – making it an RTA with a human face and a model of regional economic integration for
other regions to emulate.


Simulation studies indicate that such an agreement would have the potential to generate the
largest welfare gains for the region – up to $140 billion or over 1 per cent of the region’s GDP, with
broad and comprehensive coverage.


Building seamless connectivity


Economic integration depends critically on the development of seamless connectivity between
countries. This would require investments in transport, energy and ICT infrastructure.


Transport


Asia’s most important maritime liner routes, by volume, still run to Europe and North America.
Although almost all the region’s coastal countries are now linked by direct shipping services or
by transhipment and transit operations through hub ports, shipping connectivity is still poor
between many neighbouring countries. Moreover, the Pacific island developing economies have
the added disadvantage of being located a long distance from the rapidly growing economies in
Asia.


Over the past decade, the region has significantly improved air transport. More low-cost carriers
have entered the market, flight frequencies have increased, and countries have invested in new
and existing airports. Most Asia-Pacific countries are now linked, either directly or through hubs,
and have been making air service agreements and liberalizing their air transport markets. Land
based transport infrastructure is needed, however, to link airports to production and population
centres.


Land transport is important for regional economic integration and for balanced regional
development. ESCAP simulation exercises show that improving land transport connectivity has
potential to increase economic growth, especially in relatively poorer areas and thus reducing




xxiv


development gaps. Land routes are particularly critical for the development of the land locked
countries. In recent decades governments across the region have made considerable efforts
to extend national road and railway systems. Even so, given the likely expansion of intra-Asian
overland trade, regional road networks are still rather inadequate. The Asian Highway network
now extends through 32 member states and comprises 142,000 km of highways. Although there
are no “missing links” in terms of absence of roads, poor road quality can act as a deterrent for
international transport. For railways, the region as a whole has yet to realize its potential because
of many missing links, which constitute about 9 per cent of the Trans-Asian Railway network.


Countries can make greater use of the Asian Highway and Trans-Asian Railway routes by
improving transport facilitation measures and by investing in intermodal facilities such as dry
ports. Furthermore network externalities can be expanded by connecting initiatives across the
subregions.


Transport is still hampered by many non-physical barriers that lead to excessive delays, high costs
and uncertainties. ESCAP has been urging member countries to accede to seven international
conventions related to land transport facilitation and has prepared a Regional Strategic Framework
for the Facilitation of International Road Transport.


There is further scope for strengthening cooperation between ESCAP and the Asian Development
Bank in the identification and financing of priority transport infrastructure projects, including the
completion of missing links in the Trans-Asian Railway network and upgrading of roads in the
Asian Highway network.


Energy connectivity for energy security


During the next 20 years, Asia-Pacific energy demand is projected to grow annually by 2.4 per
cent. Given the uneven distribution of energy resources among countries, the region clearly has
enormous potential for increasing energy trade. Nevertheless, intraregional energy trade faces a
number of obstacles. The most important one is the lack of infrastructure, which often prevents
countries from accessing even domestic resources. Other impediments include the lack of a
regional agreement setting out consistent rules of trade.


A large number of energy infrastructure projects are planned or under way in the region. Examples
include pipelines to export hydrocarbons from the Russian Federation’s East Siberian and Sakhalin
reserves, ASEAN gas pipelines and power grids, SAARC’s energy ring, and the Turkmenistan-
Afghanistan-Pakistan-India pipeline project.


A region-wide energy cooperation framework could encourage joint investments by buyers and
sellers in subregional power, gas and oil grids. In this respect, the modalities developed for the
previously mentioned intergovernmental agreements on the Asian Highway and on the Trans-
Asia Railway networks could provide useful models for the development of an integrated regional
power grid or “Asian Energy Highway”. Cooperation could also be greatly beneficial for research on
energy technologies, or for joint exploration ventures by regional energy companies. In addition,
regional cooperation could boost the development, commercialization and dissemination of
energy-efficient technologies. The ministerial-level Asia-Pacific Energy Forum, which is scheduled
to be held in Vladivostok, Russian Federation, in May 2013, could provide the basis for a regional
framework for energy connectivity and trade.


Information and communications technology and digital connectivity


The Asia-Pacific region has been a major beneficiary of the information technology revolution, but
the digital divide prevails in terms of unequal access and affordability of services across countries.




xxv


Information technology services tend to be more expensive in the poorest countries. On average,
less than 20 per cent of people in Asia and the Pacific have access to the Internet. Traffic volumes
on the Internet in the region are expected to continue to increase exponentially both within and
between subregions. The region, therefore, needs to invest in additional terrestrial fibre-optic
cable routes and in the capacity of new Internet hub cities. As these new Internet hubs do not
need to be clustered around the congested megacities of Asia, their establishment could provide
opportunities for more inclusive and geographically balanced development. Overall, the region
still lacks infrastructure commensurate with its growing global influence, or its expected surge in
Internet traffic. This would require more systematic intergovernmental cooperation to provide an
organizing framework for expanding ICT connectivity, including through cooperation in satellite
technology.


Enhancing regional financial cooperation


Asia-Pacific regional cooperation in finance has mostly been confined to mechanisms to provide
short-term liquidity, but much potential remains unexploited. The Asia-Pacific region boasts vast
reserves. However, these reserves are largely invested outside Asia and the Pacific in low-yielding
securities in advanced economies. This can be attributed to the region’s poorly developed regional
financial architecture. In addition, a substantial amount of the region’s private savings are held in
other parts of the world. In 2008, they were valued at $7.4 trillion, accounting for 23 per cent of
invested assets worldwide. Only 16 per cent of the Asia-Pacific portfolio securities investment ends
up in the region owing to the small size of the securities markets. All countries would benefit from
the pooling of regional funds to provide liquidity, boost trade financing and increase investments
for infrastructure.


The establishment of Asian Development Bank (ADB) in the 1960s and the Asian Clearing Union
in the 1970s are examples of initiatives taken in the region to promote financial cooperation. A
number of new ones have been added recently. However, most of them are in early stages of
evolution and need to be scaled upto become more effective. For example, the Chiang Mai Initiative
Multilateralization could play a key role in assisting member countries with short-term liquidity
support. But thus far it has hardly been utilized because of its link with the International Monetary
Fund conditionality beyond a 20 per cent threshold. Plans are in the works, to double the size of
the initiative’s funding from 120 billion and expand its operations to include a surveillance and
monitoring office. However, the initiative’s coverage needs to be expanded beyond the ASEAN+3
countries to other systemically important countries of the region and others and set up a quick
disbursal facility to effectively serve as a regional lender of last resort.


The Asian Bond Fund and the Asian Bond Markets Initiative are also important initiatives to
develop regional bond markets and mobilize financing for lesser developed countries. However,
the scale of these initiatives needs to be expanded, and their coverage needs to be extended
beyond ASEAN+3 countries. Therefore, it will take some time before Asian bond markets offer
substantial sources of financing for infrastructure development.


In the area of infrastructure financing, an important recent initiative is the ASEAN Infrastructure
Fund being set up in Malaysia with an initial equity base of $485 million and support of ADB.
The fund aims to catalyse more than $13 billion in investments by 2020 through co-financing. In
2010, the SAARC Development Fund was set up in Bhutan with paid-up capital of $200 million to
finance infrastructure projects, including feasibility studies, but it also has social and economic
windows. Investing in infrastructure across the Asia-Pacific region promises not only high rates
of financial return, but also opportunities to diversify risk. Existing forms of investment, such as
lending by ADB, could be complemented with a new large-scale lending facility for infrastructure.
This facility could help coordinate other sources of lending such as by multilateral and bilateral




xxvi


development agencies and private financial institutions. Its backing for infrastructure projects
could also signal opportunities to private investors. As a regional body, the facility could also be
in a position to keep track of intraregional spillovers and finance economically significant cross-
border projects. Another possible function of the facility could be to provide advisory services
and technical assistance. Its capital base could be funded by contributions made by central banks
and funds raised through issuing bonds. The ESCAP secretariat is already engaged in elaborating
elements of a regional financial architecture for supporting infrastructure investment, including
the cross-border listing of equity and bonds by companies from across the region.


Economic cooperation for addressing shared vulnerabilities and risks


Not only can greater regional integration help countries capitalize on their strengths, but it can
also help them address shared vulnerabilities, notably food insecurity, disasters, pressures on
natural resources, social exclusion and rising inequalities.


Food security


In the past half-century, Asia and the Pacific has made tremendous progress in food security.
Nevertheless, the region still faces persistent poverty and hunger. The main obstacle is not an
overall lack of food. The problem is that many people are not consuming enough of that food.
They are prevented from doing so by many factors, including poverty, natural disasters, conflict
and war, poor access to resources, lack of employment opportunities, lack of education and
underinvestment in agriculture as well as instability in the world food and financial systems.


Given that neighbouring countries share many resources critical to the production and distribu-
tion of food, food security also has strong regional dimensions. The High-Level Task Force on
the Global Food Security Crisis indicated the following potential areas of regional cooperation:
regional food reserves, information systems, cooperation in agricultural research, managing
transboundary resources, and building regional agricultural markets. Asia and the Pacific is very
diverse in food production, providing the region with considerable scope for collaboration. Thus,
the challenge is to harness the region’s assets into a cohesive strategy.


Dealing with disasters


The world seems to be increasingly affected by natural hazards. As populations grow, more people
live in disaster-prone areas. As a result, the number of those affected by disasters tends to rise,
though this may also reflect improved reporting.


Some disasters have a regional impact simply because natural phenomena extend across wide
geographical areas. But the impacts of disasters can also be extended by growing economic
interdependence. The 2011 floods in Thailand, for example, damaged factories belonging to one
of the world’s largest manufacturers of hard disks, severely affecting global computer supplies.


Most countries in the region have, to some extent, established national policies, legislation, or
plans to prepare for and cope with disasters. Asia and the Pacific would also benefit from more
comprehensive regional agreements and cooperation. Better management of transboundary
river basins, for example, can prevent floods in neighbouring countries. The response to tsunamis
also calls for regional cooperation to develop effective early-warning systems.


Regional and transboundary cooperation in developing adaptation strategies can bring mutual
benefits to all countries, for example, by reducing uncertainty through exchanges of data and
information. Cooperation can also widen the knowledge and information base, increasing the
options for prevention, preparedness and recovery, and thereby arriving at better and more cost-
effective solutions.




xxvii


Pressures on natural resources and sustainability


Rapid economic growth in Asia and the Pacific has put greater pressure on natural resources. With
limited per capita endowments, the region is particularly vulnerable to disruptions associated
with volatile energy and resource prices, land use changes and climate change. Notably, these
disruptions are becoming increasingly interconnected.


Some of the most significant pressures arise from rising demand for energy, which is projected to
increase by about 34 per cent over the next decade. In addition, there are threats to biodiversity,
sulphur dioxide emissions, the rapid accumulation of solid waste, and the increasing prices of
many natural resources. As of 2005, the latest year for which these data are available, Asia and
the Pacific was the world’s largest user of resources, consuming 35 billion tons per annum of key
materials such as biomass, fossil fuels, metal ores and industrial and construction materials –
amounting to 58 per cent of the global use of resources.


Recognizing that these challenges to sustainability pose threats to economic growth and poverty
reduction, the region’s leaders have been developing regional responses. One of the important
approaches involves the promotion of Green Growth. This will require technological innovation to
improve eco- and resource efficiency.


In this context, a key priority is the development, commercialization and transfer of material-
and carbon-efficient technologies and promoting lifestyle changes to reduce the material- and
carbon-intensity of consumption.


The areas in which regional cooperation could help promote environmentally sustainable
technologies include: creating a critical mass of skills, enabling the growth of low-carbon
technologies; encouraging collaboration in research; developing regimes for intellectual property;
establishing innovation hubs; and designing incentives to encourage technological switchover.


Addressing sustainability risks


The Asia-Pacific regional preparatory meeting for the United Nations Conference on Sustainable
Development (UNCSD) – Rio+20 held in October 2011 underlined the need for regional cooperation
to “facilitate technological innovation and transfer and promote access to green technologies at
affordable costs”. A recent review of country submissions to the UNCSD secretariat confirms that
technology transfer and capacity building are among the top priority issues.


Technological innovations are not only needed to improve eco- and resource efficiency. They are
also critical to ensuring food security through the development of sustainable agriculture practices
and to enhance the effectiveness of monitoring and early warning systems to reduce disaster risks.
To maximize the effectiveness of the region’s response to these interlinked challenges, the creation
of a region-wide body named “Asia-Pacific Technology Development Council” (APTECH), could
be considered. APTECH would serve as a regional apex body of national innovation institutions
to foster cooperation and coordination in innovation to address common issues and shared
problems with sectoral bureaus. It would promote cooperation in pre-competitive research and
development with a fund for implementing joint innovation proposals. The intellectual property
would be owned by APTECH and shared freely with members for onward sharing with national
and regional enterprises for further competitive research.


Addressing social risks


Despite the region’s economic dynamism, the number of people living in extreme poverty,
suffering from hunger and lacking sufficient access to sanitation, education, health and financial
services is still enormous. In addition, income inequality has increased, with the population-




xxviii


weighted mean Gini coefficient for the entire region increasing from 32.5 per cent in the 1990s
to 37.5 per cent in recent years. These two phenomena are related for a number of reasons. First,
economic growth in the twenty-first century puts a premium on educated individuals who are
not only literate but also adept at using modern ICT. When professionals and skilled workers are
scarce in rapidly growing economies, their real wages tend to increase significantly faster than
average, contributing to an increase in income inequalities. Second, there is much evidence that
poverty and social deprivations, such as lack or insufficient access to basic sanitation, education
and health services, play a large role in determining health outcomes – and thus the potential to
engage fully in employment activities – across the population. In sum, economic growth is not
necessarily the tide that lifts all boats.


A key objective of regional economic integration schemes is to narrow development gaps and
bring about convergence in the levels of economic development of its participants through
the optimal deployment of the region’s resources. The objective of achieving a balanced and
equitable regional development also creates conditions for a more enthusiastic participation of all
partners, including those with scarce productive capacities. Some studies suggest that increased
trade by itself, even if balanced, does not ensure economic development. Thus, growth in trade
must be accompanied by complementary development policies, including investment, especially
in infrastructure and other public goods such as education and research and development, and
regional and sectoral programmes.


Many existing regional trading arrangements include balanced regional development and social
cohesion policies. Apart from special and differential treatment provisions in favour of developing
and least developed countries, which are normally incorporated in trade liberalization schemes,
the regional trade and economic cooperation arrangements for Asia and the Pacific proposed in
this study should be accompanied by the creation of regional development funds for promoting
balanced regional development, the enhancement of infrastructure and connectivity and
technological capability-building in the relatively poorer regions. With these steps accompanying
the programmes of regional economic integration, regionalism in Asia and the Pacific would
hopefully become a model of an inclusive, balanced, equitable and participatory development
process for other regions to emulate.


Towards a broader and comprehensive framework


An ambitious agenda of regional economic integration would need a comprehensive institutional
architecture. This could include the following elements:


A summit level body – An ”Asia-Pacific Economic Summit” would be in charge of setting up the
region’s agenda and providing direction for its implementation.


Ministerial councils – These would focus on trade and investment, finance, transport, energy, food
security and agriculture, environment, disaster risk reduction and technology and would give
directions to respective senior officials committees.


Consultative Committee of Subregional Associations – This would bring together all subregional-
bodies to facilitate mutual learning.


People-to-people contacts – Regional associations can organize interactions for all different
professions. These should include an Asia-Pacific Business Advisory Council and an Asia-Pacific
Network of Think Tanks.




xxix


The elaborate institutional architecture proposed here would need a secretariat to service it.
ESCAP secretariat, being the universal and multidisciplinary intergovernmental body of Asia and
the Pacific could be strengthened to provide secretariat services to APES, ministerial councils and
their senior officials level operational bodies. In addition, the ESCAP secretariat would work closely
with the ADB, the other key regional development organization with overlapping membership
and committed to regional economic integration, especially in areas such as financial cooperation,
infrastructure development and connectivity, trade facilitation, environment and technology
development.


In December 1963, the First Ministerial Conference on Asian Economic Cooperation, held in Manila
under the auspices of the Economic Commission for Asia and the Far East (ECAFE) as ESCAP was
known then, endorsed a proposal to establish a regional development bank for Asia. To celebrate
the fiftieth anniversary of that conference, ESCAP could convene the Asia-Pacific Ministerial
Conference on Regional Economic Cooperation and Integration in 2013. This conference would also
present an opportunity to review and discuss possible ways to implement the recommendations
contained in this study and take steps to implement them, as appropriate, with the goal of turning
the 21st Century into an inclusive and sustainable Asia-Pacific Century!




The case for regional economic integration in Asia and the PacificCHAPTER ONE


1


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One The case for regional economic integration in Asia and the Pacific
The Asia-Pacific region’s rapid growth since the 1950s
had been supported by a favourable external economic
environment and opportunities arising from globalization.
This, however, has changed dramatically in the aftermath
of the global financial crisis of 2008-2009. In the new global
environment, sustaining the region’s growth and realizing
the Asia-Pacific century critically depend on its ability to
harness the potential of regional economic integration.


Compared with other parts of the world, regionalism has
been slower to take off in Asia and the Pacific. As a result, the
region still has many underexploited opportunities for taking
advantage of the multiple complementarities among its diverse
economies. In addition to sustaining levels of growth, this should
also enable the region to achieve a more balanced social and
economic development – as its lagging economies are poised to
be boosted by closer connection and integration with economic
growth poles such as China and India.


Close regional cooperation brings many other benefits, such
as helping to foster peace between neighbouring countries
and allowing them to address shared vulnerabilities and risks.
It should also enable them to participate more effectively in
global economic governance by exercising a degree of influence
commensurate with their rising economic weight.


Re-emerging Asia and the Pacific


Though the economic rise of Asia and the Pacific may seem to
be a modern phenomenon, it is in fact a re-emergence. Through
previous millenniums up to the early part of the nineteenth
century, the Asia-Pacific region dominated the global economy.
Until 1820 Asia generated more than half of the global GDP,
with China and India accounting for one-quarter each. Then,
following the era of colonialism the region witnessed a period of
relative stagnation, with its global economic share declining to
22 per cent in 1913 and 16 per cent in 1950.1 As a result, in the
1960s there were some pessimistic assessments of the region’s
economic prospects.2




The case for regional economic integration in Asia and the PacificCHAPTER ONE


3


FIGURE TITLE


I.1. Real rates of growth of GDP, Asia-Pacific economies and advanced economies


But the pessimists were proved wrong. The
economic revival in Asia started in Japan,
whose economic growth in the 1950s and
1960s had boosted the region’s share in the
world economy to 20 per cent in 1970. Japan
was followed by the newly industrializing
economies (NIEs) – the Republic of Korea;
Singapore; Hong Kong, China; and Taiwan
Province of China – in the 1970s and by
Indonesia, Malaysia, the Philippines and
Thailand in the 1980s. This “Asian miracle”
increased the region’s share of global GDP to
28 per cent in 1990.3 Then, with the region’s
most populous countries, China and India,
joining the growth bandwagon in the 1990s
and 2000s the Asian share of the world GDP
increased to as much as 39 per cent in 2008.
Because of the region’s fast growth (figure
I.1), the centre of gravity of global economic
activity has been shifting decisively to the
East.4


This shift is expected to continue during the
twenty-first century, which commentators
have referred to as the ”Asian century”. One
assessment in 2003, for example, indicated
that by 2050, along with the United States of


Source: ESCAP based on United Nations Statistical Division, National Accounts Main Aggregates database; and International Monetary Fund,
World Economic Outlook database (accessed 10 March 2012).


America and Japan, China and India would
be among the world’s top four economies.5
Subsequent revisions have suggested that
they could achieve this prominence even
more swiftly.6 In a similar vein, a 2011 study
supported by ADB projected that between
2010 and 2050 the region’s share in global
GDP would rise from nearly 28 to more than
52 per cent, with China accounting for 20 per
cent and India for 16 per cent.7


This economic dynamism has helped lift
hundreds of millions of people out of poverty
– a pace of poverty reduction unparalleled in
human history. If these trends continue, the
region could eventually eliminate the world’s
largest concentration of poverty.


But this cannot be taken for granted. The
promise of the Asian century might not
materialize. After the global financial crisis of
2008-2009, countries in Asia and the Pacific
have found themselves in a very different
economic environment. As well as producing
more goods, they will also need to provide
more of their own markets for them.




4


Fa c t o r s c o n t r i b u t i n g t o A s i a n
dynamism


Economic success in Asia, in particular in East
Asia, was due to many factors. Importantly,
these countries invested significantly in
human resources, while supporting the
private sector and promoting technology
and innovation. They also aimed for
macroeconomic stability, while achieving
pragmatic balances between the roles of
states and markets and between export
promotion and import substitution.


Other factor that contributed to the region’s
dynamism was access to technology, finance
and markets of the Western advanced
economies. Japan, for example, received a
great boost from procurement by the United
States in the wake of the Korean War. Later, the
Republic of Korea benefited from the United
States procurement in the wake of the war in
Viet Nam. Similarly, during the Cold War era,
the NIEs of Taiwan Province of China; Hong
Kong, China; and Singapore, all close allies of
the United States, received substantial help
from the West in the form of ready markets
for their products. The NIEs also benefited
greatly when the advanced economies of
the West, and later Japan, relocated some of
their industrial production, especially labour-
intensive manufacturing.


Subsequently, many of these industries moved
to China, which offered cheaper labour. And
during the first decade of this century, China
was able to take advantage of a buying spree
by American consumers, which enabled it to
generate enormous external trade surpluses.
Over the same period, India too was able to
benefit from Western outsourcing, notably for
information technology (IT) services.


Until 1995 and the completion of the Uruguay
Round of the General Agreement on Tariffs
and Trade (GATT) negotiations, most Asia-
Pacific developing economies were able
to take advantage of multilateral trade
agreements without having to offer much in
return. Seeking to build productive capacities
and export-oriented industries, they were, for
example, free to protect infant industries and
offer subsidies, while requiring that foreign
investors meet requirements on local content
and export performance.8 They were also able


to exploit relatively soft intellectual property
protection regimes.9 In addition, during
this period they did not face constraints on
the use of natural resources or the threat of
climate change.


A challenging new context for the
region


Now these developing economies face a
very different global environment. Firstly, the
growth of imports of the United States and
the euro zone economies from Asia and the
Pacific is unlikely to revert to the pre-crisis
trend. These Western economies, which are
still recovering from the 2008 global financial
crisis, face a subdued and uncertain outlook10
and have large public debts and ageing
populations. They also have limited carbon
space. Having contributed about 70 per cent
of the current global stock of greenhouse
gases, they will have to drastically reduce
their share of emissions. As a result, although
the advanced economies of the West will
remain important markets, they are unlikely to
remain the Asia-Pacific region’s main engine
of growth.


In addition, since the completion of the
Uruguay Round of the GATT, Asia-Pacific
countries have faced a restricted policy
space with tightened intellectual property
regimes and reduced opportunities for
imposing performance requirements on
foreign investors. Nor is there much prospect
of further multilateral trade liberalization. The
WTO Doha Round has been in a stalemate for
more than a decade. Indeed, the trend seems
to be towards greater protection in the form,
for example, of penalties on outsourcing,
rising visa fees for immigrant workers, the
imposition of countervailing duties on
developing country products and unilateral
carbon taxes on foreign airlines.11


At the same time, the faster-growing emerging
economies in the region need to deal with
surges of short-term capital inflows which
threaten the stability of financial and capital
markets.12 The more vulnerable economies
also face the prospect of reduced inflows from
development assistance, which fell globally
between 2010 and 2011 by 3 per cent.13




The case for regional economic integration in Asia and the PacificCHAPTER ONE


5


Rising inequality threatens social
cohesion


The region has made significant progress
towards achieving many of the Millennium
Development Goals, particularly in reducing
poverty (figure I.2); between 1990 and 2009,
the mean headcount poverty ratio fell from
50 to 22 per cent.14 But Asia and the Pacific
is still home to close to one billion people
living on less than $1.25 a day. Indeed, the
bulk of the world’s deprived people, including
those without access to sanitation and
undernourished children, live in the Asia-
Pacific region (figure I.3).15


Although economic growth has led to an
increase in the incomes of the poor, the
incomes of the rich have increased more
swiftly. As a result, the region is now facing
rising inequality with potential threats to social
cohesion. Since the 1990s, the population-


weighted mean Gini coefficient for the region
as a whole increased from 32.5 to 37.5, and
only 10 of the 25 countries that enjoyed
positive annual economic growth succeeded
in reducing income inequality. This rise in
inequality partly reflects the transition from
agriculture to industry and services, in which
there are more significant wage differentials,
as well as rapid technological change, which
puts a premium on higher levels of education
and leaves fewer opportunities for low-skilled
workers. At the same time, workers have
experienced a decreased bargaining power.16


Inequalities in income are accompanied by
inequalities in access to sanitation, education,
health services, food, electricity and credit.
There are also marked differences between
households in urban and rural areas, between
women and men, and between different social
and ethnic groups. Indeed, socioeconomic


FIGURE TITLE


I.2. Country groups on and off track for the MDGs


Source: ESCAP, ADB and UNDP, Asia-Pacific Regional MDG Report 2011/12, table I-1, p. 9 (Bangkok, United Nations and ADB, 2012).




6


FIGURE TITLE


I.3. The Asia-Pacific share of the developing world’s deprived people


Source: ESCAP, ADB and UNDP (2012).


inequalities could be a significant obstacle
for the achievement of the Millennium
Development Goals.17 The connection
between income and socioeconomic
inequalities is discussed in chapter five.


The region’s rising inequality and persistent
development gaps between and within
countries do not augur well for social
cohesion, peace or stability, and could lead
to friction between countries and hamper the
process of growth itself.


Disaster risks


A further concern in the years ahead is that
many more people in the Asia-Pacific region
are likely be exposed to natural disasters. Asia
and the Pacific is the world’s most disaster-
prone region. During the period 1980-2009 it
accounted for 45 per cent of global disasters,
42 per cent of the economic losses from
disasters, and 86 per cent of disaster-related
deaths.18 In 2011, a number of countries were
severely affected by natural disasters, starting
with the earthquake in Christchurch, New
Zealand, followed by the earthquake and
tsunami in Japan, and severe flooding in a


number of countries, notably Thailand and
Pakistan. Overall, the damages and losses for
the Asia-Pacific region in 2011 were at least
$267 billion.19 Disasters typically hit the poor
and most vulnerable hardest, because they
tend to live in the most exposed areas.


Natural disasters do not respect national
borders and often affect a number of countries.
But even when the physical damage is limited
to one country, by disrupting the operation of
global supply chains their economic impact
can be transmitted to other countries across
the region. For example, the 2011 earthquake
and tsunami in Japan affected auto and
electronic industries across the region
through the scarcity of some critical parts.
Similarly, the floods in Thailand shut down a
major producer of hard-drive components,
affecting both regional and global computer
industries. Droughts and floods often result
in crop losses, potentially increasing regional
and global food prices and heightening food
insecurity. The 2010 flood in Pakistan is a
prime example of this.


Therefore, Asia-Pacific countries need to invest
more in disaster risk reduction, particularly in




The case for regional economic integration in Asia and the PacificCHAPTER ONE


7


those areas where rapid economic growth
has heightened risks. They will also need
to develop effective early warning systems
and plans for disaster management and
recovery.20 As the problems and impacts of
natural disasters often go beyond national
boundaries, addressing them through
regional cooperation would be most effective.


Pressures on natural resources


A significant constraint on economic growth
in Asia and the Pacific, as elsewhere, has
been the recent rise in commodity prices –
much of which reflects the region’s rapidly
increasing demand.21 Between 2000 and
2008, the region’s share of global energy
use, for example, increased from 39 to 45
per cent.22 In addition, the threat of global
warming will reduce both global and regional
carbon space. Economic growth in Asia and
the Pacific thus needs to be sensitive to
environmental sustainability – undertaking
technological innovations to reduce the
use of energy and other resources and re-
orienting lifestyles towards low-material and
low-carbon consumption paths.


Regional integration for an inclusive
and sustainable Asia-Pacific century


These and other constraints could well
affect future growth in Asia and the Pacific.
Indeed, a number of middle-income Asia-
Pacific economies could face long periods
of slow growth that would leave them in a
”middle-income trap”. This is suggested by
the experience of NIEs, such as Malaysia,
the Philippines and Thailand, which have
experienced relatively slow growth rates since
the 1997 Asian financial crisis. Recent analysis
by the Asian Development Bank estimates
that in these circumstances Asia’s GDP in
2050, instead of reaching the projected 52 per
cent of the global GDP under the ”Asia-Pacific
century” scenario, would reach only 31 per
cent.23


Sustaining growth in the future will require
rebalancing the Asia-Pacific economies so
that they rely less on exports to the developed
countries and more on domestic and regional
sources of demand.24 Unless the region


develops alternative engines of growth, its
growth rate will slow below what is needed
to reduce poverty sufficiently and to provide
enough decent jobs for its burgeoning youth
population. The current slowdown of China,
India and other economies in 2011-2012
highlights the urgency of this issue.


Turning development gaps into engines of
growth


One of the most promising reservoirs of
domestic demand is the region’s ”bottom
billion” people currently living in poverty.
To join the mainstream of Asia-Pacific
consumers, their purchasing power must
be boosted. This will require broad-based
investment in education, health services,
social protection and basic infrastructure,
which will facilitate access to employment
and business opportunities for all social
groups. From this perspective, social policy
should not be viewed as an expense but as
a strategic investment that, in addition to
promoting social justice, would sustain the
region’s growth. Closing the Millennium
Development Goals gaps would require an
investment of $639 billion.25


Another important investment opportunity
is infrastructure. Across the region, there are
some striking contrasts in the availability of
the infrastructure that is critical for economic
and social development. These disparities are
reflected in ESCAP’s composite infrastructure
index, which indicates striking contrasts
between developed economies such as
Singapore and Japan and least developed
countries (LDCs) such as the Lao People’s
Democratic Republic, Nepal, Papua New
Guinea and Solomon Islands (figure I.4).
Closing the infrastructure gaps across the
region would require investments of the
order of $8 trillion over a decade, or about
$800 billion per annum.26


If these investments were to be funded, they
could provide another substantial source of
aggregate demand, while contributing to a
more equitable and geographically balanced
pattern of regional development.




8


FIGURE TITLE


I.4. Infrastructure index, selected economies


Source: ESCAP, based on ESCAP, Economic and Social Survey of Asia and the Pacific 2010 (Sales No. E.10.II.F.2), figure 61, p. 135 .


Building productive capacities in the
poorest economies


The greatest opportunities for the least
developed countries will arise from
establishing closer links with the region’s
growth poles – China and India. Regional
integration usually leads to a process called
“efficiency-seeking industrial restructuring”.
While such processes allow domestic and
foreign firms to exploit economies of scale and
specialization and save in labour or materials
costs, they can also provide many benefits
for poorer countries, particularly through
building productive capacities. The process
of efficiency-seeking industrial restructuring
could also help Asia-Pacific countries avoid
falling into the middle-income trap.


Addressing shared vulnerabilities


Regional integration can also help Asia-Pacific
countries address shared vulnerabilities and
risks, many of which are economic. The 1997
Asian financial crisis, for example, started in
Thailand and then spread across East Asia,
highlighting regional interdependencies –
and prompting a response in the form of the


Chiang Mai Initiative. But there are many other
shared concerns. One is energy security – the
provision of energy at affordable prices. This
could be fostered by a number of measures
such as linking production and consumption
centres through power grids and oil and gas
pipelines, joint technology development
programmes for non-conventional sources
of energy, and the development of a regional
energy market. Another vulnerability is
the pressure on natural resources, which is
pushing up commodity prices. In response,
countries in Asia and the Pacific could pool
resources to develop material-saving and
low-carbon technologies. Food security is a
further shared concern; regional responses
could include pooling resources for joint
research.


Fostering peace and stability


By deepening mutual interdependencies and
opening up more spaces, formal and informal,
for cross-country dialogue, regional economic
integration can promote greater mutual
understanding, help in resolving conflicts and
usher peace and stability.27




The case for regional economic integration in Asia and the PacificCHAPTER ONE


9


Giving a voice to the region in international
forums


Finally, regional cooperation and integration
would enable Asia and the Pacific to exercise
influence in global economic governance
commensurately with its growing economic
weight. The region would thus be in a stronger
position to shape the emerging global
economic order in tune with its development
requirements.


Conditions for fruitful integration


Regional economic integration is more likely
to be successful when the process can be
grounded in a shared history and culture.
Exchanges are facilitated when countries have
complementarities in factor endowments
that can be shared to mutual benefit. And
integration based on trade would be more
fruitful if it opens up large and growing
markets.


Shared history, culture and values


Many areas of the Asia-Pacific region have
distinct identities shaped by centuries of
history and cultural exchanges. In Asia, much
of this has been rooted in trade – starting with
the famed Silk Routes of two thousand years
ago. Trade in goods has been accompanied by
a vibrant exchange of ideas. Another notable
unifying factor has been shared religious
beliefs. The impressive cultural sites of Bagan
in Myanmar, Borobudur in Indonesia, and
Angkor Wat in Cambodia are a testimony to
the vast trading and cultural networks that
Asia had in ancient times.


This long history of interaction is also notable
in that it has been accompanied by few major
conflicts between countries. India and China
have, for example, over the centuries been
highly developed nations – economically,
militarily, ideologically and culturally. They
could have been competitors for dominance.
Yet that has not happened. Indeed, the history
of their relationship has been one of mutual
respect and coexistence. Recent perceptions
of Asia as a conflict-ridden region should
not hide centuries of cooperation between
India, China, Japan and what is now the


ASEAN region. These historical roots provide
a strong basis for establishing an Asia-Pacific
community.28


Synergies for mutually beneficial
cooperation


Fruitful integration requires synergies or
complementarities based, for example, on
diverse factor endowments or specializations.
Some of these will be the result of differing
levels of development. Asia and the Pacific
includes high-income countries such as
Japan, Australia, New Zealand, and the
Republic of Korea, which are members of the
Organisation for Economic Co-operation and
Development (OECD), and at the other end of
the scale a number of low-income and least
developed economies. This diversity opens
up opportunities for mutually beneficial
exchanges of development experiences.


There are also complementary factor
endowments. Some economies in East
Asia have abundant capital but rapidly
ageing workforces. Others, particularly in
South and South-East Asia, may have less
capital but should for the next few decades
benefit from a demographic dividend of
a young and growing workforce. Regional
economic integration should thus enable
labour-intensive industries to gravitate to
labour-abundant countries where they can
help build productive capacity. Meanwhile,
labour-scarce economies can specialize in
the production of capital- and knowledge-
intensive goods.


Another area of complementarity is
finance. China and Japan, for example, have
accumulated sizeable foreign exchange
reserves which they are investing in the United
States and Europe, often at relatively low
rates of return. Countries concerned about
the future value of these assets could instead
invest more productively closer to home –
in infrastructure development projects that
currently remain underfunded despite high
long-term payoffs.


There are also complementarities in energy
production and consumption. On the one
hand, economies such as Indonesia, the




10


Islamic Republic of Iran, Kazakhstan, Malaysia,
the Russian Federation and Turkmenistan have
abundant hydrocarbon energy resources.
On the other hand, major economies such
as China, India, Japan and the Republic of
Korea are highly dependent on hydrocarbon
imports.


The Asia-Pacific region has also developed
cross-country complementarities within
industries. East Asian countries, for
example, have specialized in manufacturing
and hardware while South Asian economies
have focused on services and software.
Recent analyses have found significant
complementarities at disaggregated
industrial sectors both within and between
subregions, with the latter being generally
higher than the former.29


Large markets and a growing middle class


Another important factor for the success of
regionalism is a large and growing market.
With rapid economic growth, the Asia-Pacific
region is emerging as the main source of final
demand for the region’s exports. China and
India now have sizeable middle classes which
form the world’s largest markets for a growing
range of products and services, such as mobile
phones, motor cars and jet planes. As a result,
between 2000 and 2010 the proportion of
Asia-Pacific trade that was carried on an
intraregional basis rose from 48 to 54 per
cent.30 The region’s large and rapidly growing
markets make regional economic integration
an increasingly viable development strategy.


This would not only enable the poorer
countries of the region to take care of their
development challenges, such as poverty and
hunger, but would also benefit the advanced
economies of the West by absorbing more
of their exports and thus help bring down
their levels of debt. Asia and the Pacific could
therefore become a growth pole for the
advanced economies and other developing
regions.31


Lessons from global experience


Since the early 1990s, the ”new regionalism”
has been a dominant trend in the world


economy, particularly in Europe with the
formation of the Single European Market and
in North America with the signing of the North
American Free Trade Agreement (NAFTA). In
comparison with earlier and shallower forms of
cooperation, these regional trade agreements
(RTAs) pursued free trade complemented by
strong rules of origin and mobility of capital
and, in the European Union (EU), mobility
of labour. Subsequently, the EU deepened
integration, expanded its membership and
progressively evolved into an economic
union, with some of its members forming a
monetary union with a single currency.


Other regions have pursued similar RTAs.
In Latin America and the Caribbean, these
include the Common Market of the South
(MERCOSUR), the Caribbean Community
(CARICOM) and the Andean Community
of Nations, and in Sub-Saharan Africa, the
Common Market for Eastern and Southern
Africa (COMESA) and the Southern Africa
Development Community (SADC). There
are now some 300 plurilateral and bilateral
FTAs32 across the world and an important
part of global trade is now conducted on
a preferential basis.33 This also encourages
other countries to negotiate their own RTAs
to prevent discrimination by trading partners
that belong to existing RTAs.


During the last 20 years, there has been a
debate on the impact of RTAs on further
trade liberalization. Are they stumbling
blocks or building blocks? Recent research
tends to support the view that regionalism,
by liberalizing trade, should be viewed as a
building block of multilateralism.34


RTAs also create larger markets, which are
attractive to foreign investors. For example,
since the formation of the single market
the EU has increased its share in global FDI
inflows from nearly 30 per cent in the 1980s
to about 50 per cent today.35 Similarly, Mexico
has benefited from its NAFTA membership.
Comparing the periods 1991-1993 and 2000-
2002, annual FDI inflows increased from
$12 billion to $54 billion, as many industries
relocated to maquiladora processing zones in
the north of Mexico.36 The strong association
between membership in RTAs and FDI




The case for regional economic integration in Asia and the PacificCHAPTER ONE


11


inflows has been confirmed in a number of
quantitative studies.37 Mexico also benefited
from lower volatility in its growth rate and
a substantial improvement in total factor
productivity.38


Even more important than providing larger
markets, RTAs help strengthen overall
competitiveness by enabling intraregional FDI
to achieve extensive industrial restructuring
or rationalization. Therefore, most RTAs now
extend their scope beyond trade to include
investment liberalization and facilitation.
This means, for example, that multinational
enterprises (MNEs) no longer need to
maintain horizontal national operations
and instead can assign the responsibility
for serving specific regional or even global
markets in particular products to certain
affiliates to harness economies of scale and
specialization – a strategy sometimes called
”product mandating”.39


Deeper integration encourages industries
to migrate to low-wage locations to the
advantage of the lesser developed economies.
In the EU the poorer members have benefited
from resource transfers, but they have
also gained significantly from industrial
restructuring. For instance, after joining the
European Economic Community in 1973,
Ireland increased its per capita income from
59 per cent of the European average to over
100 per cent by 1998.40 Both Ireland and other
countries that joined the EU since the 1980s
such as Greece, Portugal, Spain, Slovenia and
the Czech Republic are also among those that
managed to avoid the middle income trap and


moved to high income status (table I.1). Some
of these countries, especially Greece, Portugal
and Spain have subsequently accumulated
unsustainable levels of debt because of
imprudent financial management and are
currently facing serious economic difficulties.
But this is more the result of financial
mismanagement – and a demonstration that
monetary union needs to be complemented
by fiscal union.


Even though the Asia-Pacific region is a recent
entrant in the area of regional economic
integration, the experience of some of its
countries fit the pattern observed from other
regions. For instance, Cambodia, Lao People’s
Democratic Republic and Viet Nam, which
joined ASEAN in the 1990s, have seen their per
capita income levels rapidly moving towards
the ASEAN average (figure I.5, panel A). In
addition, the share of these three countries
in ASEAN’s cumulative FDI inflows increased
rapidly in the mid-1990s and late 2000s (figure
I.5, panel B)


In South Asia, the India-Sri Lanka FTA signed
in 1998 can be taken as an early experiment
in regional economic integration. Between
2000, when the FTA became effective, and
2005-2006, India’s exports to Sri Lanka rose
annually on average by 34.5 per cent while
those of Sri Lanka to India grew by 132
per cent. As a result, Sri Lanka’s imports to
exports ratio fell from 10.3:1 to 3.3:1 over this
period. In addition, the number of Sri Lankan
export items tripled with a notable shift from
agricultural products to high-value added
manufacturing goods such as tea, sausages,


TABLE TITLE


I.1. Transitions from middle-income to advanced-country levels


Country
Growth phase in


transition


Income per capita
at start


(US dollars, PPP)


Income per capita
at end


(US dollars, PPP) Time in years
Growth per annum


in transition
Cyprus 1994-2004 15 002 23 736 10 4.8
Czech Republic 2000-2007 14 960 24 279 7 7.2
Finland 1988-2000 14 920 24 441 12 4.2
Greece 1995-2004 14 957 24 059 9 5.4
Ireland 1993-1998 14 934 23 520 5 9.5
Portugal 1997-2008 15 574 23 093 11 3.6
Slovenia 1998-2005 15 412 23 388 7 6.1
Spain 1991-2001 15 027 23 421 10 4.5
Sweden 1987-1998 15 722 23 468 11 3.7


Source: Reisen (2011) based on data from IMF, World Economic Outlook database.




12


biscuits, chocolates, ceramics, furniture, metal
products, footwear, wooden toys, herbal
products, memory chips, and machinery and
mechanical appliances, many of which are
produced with FDI from India. Around three-
quarters of Sri Lanka’s exports have been
undertaken within the framework of FTA
preferences. Finally by 2004-2005 India was
Sri Lanka’s fourth largest source of FDI.41


E m e r g i n g r e g i o n a l e co n o m i c
integration in Asia and the Pacific
The Asia-Pacific region has been a relatively
late-starter with regard to regional economic
integration. There were some significant
achievements in this area during the 1970s,
including the signing in 1975 of what is now
the Asia-Pacific Trade Agreement (APTA),
and the creation in 1974, also under the
auspices of ESCAP, of the Asian Clearing
Union.42 In general, however, the Asia-Pacific
economies retained a deep and abiding faith
in multilateralism.


But in the 1990s views started to change.
This was partly due to the slow progress of
multilateral trade negotiations and the rise of
regionalism elsewhere. More importantly, the
Asian financial crisis of 1997 highlighted the
economic interdependences of a number of
countries. This led to the Chiang Mai Initiative
for monetary cooperation, which involves
ASEAN+3 (China, Japan and the Republic of
Korea). In the late 1990s Japan changed its
views on trade policy, recognizing that RTAs
could advance its interests.43 Since then, the
region has undertaken a series of initiatives
towards regional economic integration.


One of the most significant forums has been
ASEAN. Although set up in 1967, this forum
involved relatively little economic cooperation
until the signing in 1992 of the ASEAN Free
Trade Agreement whose implementation
was accelerated to 2002 from 2008 in the
aftermath of the Asian crisis. Member
countries further deepened cooperation with
the ASEAN Economic Community planned to
be established in 2015.


FIGURE TITLE


I.5. Performance indicators of Cambodia, Lao People’s Democratic Republic and Viet Nam, in comparison with
ASEAN, 1992-2010


Source: ESCAP based on data from World Bank, World Development Indicators database.


Note: Myanmar and Brunei Darussalam are not included in the total for ASEAN because of missing GDP data for these countries. Cumulative FDI
inflows is the sum of FDI inflows between 1992 and subsequent years.




The case for regional economic integration in Asia and the PacificCHAPTER ONE


13


Similarly, the South Asian Association for
Regional Cooperation (SAARC) came into
being in 1985 but did not adopt a programme
of economic cooperation until 1991 when
it formed the Committee on Economic
Cooperation. In 1995, the members created
a SAARC Preferential Trading Agreement and
in 2004, they eventually agreed to create a
SAARC Free Trade Area to be implemented
over 10 years starting in 2006. At a summit in
Bhutan in 2010, SAARC members adopted a
SAARC Agreement on Trade in Services and
established the SAARC Development Fund.


Another notable initiative is the Bay of Bengal
Initiative for Multi-Sectoral Technical and
Economic Cooperation (BIMSTEC). This spans
two subregions: from South Asia, it includes
Bangladesh, Bhutan, India, Nepal and Sri
Lanka and from South-East Asia, Myanmar
and Thailand. In 2004, BIMSTEC adopted
a framework agreement for a free trade
agreement to be implemented within 10
years.


Initiatives in other subregions include the
Economic Cooperation Organization (ECO),
initially formed in 1985 by the Islamic Republic
of Iran, Pakistan and Turkey, but later expanded
to include Afghanistan and six Central
Asian countries – Azerbaijan, Kazakhstan,
Kyrgyzstan, Tajikistan, Turkmenistan and
Uzbekistan. In 2003, the members established
the ECO Trade Agreement.


In the Pacific, what is now the Pacific Islands
Forum (PIF) was set up in 1971 and has 16
member States, including Australia and New
Zealand and 14 independent Pacific island
developing economies. In 2006, within the
framework of the 2001 Pacific Agreement for
Closer Economic Relations, 12 members of PIF,
also signed the Pacific Island Countries Trade
Agreement.


These subregional agreements are
complemented by a number of bilateral
trade agreements between countries of the
subregions and across the subregions.


Seeking broader regionalism


As observed earlier, the complementarities
and synergies between subregions are
generally greater than those within


subregions. Therefore, for capital, people and
natural resources to be deployed optimally,
they should be able to work within a broader
regional framework.44 This can be achieved by
coalescing bilateral and subregional FTAs. In
this respect, ASEAN has taken some exemplary
initiatives to bring together countries from
different subregions. Since 2002, ASEAN has
upgraded its dialogue partnerships with
neighbouring countries to an annual summit
level that has fostered numerous arrangements
for regional and bilateral free trade that are at
different levels of implementation. It has, for
example, negotiated “+1” RTAs with Australia,
China, India, Japan, New Zealand and the
Republic of Korea. These economies are also
engaging each other – for instance, through
the India-Japan and the India-Republic of
Korea comprehensive economic partnership
agreements, already concluded. ASEAN’s
engagement with dialogue partners has also
led to broader groupings. Besides ASEAN+3,
it also organizes an annual East Asia Summit
(EAS) which involves ASEAN and all its dialogue
partners. EAS, which brings together 16 of
the largest and fastest-growing economies,
is expected to pave the way for a broader
regional arrangement in Asia that could be
the third pole of the world economy.45 In
2007, the EAS leaders launched a track-II
study group for examining the feasibility of a
Comprehensive Economic Partnership of East
Asia (CEPEA) comprising 16 (ASEAN 10 +6)
countries whose results were presented at the
fifth EAS summit in 2009. At the Bali Summit
in November 2011, two new members were
admitted to EAS – the United States and the
Russian Federation.


A further indication of the growing recognition
of broader regional economic integration in
Asia and the Pacific is that the region’s leaders
have articulated their visions of a broader Asia-
Pacific community allowing exploitation of
the region’s vast synergies for mutual benefit
(box I.1). The past decade has also witnessed
a steady stream of studies making the case for
broader regionalism in Asia and the Pacific,
including by the Asian Development Bank.46


Gains from economic integration


A number of recent studies have indicated the
potential gains from economic integration.




14


An ADB study, for example, compared
the impact of regional integration with
global trade liberalization under different
scenarios to 2025.47 Using the Global Trade
Analysis Project database with the World
Bank’s LINKAGE model, the study found


that regional trade and integration could
offer great potential. It also concluded that
much of the gains in Asia from global trade
liberalization could be realized by a regional
initiative alone. Significantly, it ascertained
that the gains from abolishing global tariffs


BOX I.1. Asia-Pacific leaders’ statements on broader regionalism


Dr. Manmohan Singh, Prime Minister of India, said at the Third India-
ASEAN Business Summit in New Delhi on 19 October 2004:


“We envision an Asian Economic Community. (…) Such a community
would release enormous creative energies of our people. One cannot
but be captivated by the vision of an integrated market, spanning
the distance from the Himalayas to the Pacific Ocean, linked by
efficient road, rail, air and shipping services. This community of
nations would constitute an ‘arc of advantage’, across which there
would be large-scale movement of people, capital, ideas, and
creativity. (…)This is an idea whose time is fast approaching, and
we must be prepared for it collectively.”


The Chairman’s Statement at the Fourth East Asia Summit in Cha-
am Hua Hin, Thailand on 25 October 2009 included the following
passage:


“We acknowledged the importance of regional discussions to
examine ways to advance the stability and prosperity of the Asia-
Pacific region. In this connection, we noted with appreciation the
following:


a. the Philippines’s proposal to invite the heads of other regional
fora and organizations in Asia-Pacific to future EAS meetings
to discuss measures that will protect the region from future
economic and financial crisis and strengthen Asia economic
cooperation, including through the possible establishment of
an economic community of Asia.


b. Japan’s new proposal to reinvigorate the discussion towards
building, in the long run, an East Asian community based on
the principle of openness, transparency and inclusiveness and
functional cooperation.


c. Australia’s proposal on the Asia Pacific community in which
ASEAN will be at its core, will be further discussed at a 1.5 track
conference to be organized by Australia in December 2009. “


Sources: Singh (2004), East Asia Summit (2009), emphasis added.




The case for regional economic integration in Asia and the PacificCHAPTER ONE


15


would be far outweighed by those resulting
from removing tariff and structural barriers
to Asian trade. It also concluded that regional
integration would promote Asian economic
convergence, raise average growth rates
and benefit poorer countries. In particular,
greater regional integration would propagate
commercial linkages and transfer the stimulus
from the rapid-growth economies of Asia,
particularly China and India, to their lower-
income neighbours. A more recent study
estimated potential welfare gains from
regional economic integration within the
CEPEA framework of up to $284 billion – which
is in tune with previous studies and larger
than other regional integration schemes.48


Strengths, weaknesses, opportunities
and threats of broader regionalism


Broader regionalism in Asia and the Pacific
would not only bring a number of strengths
and opportunities but also suffer from some
weaknesses and threats.


Strengths – Many of these arise from
complementarities. Some economies such
as those of Australia, Islamic Republic of Iran,
Myanmar and the Russian Federation are well
endowed with natural resources while others
depend more on imports. Some economies,
such as those of China, Japan, and the Republic
of Korea, depend more on manufacturing
while others, such as India and the Philippines,
are dominated by services. The region not only
has large net exporters, such as China, Japan,
the Republic of Korea and most of the ASEAN
countries but also has net importers such
as India. The region has some of the world’s
fastest-growing economies, including China
and India, and others with large markets such
as Japan. Collectively, the region is endowed
with natural resources as well as large human
and financial resources. Furthermore, the
Asia-Pacific economies have already arrived at
numerous bilateral and subregional FTAs that
provide valuable foundations for a broader
regional grouping. Another strength is that
many Asia-Pacific countries in the past have
enjoyed vibrant intraregional trade and have
centuries-old civilizational and cultural links.


Opportunities – As western sources of
aggregate demand decline, Asia-Pacific
countries need to rebalance their economies.
This opens up opportunities to boost not
just domestic but regional consumption.
Another opportunity arises from greater
political and public support for regionalism
as is evident from the statements of different
leaders as well as from perception surveys.
The slow progress in the Doha Round of
multilateral trade negotiations also creates
space by releasing negotiators to work on
regional arrangements. Businesses can
also take advantage of opportunities to
reduce transaction costs caused by the
“noodle bowl” syndrome and seek efficiency
through industrial restructuring. Industrial
restructuring also opens up the prospect of
narrowing development gaps by building
productive capacities in poorer economies.


Weaknesses and threats – These arise from
the perceived lack of strong political will and
leadership. ASEAN has been a driving force but
its first priority, understandably, is to complete
the ASEAN Community. Broader integration
is also slowed by a lack of coherence: some
members would prefer a less-inclusive EAFTA
while others vigorously oppose it in favour
of the more inclusive CEPEA. Progress can
also be slowed by bilateral political tensions
and sensitivities. In fact, such tensions could
be reduced within a broader grouping.
Other weaknesses are the lack of regional
institutions, shallow financial markets and
inadequate transport infrastructure.


On balance, the positive factors outweigh
the negative factors. Even the political
differences need not be an obstacle. Indeed,
those between Asia-Pacific countries may be
less significant than those formerly between
European countries whose leaders agreed
to set aside their differences and move
ahead with economic integration. Hopefully,
Asia-Pacific leaders will also appreciate
the compelling arguments for deeper and
broader economic integration and begin to
push the agenda.




16


Key elements of regional economic
integration


Regional economic integration requires a
long-term vision supported by the necessary
frameworks and institutions. This would
involve four key elements:


• An integrated Asia-Pacific market: This
would involve coalescing numerous
bilateral and subregional arrangements
into broader regional trading and
economic cooperation arrangements
open to all Asia-Pacific economies. This
should be based on the principles of
openness, transparency and equity. It
should substantially extend to all trade,
and cover liberalization and facilitation
of trade in goods and services and
investments. It should provide for
flexibilities and special and differential
treatment for poorer economies and
economic assistance for lagging areas
and vulnerable sections of societies.
This would represent regionalism
with an a human face. The creation of
a broader market does not, however,
mean that subregional groupings lose
their relevance. They should continue as
building blocks of the broader regional
arrangement while pursuing their
own programmes of trade facilitation,
stronger connectivity, and food and
energy security.


• Seamless physical connectivity: The
full potential of intraregional trade
cannot be realized without improved
connectivity. For example, better
surface transport, and multimodal
transport networks connected through
dry ports, will help spread the benefits
of industrialization to the hinterlands.
Connectivity should extend to energy
pipelines and power grids and broadband
cables for knowledge networks. These
connections will link lagging regions
with growth poles and encourage more
balanced regional development.


• Fina nc ial co op era tion: Financial
cooperation can promote mutual trade
and build resilience to financial crises,
while also make better use of regional


resources for investment in infrastructure
that will strengthen connectivity.


• Addressing shared vulnerabilities
and risks: Mutual cooperation will put
countries in a better position to respond
to shared vulnerabilities, such as energy
and food security, natural disasters
and environmental sustainability –
as well as rising inequalities, slower
poverty reduction, and threats to
social cohesion. The options would
include jointly developing technology,
enhancing people-to-people contacts
to promote better understanding and
sharing development experiences and
best practices.


If implemented as a part of a package, this
four-pronged plan would help realize a
long-term vision by building an Economic
Community of Asia and the Pacific.


In subsequent chapters, this report
summarizes the modalities and institutional
architecture that would be needed to
pursue the four-pronged plan across the
region. Chapter six of the study offers a way
forward for the consideration of the ESCAP
Commission.


Endnotes


1 See www.ggdc.net/MADDISON/oriindex.htm. Asia
is defined as China; India; Indonesia; Japan; Philippines;
Republic of Korea; Thailand; Taiwan Province of China;
Bangladesh; Myanmar; Hong Kong, China; Malaysia;
Nepal; Pakistan; Singapore; and Sri Lanka.


2 See for example, Myrdal, 1968.


3 See World Bank, 1993.


4 Quah, 2010, of the London School of Economics,
has prepared an animation that depicts the world’s
economic centre of gravity shifting from somewhere in
the Atlantic in 1980 to somewhere between India and
China by 2050.


5 Wilson and Purushothaman, 2003.


6 Wilson, Burgi and Carlson, 2011, p. 3.


7 Kharas and Kohli, 2011. The projections by Goldman
Sachs and ADB are not comparable to the historical
data compiled by Maddison. The latter are adjusted by
PPP using the Geary-Khamis methodology.




The case for regional economic integration in Asia and the PacificCHAPTER ONE


17


8 See Amsden, 2001; Wade, 2003; Lall, 2005; Kumar,
2005; Kumar and Gallagher; 2006; for evidence.


9 See Kumar, 2003, for evidence.


10 IMF, 2012, projected growth of little over 2 per cent
over the medium term for the advanced economies.


11 See e.g. Bruce Einhorn, “U.S. Senate Targets India
Outsourcers”, 8 August 2010. Available from www.
businessweek.com/globalbiz/blog/eyeonasia/
a rc h i ve s / 2 0 1 0 / 0 8 / u s _ s e n a t e _ t a rg e t s _ i n d i a _
outsourcers.html; “EU’s unilateral carbon tax disturbs
other nations”, Global Times, 22 March 2012. Available
from www.globaltimes.cn/NEWS/tabid/99/ID/701643/
EUs-unilateral-carbon-tax-disturbs-other-nations.aspx.


12 ESCAP, 2012.


13 OECD, 2012.


14 The headcount poverty rate is defined as the share
of the population living with less than $1.25 (in 2005
prices, adjusted by PPP) per day. See ESCAP, ADB and
UNDP, 2012.


15 See ESCAP, ADB and UNDP, 2012.


16 ESCAP, 2012.


17 See ESCAP, ADB and UNDP, 2012.


18 ESCAP and UNISDR, 2010.


19 ESCAP estimations based on data from Japan:
National Police Agency, the Cabinet Office; Thailand:
Department of Disaster Prevention and Mitigation,
Royal Irrigation Department; New Zealand and
Pakistan: EM-DAT. Available from www.emdat.be/.


20 ESCAP, 2012.


21 ESCAP, 2010a and 2012.


22 International Energy Agency, 2011. Available from
www.iea.org/textbase/nppdf/free/2011/key_world_
energy_stats.pdf.


23 Kohli, Sharma and Sood, 2011.


24 See ESCAP, 2010a, 2011b and 2012.


25 ESCAP 2010b, table 1.7, p. 18.


26 See ADB and ADBI, 2009.


27 Dumas, 2006.


28 See Shankar, 2004, for more details. Also see Frost,
2008.


29 ESCAP, 2011b, chapter 3.


30 See chapter two for more details.


31 For instance, the United States plans to double its
exports and increase savings in the coming years. This
objective can only be achieved if the rest of the world is
able to absorb growing United States exports. A rapidly
growing Asia-Pacific region would create space for
other regions to grow. See United States, 2009.


32 WTO, 2011.


33 Estimates of the exact share of trade conducted
on a preferential basis depend on methodological
considerations, including how to classify trades
between partners to the same RTA on items with zero
most favoured nation (MFN) rates, or whether to count
or not intra-EU trades as preferential.


34 See, e.g. Menon, 2005; Baldwin and Seghezza, 2007.


35 See UNCTAD, 2006.


36 See Kose, Meredith and Towe, 2004.


37 See e.g. Kuma, 2003; Medvedev, 2006


38 See Kose, Meredith and Towe, 2004.


39 See e.g. Kumar, 2007a, for details.


40 In 1998, Ireland’s per capita income was $21,482
compared to an average of $21,227 for the European
Union. Figure adjusted by PPP. Source: World Bank,
2000, p. 40.


41 For a detailed analysis see Kelegama and Mukherji,
2007.


42 APTA covered reciprocal tariff concessions between
five member States, namely Bangladesh, India, Lao
People’s Democratic Republic, Republic of Korea and
Sri Lanka. In 2000, China joined the APTA.


43 Sutton, 2005.


44 Rowley, 2004.


45 See Kumar, 2007b and 2011, for more details.


46 See e.g. ADB, 2008 and 2011; ADB and ADBI, 2009;
Francois, Rana and Wignaraja, 2009; Kohli, Sharma
and Sood, 2011; Kumar, 2004; Kumar, Kesavapany and
Chaocheng, 2008; among others.


47 Brooks, Roland-Holst and Zhai, 2005.


48 See Kumar, 2007a, for a review of simulation studies;
CEPEA, 2008 and 2009; Kawai and Wignaraja, 2007.




18


Photo by Hanna Rubio




Towards a broader integrated marketCHAPTER TWO


19


UN Photo - M. Guthrie




20


Two Towards a broader i nte g rate d m a r ke t
The most significant forms of economic
integration in Asia and the Pacific have been
through trade, investment and migration.
Many of these activities have benefited from
various preferential arrangements, each of
which covers a limited number of countries. To
take fuller advantage of the region’s enormous
opportunities, regional integration could be
better pursued by broader arrangements that
cover the whole region.


Asia and the Pacific is the world’s most dynamic
trading region. Between 2000 and 2010, global
trade increased by an annual average of 9 per
cent, but trade within the region expanded by 12
per cent.1 This pattern continued after the global
financial crisis when businesses in Asia and the
Pacific became more eager to trade with each
other. Faced with stagnant demand in traditional
export markets, exporters looked increasingly at
the growing purchasing power in China, India,
Indonesia, the Russian Federation and other Asia-
Pacific economies.


Trading opportunities


The extent of the trading opportunities is highlighted
in figure II.1. This shows that intraregional exports
have far outpaced those to Europe, North America
and the rest of the world, and that they will
continue to do so between 2010 and 2016, when
they are expected to rise from $3.1 trillion to
between $5.6 trillion and $6.8 trillion. Already more
than half of Asia-Pacific trade is intraregional, with
the proportion increasing between 2000 and 2010
from 48 to 54 per cent (table II.1). If current trends
continue, Asia and the Pacific would become the
world’s largest regional market by 2012.




Towards a broader integrated marketCHAPTER TWO


21


Within Asia and the Pacific, trade is
concentrated in two subregions: East and
North-East Asia and South-East Asia, though
their share has been slipping. Between 2000


and 2010, the share of the region’s exports
going to these two subregions fell from 89.3 to
81.8 per cent. Over the same period, the share
of South and South-West Asia rose from 4.6 to


FIGURE TITLE


II.1. Destination of Asia-Pacific exports, 2002-2016


TABLE TITLE


II.1. Distribution of merchandise exports, by region, 2000 and 2010


Source: ESCAP based on data from International Monetary Fund, Direction of Trade Statistics.


Note: Forecasts for the period 2011-2016 based on gravity equation estimates of regional trade flows. See annex for details.


Source: ESCAP based on data from International Monetary Fund, Direction of Trade Statistics.


Note: The Asia-Pacific region is defined as comprising the five ESCAP subregions: East and North-East Asia, South-East Asia, the Pacific, South and
South-West Asia (which includes Turkey and the Islamic Republic of Iran) and North and Central Asia (which includes the Russian Federation,
Armenia, Azerbaijan and Georgia).


To
Percentage
of exports from Asia-Pacific Europe


North
America


Latin
America and
Caribbean


Middle East
and North


Africa
Sub-Saharan


Africa
2000


Asia-Pacific 48.1 21.1 25.0 2.5 2.4 1.0
Europe 11.5 70.2 11.2 2.4 3.5 1.3
North America 23.5 20.0 35.3 18.3 2.3 0.6
Latin America and Caribbean 8.1 13.9 59.1 17.5 1.1 0.4
Middle East and North Africa 44.1 29.7 16.4 1.9 5.7 2.2
Sub-Saharan Africa 23.0 37.9 24.8 2.8 2.0 9.5


2010
Asia-Pacific 53.7 19.7 15.4 4.5 4.7 2.0
Europe 15.2 69.0 7.6 2.5 4.1 1.6
North America 29.4 15.3 31.3 18.8 4.0 1.3
Latin America & Caribbean 20.5 13.7 43.0 19.8 2.1 0.9
Middle East and North Africa 55.9 18.8 11.8 1.4 9.7 2.4
Sub-Saharan Africa 35.8 24.3 22.0 3.8 1.9 12.2




22


TABLE TITLE


II.2. Distribution of Asia-Pacific merchandise exports, by subregion, 2000 and 2010


Source: ESCAP based on data from International Monetary Fund, Direction of Trade Statistics.


To
Percentage
of exports from


East and
North-East Asia South-East Asia


South and
South-West Asia


North and
Central Asia Pacific


2000
Asia and the Pacific 65.8 23.4 4.6 1.5 4.7
East and North-East Asia 70.9 21.5 3.2 0.5 4.0
South-East Asia 57.5 33.4 4.0 0.2 4.9
South and South-West Asia 56.3 18.2 17.2 5.8 2.6
North and Central Asia 46.3 3.9 21.7 28.0 0.1
Pacific 63.1 16.0 4.7 0.4 15.8


2010
Asia and the Pacific 60.8 21.1 9.2 4.0 5.0
East and North-East Asia 64.4 19.6 7.2 4.3 4.4
South-East Asia 53.7 31.7 7.1 0.9 6.7
South and South-West Asia 49.0 14.3 27.4 7.4 1.9
North and Central Asia 50.4 8.2 24.9 16.0 0.6
Pacific 70.9 11.1 7.4 0.5 10.0


9.2 per cent and that of North and Central Asia
from 1.5 to 4.0 per cent (table II.2).


Table II.2 also shows that East and North-
East Asia is the main export market for all
the Asia-Pacific subregions (including East
and North-East Asia itself ). In addition, South
and South-West Asia is now the second
largest subregional export market for North
and Central Asia. It is also noticeable that
intra-subregional trade decreased for all the
subregions between 2000 and 2010, with the
exception of South and South-West Asia, as
export opportunities across the subregions
became more important. In other words,
export opportunities between the subregions
are becoming more important over time.


The merchandise trade data from the region
also show significant changes at the level
of individual countries, with China notably
surpassing Japan as the region’s largest
exporter and importer. Between 2000 and
2010, exports from China grew at an annual
average rate of 17 per cent to reach $1.83
trillion, or 32 per cent of the region’s exports.
Over the same period, the country’s imports
grew even more spectacularly, by 19 per cent
annually, to reach $1.27 trillion, or 24 per cent
of the region’s imports. India was another


economy in the region that experienced rapid
trade growth; its exports grew on average by
18 per cent annually during that time period
to reach $242 billion, or 4 per cent of the
region’s exports, while its imports expanded
by 25 per cent to $349 billion, accounting for
7 per cent of the region’s total in 2010. This
made India the region’s fifth-largest importer
after China; Japan; Hong Kong, China; and the
Republic of Korea.


An export opportunities indicator


Growing markets provide opportunities for
both current and new exporters across the
world. In order to assess the prospects and
desirability of further trade liberalization
within the Asia-Pacific region, a new “export
opportunities indicator” developed by ESCAP
identifies which markets are the most promis-
ing for each country in the world. This is based
on the assumption that it is easier for exporters
to enter and expand sales in a market that is
growing than in one which is stagnant or
declining. The value of the indicator for each
destination country represents the potential
annual increase, measured in billions of dollars,
in imports from industries in which the source
country is internationally competitive. This
does not mean, of course, that the exporting




Towards a broader integrated marketCHAPTER TWO


23


FIGURE TITLE


II.2. The ten most promising export markets for Asia-Pacific countries


Source: ESCAP based on data from United Nations Statistics Division, Commodity Trade Statistics database (COMTRADE).


Note: The export oppotunities indicator represents the potential annual increase, in billions of US dollars, in the size of the export markets of each
country visa-a-vis each of its trading partners. See Annex for details.





24


country will necessarily be in a position to
take advantage of all this market growth
because other countries that export similar
products will also try to take advantage of
these emerging opportunities. Details on
the methodology for the computation of the
indicator are included in the annex.


The results of this analysis are summarized in
figure II.2, which shows the ten most promising
export markets in the world for each country
in Asia and the Pacific. The results show that
China is among the top 10 export markets
in the world for all the countries in Asia and
the Pacific. Other top 10 export markets
for countries in the region are India (for 44
countries), Republic of Korea (for 39 countries),
Russian Federation (for 32 countries) and
Turkey (for 28 countries). Exports to China
also provide the indicators with the largest
values: export opportunities in China for
Japan, for example, are growing by $35 billion
a year, followed by those for the Republic of
Korea at $29 billion. Nevertheless, China also
offers important export opportunities to
lower-income or less developed countries,
including the Democratic People’s Republic
of Korea, $16 billion, Papua New Guinea, $11
billion, Mongolia, $8 billion, Myanmar, $3.7
billion, Lao People’s Democratic Republic,
$3.4 billion, and Nepal, $2.4 billion. The


second most promising market for the Asia-
Pacific exporters is India, which offers large
opportunities for products from Georgia
and the Russian Federation, both $8 billion,
and Kazakhstan and Papua New Guinea,
both $7 billion. For most countries the
greatest opportunities lie outside their own
subregions.


This is confirmed by table II.3, which shows
the export opportunities indicator for the
average country in each of the five Asia-Pacific
subregions. The conclusion from this table is
that, with the exception of East and North-
East Asia, the average country stands to gain
substantially more by exporting to other
subregions than to other countries in its own
subregion. This observation contrasts with the
approach to regional economic integration
adopted so far in Asia and the Pacific, which
remains essentially subregional and fails to
recognize the often greater potential of trade
expansion across the subregions.


It should also be noted that, on average,
the opportunities within Asia and the
Pacific are greater than those in Europe and
North America combined. This is illustrated,
by country, in figure II.3. For the average
country in Asia and the Pacific, the region
itself provides 45 per cent of the total export


TABLE TITLE


II.3. Export opportunities indicator, for the average country in Asia-Pacific subregions and selected regions of the
world


To
Indicator
of opportunities
to export from


East
and


North-
East
Asia


South-
East
Asia


South
and


South-
West
Asia


North
and


Central
Asia Pacific


Asia
and the
Pacific Europe


North
America


Rest
of the
World


East and North-East Asia 23.3 3.7 5.3 3.6 0.8 36.8 20.8 3.9 11.8
South-East Asia 19.4 2.3 4.1 1.7 0.6 28.1 16.2 5.4 6.9
South and South-West Asia 9.1 2.1 2.8 1.9 0.5 16.5 12.9 3.6 7.0
North and Central Asia 13.5 3.1 6.1 1.0 0.7 24.4 18.1 7.9 6.8
Pacific 5.2 1.4 2.5 0.7 0.3 10.1 7.3 1.8 3.5
Asia and the Pacific 13.0 2.4 3.9 1.6 0.6 21.4 14.1 4.3 6.7
Europe 13.8 3.8 5.6 4.5 1.0 28.6 29.7 6.1 13.7
North America 32.1 6.6 11.1 4.3 1.5 55.6 40.3 10.9 16.5
Rest of the World 9.5 2.2 3.9 1.3 0.6 17.5 12.1 4.9 5.6


Source: ESCAP based on data from United Nations Statistics Division, Commodity Trade Statistics database (COMTRADE).


Note: Each row represents the export opportunities indicator of the average country in each region or subregion vis-à-vis the aggregate of
countries in the importing region or subregion.


(Billions of US dollars)




Towards a broader integrated marketCHAPTER TWO


25


opportunities, compared to 39 per cent for
the United States of America and Europe
combined. In addition, 32 of the 51 economies
shown in the figure have larger opportunities
within the region than in the United States
and Europe combined. While this does not
imply that countries should ignore traditional
export markets outside the region, it suggests
that there is much that could be gained by
reducing obstacles to intraregional trade.


As might be expected, the best prospects
are available to the largest exporting
countries, as they tend to have a revealed
comparative advantage in a larger range of
products. However, the countries with the
largest export opportunities in relation to
their current levels of exports are all smaller
exporters. For example, while the ratio of
export opportunities in Asia and the Pacific
to total exports is 0.028 for China and 0.081
for Japan, it exceeds 10 for many economies
including Armenia, Bhutan, Fiji, Samoa and
Timor-Leste, among others. Examples of
export opportunities within Asia and the
Pacific for specific economies in the region
include the following:


• Pacific island developing economies,
such as Kiribati, Solomon Islands, Tuvalu
and Vanuatu can benefit from the $257
million annual growth of the regional
market for “frozen fish, excluding fillets”,
$159 million of which are additional
annual imports by China, $50 by the
Russian Federation and $27 by Thailand.2


• Bangladesh and Cambodia are traditional
exporters of garments, as are emerging
exporters, such as Myanmar and Nepal.
The indicators show that the market for
”other outer garments of textile fabrics,
not knitted, or crocheted” has been
growing in the region at an average
value of $167 million per year – by $58
million per year in the Russian Federation
and by $51 million in the Republic of
Korea. Also of interest to Cambodia is
the data on footwear market, which has
been expanding across the region, by
$392 million per year, most rapidly in the
Russian Federation, $200 million, China,
$58 million, the Republic of Korea, $51
million and Turkey, $38 million.


FIGURE TITLE


II.3. Export opportunities, by country


Source: ESCAP based on data from United Nations Statistics Division,
Commodity Trade Statistics database (COMTRADE).


(Billions of US dollars)




26


• The Lao People’s Democratic Republic
should be able to benefit from the
expansion in the demand for copper
for which the market is growing by
$1.8 billion per year, mostly in China.
Similarly, the market for “copper and
copper alloys, worked” is growing across
the region, by about $534 million per
year. The main expanding markets are:
China at $273 million, Thailand at $57
million and Turkey at $45 million.


Barriers to trade


Even though intraregional trade has been
increasing, it continues to face a number of
barriers. Traditionally, countries relied on
tariffs to protect domestic producers against
foreign competition, but increasingly the
instruments of choice are various non-tariff
and behind-the-border barriers.


Tariffs


There is no doubt that six decades of
multilateral trade negotiations have led to
a significant reduction of so-called most
favoured nation (MFN) tariffs, to more
clarity about types of tariffs, for example
ad valorem versus specific tariffs, and to a
higher predictability on levels of duties to be
charged. Historically, applied import tariffs in
most of the Asia-Pacific economies have never
been very high, on average, as many of these
economies needed to import raw materials
and intermediate products to sustain their
export dynamism. In 2009, the average
applied MFN rate in the region was 8 per cent,
with only Maldives having an average MFN
applied rate of about 20 per cent and most
other economies having average rates of less
than 10 per cent.


While the average level of applied MFN tariff
rates have been reduced significantly, many
countries in the region still have higher
average bound rates. The unweighted average
of bound tariffs for the selected Asia-Pacific
economies is 28 per cent, but the variation
of average bound tariffs around this mean is
very large, ranging from less than 5 per cent
to more than 100 per cent. Furthermore, many
countries still do not bind 100 per cent of
their tariffs. On average, the extent of imports


covered by bound tariffs or binding coverage
in Asia and the Pacific is 88 per cent, but the
coverage could be as low as 15 per cent.
The lower the binding coverage, the more
flexibility a country has in introducing higher
levels of applied import tariffs on products
that do not have tariff bindings. While this
increases “policy space” of individual countries,
it also makes the trading environment less
stable and more unpredictable.


Notably, average tariffs are based on so-called
dutiable imports excluding all zero-rate MFN
tariffs. However, the share of zero-rate MFN
bound or applied tariffs is significant, more so
in high-income than in low-income countries
in a region. For most countries, non-agriculture
tariffs lines have a larger proportion of bound
zero duty than agriculture lines. As many as
thirteen economies in the region apply zero
duty to more than 50 per cent of their non-
agriculture tariff lines, including Singapore,
Hong Kong, China and Macao, China where the
duty-free share is 100 per cent. For agriculture
products, 10 countries apply zero duty to more
than 50 per cent of their agriculture tariff lines.
As in the case of positive tariff rates, countries
tend to apply more zero tariffs than what they
are willing to bind at zero-rates, meaning that
they wish to preserve the flexibility to invoke
duty on most of the tariff lines for which they
currently impose no duties.


Non-tariff measures


There is much less data on non-tariff measures
(NTMs), which prevents comparisons across
countries or over time. The WTO provides
regularly updated information on technical
barriers to trade (TBT) through a publicly
accessible database (TBT_IMS). In addition
to TBT there are many other NTMs, which
should be properly monitored. However,
while there have been many attempts to
organize comprehensive inventories of NTMs,
none of these initiatives have yet to produce
databases equivalent to tariff schedules.
Technical barriers to trade are, in principle,
non-discriminatory and apply to all trading
partners. The other barriers to trade arise
from time-consuming customs procedures,
conformity assessments, non-transparency,
arbitrariness, poor facilitation of trade at




Towards a broader integrated marketCHAPTER TWO


27


the borders, poor physical connectivity and
freight and associated costs, among others.3


Accounting for the costs of merchandise
trade


According to the ESCAP Trade Cost Database,
nowadays tariffs typically account for no
more than 10 per cent of overall trade costs.4


But while tariffs have been falling, both as
nominal and effective rates, the costs of
non-tariff and behind-the-border measures
remain very high. For example, intraregional
trade is inhibited by documentary and other
import and export procedures which account
for up to 15 per cent of the value of traded
goods.5 These form part of what are measured
as comprehensive trade costs.6


Between 2005 and 2011, the time taken to
complete all trade procedures involved in
moving goods from factory to ship at the
nearest seaport – or vice versa – in the Asia-


Pacific developing economies decreased
on average by more than 18 per cent. The
greatest progress has been in South-East
Asia. On the other hand, procedures in South
and South-West Asia still take 50 per cent
more time to complete than in South-East
Asia. No significant progress was made in
the Pacific. Overall, it still takes three times
longer to complete trade procedures in the
Asia-Pacific developing economies than in
Australia, Japan and New Zealand, indicating
considerable room for improvement.


Some of the costs are inherent to the location,
culture or history of the trading partners and
may be difficult to address through policy, at
least within a reasonable time frame. These
costs are sometimes called ”natural” trade
costs. However, other costs – such as tariff rates,
the availability of logistics infrastructure and
services, a favourable exchange rate, a con-
ducive business environment and transparent
and streamlined border procedures – are open
to policy change.


FIGURE TITLE


II.4. Policy-related factors in trade costs


Source: Duval and Uthoktham (2011).


a Illustrative based on casual observation of the data only. Natural trade costs for landlocked countries may be outside the range shown for
natural trade costs.




28


Research undertaken by ESCAP suggests
that tariff trade costs in Asia and the Pacific
generally account for up to 10 per cent of
bilateral comprehensive trade costs, while
other policy-related trade costs, such those of a
non-tariff nature, account for 60 to 90 per cent.
Natural trade costs vary widely depending on
the partner countries, but account on average
for more than 20 per cent of trade costs. As
indicated in figure II.4, progress to bring down
trade costs will be particularly important in
maritime services and in information and
communications technology (ICT).


It should be noted, too, that the full costs lay
not so much in the direct costs of completing
the procedures, but in a potential reluctance
to engage in trade if the likely overall costs are
uncertain.


All subregions in Asia and the Pacific have
made progress in reducing non-tariff trade
costs between 2001-2003 and 2007-2009,
with trade costs between East Asia and
North and Central Asia experiencing the
largest reduction (table II.4). Because its
geographic proximity and similarities in
languages and culture, the costs of trade are
expected to be lower between countries in
the same subregion. However, the costs of
trade between subregions are quite high,


even when they are also relatively close
geographically. Moreover, the costs of trade
between the Asia-Pacific subregions tend to
be substantially higher than those between
them and the traditional markets of the West.
Those between the ASEAN and SAARC, for
example, are on average nearly double the
costs of trade between ASEAN and the United
States of America. Similarly, the costs of trade
between North and Central Asia and South
Asia are about twice those between North
and Central Asia and the European Union.7
Factors that explain these significantly higher
costs are explored below and in chapter three
of this study.


Apart from Singapore and Hong Kong, China,
the top-ranked economies in the ESCAP Trade
Cost Database – the ones with the lowest costs
– are Malaysia, the United States, China, the
Republic of Korea and Thailand, with Japan
and Germany following closely.8 However, the
trade cost performance of a given country
varies significantly depending on trading
partners, as well as on the type of goods.
Compared with manufactured goods, the
barriers are greater for agricultural products
which are typically governed by extensive
regulations for food safety or food security.9
Nevertheless, the costs vary considerably from
country to country suggesting significant
scope for reduction (figure II.5).


Source: ESCAP Trade Cost database (version 2).


Notes: Trade costs may be interpreted as tariff equivalents. Percentage changes in trade costs between 2001/2003 and 2007/2009 are in parentheses.
ASEAN-4: Indonesia, Malaysia, the Philippines and Thailand; East-Asia-3: China, Japan and Republic of Korea; North and Central Asia-6: Armenia,
Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan and Russian Federation; SAARC-4: Bangladesh, India, Pakistan and Sri Lanka; EU-3: France, Germany
and the United Kingdom.


Region ASEAN-4 East Asia-3
North and


Central Asia-6 SAARC-4
Australia-New


Zealand EU-3


ASEAN-4 79(-10)


East Asia-3 73(-6)
47


(-21)
North and
Central Asia-6


291
(-14)


187
(-33)


149
(-21)


SAARC-4 134(-0)
119
(-3)


270
(-22)


113
(-1)


Australia-New
Zealand


90
(-12)


78
(-16)


270
(-22)


130
(-3)


45
(-24)


EU-3 97(-5)
70


(-19)
149


(-26)
101
(-3)


89
(-17)


32
(-33)


United States 77(-0)
53


(-14)
165


(-17)
99


(-1)
82


(-11)
51


(-18)


TABLE TITLE


II.4. Non-tariff intraregional and extraregional trade costs in Asia and the Pacific, 2007-2009




Towards a broader integrated marketCHAPTER TWO


29


FIGURE TITLE


II.5. Agricultural and manufacturing non-tariff comprehensive trade costs between selected economies and Japan


Source: ESCAP Trade Cost database (version 2).


Expanding trade in commercial
ser vices


Exports of commercial services are becoming
increasingly important for Asia and the
Pacific. Between 2000 and 2010, the region
increased its contribution to world services
exports from 22 to 29 per cent. Although
the latter figure is smaller than the region’s
contribution to world merchandise exports,
38 per cent in 2010, the value of services
exports has been growing faster than that of
merchandise exports, especially in the last few
years (figure II.6). In 2011, the top exporters
of services from the region were China ($182
billion), India ($148 billion), Japan ($142
billion), Singapore ($125 billion), Hong Kong,
China ($120 billion) and the Republic of Korea
($83 billion).10 The combined service exports
of these six economies represented 63 per
cent of the region’s total during that year. The
region’s imports of commercial services have
been growing somewhat slower than exports
since 2000. Consequently, the region’s trade
deficit in commercial services, measured as a
percentage of its exports, has dropped from
15.4 per cent in 2000 to 2.8 per cent in 2011.


This decline suggests that the Asia-Pacific
region is enhancing its capabilities to produce
and export commercial services.


In the period 2000-2010, the share of travel
services exports in global services exports
dropped from one third to one quarter of
global exports, the share of transportation
services fell by 1.9 percentage points, and the
share of “other commercial services” increased
eight percentage points, from about 45 per
cent in 2000 to just over 53 per cent in 2010.
During the same period, Asia and the Pacific
increased its share of in global exports in
these three categories of services (table
II.7). The region’s largest percentage point
increase was recorded in exports of travel
services, which reached $260 billion in 2010.
The region’s share of transportation services
exports increased by 4.2 percentage points to
$245 billion in 2010, while the largest increase
in terms of value of exports was recorded in
“other commercial services”, which reached
$520 billion in 2010.


Data on bilateral trade in services among Asia-
Pacific economies are very limited. Only six
economies, namely Australia, Japan, Republic




30


FIGURE TITLE


II.6. Exports of commercial services and merchandise, Asia-Pacific, 2000-2010


Source: ESCAP based on WTO and UNCTAD WTO International Trade Statistics database (accessed 12 April 2012).


of Korea, the Russian Federation, Singapore
and Hong Kong, China, report exports and
imports of commercial services with a selected
number of trading partners. Table II.5 shows
that in 2008, these six economies export, on
average, 34.8 per cent of their commercial
services to trading partners within the region.
That year, Australia; Hong Kong, China; and
the Republic of Korea sent more than 40 per
cent of their commercial services exports to
other countries in the region. On the other
end, the Russian Federation sent only 5 per
cent of its commercial services exports to the
region.11 Data on imports are qualitatively
similar to those on exports, although the
average value of imports of the six reporting
economies originated in the region is lower, at
28.7 per cent.


Tourism services


As mentioned above, travel is the type of
commercial service that expanded the fastest
in Asia and the Pacific over the last decade. It is
a major industry with the potential to generate
millions of jobs and support economic growth.


According to the United Nations World
Tourism Organization (UNWTO), Asia and
the Pacific, currently ranked second among
the world’s regions in terms of international
tourist receipts, recorded a record number
of tourist arrivals in 2011 of 216 million or a 6
per cent increase from the year before.12 The
dynamism of the travel industry in the region
is partly the result of the increasing purchasing
power of its emerging middle class, which can
increasingly afford the expense of travelling
to other countries for tourism.


Table II.6 shows selected subregions and
countries of origin for the 10 largest tourism
markets in Asia and the Pacific.13 Overall,
almost two thirds of the tourism arrivals to
these countries originate from within the
region, and more than 50 per cent originate
from South-East Asia and East and North-East
Asia. Moreover, in seven of the ten countries,
arrivals originating in the region represent
70 per cent or more of the total arrivals. It
is expected that as the region continues to
prosper, intraregional tourism will increase at




Towards a broader integrated marketCHAPTER TWO


31


FIGURE TITLE


II.7. Changes in the share of commercial services exports, Asia and the Pacific and the world, 2000-2010


Source: ESCAP based on ESCAP and WTO, WTO International Trade Statistics database (accessed 23 March 2012).


Source: ESCAP based on United Nations Services Trade Statistics (accessed November 2011).


TABLE TITLE


II.5. Intraregional trade in commercial services, selected exporters and importers, 2008


Reporter


Partner Australia
Hong Kong,


China Japan
Republic of


Korea
Russian


Federation Singapore Average
Australia 2.7 1.5 0.8 0.1 4.2 1.9
Hong Kong, China 3.0 -0.7 4.7 0.3 4.1 1.7
Japan 4.5 6.4 10.5 1.0 6.8 4.7
Republic of Korea 3.4 2.7 3.3 1.2 3.2 2.4
Russian Federation 0.2 0.6 0.4 1.6 .. 0.5
Singapore 7.3 2.8 9.4 4.2 0.2 4.5
China 8.8 24.4 6.1 14.6 1.7 5.2 10.4
India 5.5 1.0 1.1 1.3 0.3 2.9 1.8
Indonesia 1.9 0.6 1.4 1.1 0.0 3.1 1.4
Malaysia 2.8 1.3 0.0 1.0 0.0 3.2 1.2
New Zealand 6.4 0.3 0.3 0.1 0.0 0.7 0.8
Philippines 0.6 0.8 0.9 1.3 0.0 0.9 0.8
Thailand 1.8 0.9 3.4 1.5 0.1 2.1 1.9
Viet Nam 1.1 0.2 .. 1.9 0.4 0.9 0.7
Total 47.4 44.7 27.1 44.7 5.5 37.3 34.8


(Percentage of total exports)


Transportation $245


Other commercial services
$523


Travel $260


-9


-6


-3


0


3


6


9


12


0 1 2 3 4 5 6 7 8 9 10


Share of Asia and the Pacific in global exports, percentage points change between 2000 and 2010


Sh
ar


e o
f s


er
vic


e c
at


eg
or


y i
n


gl
ob


al
ex


po
rts


,
pe


rc
en


ta
ge


p
oi


nt
s c


ha
ng


e b
et


we
en


20
00


an
d


20
10




32


a greater pace, and thus could make a large
contribution to supporting growth across the
region.


Education services


Exports of education services, especially at
the tertiary level, have increasingly become
an important source of foreign exchange
earnings for many Asia-Pacific economies.
According to data from the United Nations
Educational, Scientific and Cultural Orga-
nization (UNESCO) Institute for Statistics, the
three largest education services exporters of
the region are Australia, Japan, and the Russian
Federation. As it is clear from figure II.8, the
large majority of international students in the
Asia-Pacific economies come from other Asia-
Pacific economies.


However, statistics on the number of
international students only partially capture
trade in education services. Education
services provided to international students
are classified, according to the General


Source: ESCAP based on UNWTO (accessed November 2011).


Notes: Shares of total arrivals in parentheses. China’s arrival exclude those from Hong Kong, China and Macao, China. Data for Australia is for 2009.
Methods of data collection are not standardized across countries.


TABLE TITLE


II.6. Tourism arrivals, selected Asia-Pacific countries, 2010


Agreement on Trade in Services (GATS),
as Mode 2 of supply or consumption of a
service abroad. Although this mode currently
represents the largest share of the global
market of education services, there are other
forms of supply that are gaining relevance
especially in the developing countries of Asia
and the Pacific. For example, improvements
in access to modern ICT have opened large
potential for cross-border supply (Mode
1) through distance education, e-learning
and the operation of virtual universities. In
addition, foreign investment, franchising,
and partnerships between foreign and local
institutions have been bringing a rapid
expansion in Mode 3, a commercial presence
of institutional education providers in a
foreign country. An increase in the presence
of foreign providers of education services
through Mode 3 is often perceived as an
effective way to attract foreign students,
as well as to reduce the outflow of foreign
exchange by keeping domestic students in
the country.


Country of
destination


Subregion or country of origin
East and


North-East
Asia


South-East
Asia


Australia and
New Zealand


Russian
Federation


South and
South-West


Asia Subtotal Total
China 13 859


(44.3)
5 746
(18.4)


777
(2.5)


2 370
(7.6)


871
(2.8)


23 624
(75.6)


31 267
(100)


Turkey 427
(1.5)


120
(0.4)


156
(0.5)


3 107
(10.9)


1 987
(6.9)


5 797
(20.2)


28 632
(100)


Malaysia 2 021
(8.2)


18 937
(77.1)


647
(2.6)


32
(0.1)


997
(4.1)


22 635
(92.1)


24 577
(100)


Thailand 3 290
(24.6)


3 741
(27.9)


642
(4.8)


600
(4.5)


894
(6.7)


9 167
(68.4)


13 395
(100)


Singapore 2 664
(22.9)


4 822
(41.4)


976
(8.4)


..


..
1 084
(9.3)


9 546
(82.0)


11 642
(100)


Japan 5 661
(65.7)


722
(8.4)


258
(3.0)


51
(0.6)


105
(1.2)


6 797
(78.9)


8 611
(100)


Republic of
Korea


5 038
(64.4)


861
(11.0)


123
(1.6)


137
(1.8)


114
(1.5)


6 272
(80.2)


7 818
(100)


Indonesia 1 455
(20.8)


3 052
(43.6)


804
(11.5)


..


..
158


(2.3)
5 469
(78.1)


7 003
(100)


India 412
(7.1)


439
(7.6)


207
(3.6)


122
(2.1)


1 047
(18.1)


2 227
(38.6)


5 776
(100)


Australia 1 163
(20.8)


790
(14.1)


1 110
(19.9)


12
(0.2)


162
(2.9)


3 238
(58.0)


5 584
(100)


Total 35 990
(24.9)


39 231
(27.2)


5 701
(4.0)


6 432
(4.5)


7 419
(5.1)


94 772
(65.7)


144 305
(100)


(In thousands)




Towards a broader integrated marketCHAPTER TWO


33


Movement of people


Movement of people across borders is an
important mode of trade in services. Migration
flows between countries in the region could be
very effective in tackling structural demand-
supply imbalances between countries of the
region, contributing economic growth and
a reduction in region-wide disparities in the
distribution of labour income. For instance,
changes in technology and the mix of goods
and products produced in a particular eco-
nomy could lead to shortages in specific seg-
ments of the labour market and to excess
supply in others. While such complex changes
could, in principle, be tackled through
national educational and training policies,
both the implementation of such policies and
the time it takes to train skilled workers make
migration a more effective channel to tackle
imbalances in specific segments of the labour
market in the short to medium run.


In sum, labour migration can be mutually
beneficial for employers and migrants, as


well as for residents of countries of origin and
countries of destination, but the migration
process must be well-managed. In the light
of the significant amount of migration
occurring within Asia and the Pacific, regional
coordination of international migration
policies could facilitate better skills matching
to address labour market needs in countries of
origin and destination. This includes creating
legal channels for migration and the sending
of remittances by both skilled and low-skilled
labour migrants, resulting in more balanced
opportunities and benefits for the region.


Migrants in Asia and the Pacific


Several countries of the region have attracted
significant numbers of migrants. In 2010, the
region’s largest foreign-born population –
more than 12 million – lived in the Russian
Federation, followed by India, Australia,
Pakistan and Kazakhstan. In most cases,
the foreign-born population comes from
neighbouring countries or other countries
within the subregion. For example, Australia


FIGURE TITLE


II.8. Number of international students in selected Asia-Pacific economies, 2009


Source: ESCAP calculations based on UNESCO, Institute for Statistics database. Available from http://stats.uis.unesco.org.
Note: Figures for India are for 2006 and those for the Philippines are for 2008.


(in
th


ou
sa


nd
s)




34


and New Zealand are well connected to
each other, facilitated by the reciprocal
rights agreement under the Trans-Tasman
Travel Arrangement, which came into effect
in 1973. This informal agreement allows for
free movement of labour migrants between
the two countries. Additionally, several
Pacific island countries have large diasporas
in Australia and New Zealand. For example,
in 2005, the population of Samoa stood at
180,000, with 15,240 Samoans residing in
Australia and 50,649 Samoans living in New
Zealand.


An increasing number of migrants travel for
study, particularly at the tertiary level. The
majority of Asian students studying abroad
still favour Europe and North America,14 but
East Asian destinations, such as Japan and
Republic of Korea, and Australia are becoming
popular (figure II.8); and about 90 per cent of
these countries’ foreign students are from
Asia, especially China. In 2008, about 18 per
cent of Chinese studying abroad studied in
Japan and about 8 per cent in the Republic
of Korea. Another popular destination for
students is the Russian Federation, largely
from Kazakhstan and other Central Asian
countries.


A unique feature in the Asia-Pacific region
is that it hosts both locations of origin and
of destination of labour migrants. Some
economies, such as Japan, Malaysia, the
Republic of Korea, Thailand, Hong Kong, China
and Taiwan Province of China have recently
become destinations for labour migrants.
Those from South-East Asia migrate mainly
to the more affluent economies, notably
Brunei Darussalam, Malaysia, Thailand, and
Singapore as well as to East Asia, particularly
the Republic of Korea; Hong Kong, China;
Macao, China; and Taiwan Province of China.
Meanwhile, labour migrants from Central
Asia tend to migrate to Kazakhstan and the
Russian Federation.15


Labour migration and remittances


Labour migration also provides a source of
income to households of the migrants left
behind in the countries of origin. Moreover, for
a number of countries of origin of migration in


the region, remittances are the largest sources
of foreign exchange. In 2011 of the top ten
recipients of remittances worldwide, six were
in the Asia-Pacific region, led by India ($58
billion), China ($57 billion), the Philippines
($23 billion), Bangladesh and Pakistan ($12
billion each) and Viet Nam ($8 billion).16


For some countries, such as Tonga, Samoa
and Nepal, remittances represent a high
proportion – of 20 per cent or more – of the
GDP.17 Given these benefits, it is not surprising
that the governments of many countries,
such as Bangladesh, India, Indonesia, Nepal,
Pakistan, the Philippines, Sri Lanka, Thailand
and Viet Nam, are actively involved in the
deployment of migrant workers.


In addition, the share of remittances origi-
nating in the region itself is very significant.
According to estimates produced by the
World Bank, it ranges between 26 and 43
per cent, depending on the methodology.
According to estimates based on migrant
stocks and incomes in both the sending and
the destination economies, shown in table II.7,
some 34 per cent of the remittances received
by the region in 2010 originated in the region.
The Asia-Pacific subregions with the highest
shares of remittances coming from the region
are North and Central Asia (57 per cent), East
and North-East Asia (54 per cent) and the
Pacific (39 per cent).


Traditional sources of remittances income
outside the region include Canada and the
United States, which provide 42 per cent of
the remittances received by South-East Asia
and 31 per cent of those received by East
and North-East Asia; Europe, which provides
36 per cent of the remittances received by
the Pacific; and the Gulf Cooperation Council
countries,18 which provide 42 per cent of the
remittances received by South and South-
West Asia. However, as growth in Asia and
the Pacific continues to outpace that of these
traditional sources, it is expected that the
region will be able to offer more and more
opportunities for migrants. Thus, the share
of remittances originating from the region is
likely to increase in the future.




Towards a broader integrated marketCHAPTER TWO


35


Irregular migration


Although it is difficult to estimate the mag-
nitude of irregular migration flows, some data
emerge when countries encourage migrants
to register. The main destinations for irregular
migrants are believed to be Thailand, Malaysia
and India. The Ministry of Interior of Thailand
estimated that in 2010, there were around 1.4
million unregistered migrants in the country,
with perhaps 80 per cent of them from
Myanmar and the remainder from Cambodia
and the Lao People’s Democratic Republic.19
In the Russian Federation, about half of its
migrants are estimated to be irregular, the
majority from Central Asia and other countries
of the Commonwealth of Independent States
(CIS). Kazakhstan is believed to have between
500,000 and 1 million irregular migrants,
mostly from Kyrgyzstan, Tajikistan and Uzbe-
kistan.20


Irregular migration, which is often encou-
raged by restrictions on labour movements,
incurs high economic and social costs for
both countries of origin and destination. For
instance, high recruitment costs for labour
migrants reduces the positive impacts of
remittances because a significant proportion
of the migrants’ income should be used
to repay loans taken to cover the cost of
recruitment, such as transport and securing
a work visa. As such, the minimization of
recruitment costs, processes and delays
in regular migration are key to improving
international migration management at the
regional level.


Cooperation in labour migration


Large irregular labour migration flows between
countries reflect the absence of an adequate
legal framework to enable migration through
regular channels.


Source: ESCAP based on data from World Bank, “Bilateral Migration and Remittances 2010. Available from http://econ.worldbank.org/WBSITE/
EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:22803131~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html (accessed 20
April 2012).


Notes: Numbers in parentheses are percentages of total remitances received by each subregion and by the Asia-Pacific region (last column). World
Bank bilateral remittance estimates based on migrant stocks, destination country incomes, and source country incomes. For more information, see
Ratha and Shaw, 2007, “South-South Migration and Remittances”, Development Prospects Group, World Bank. Available from www.worldbank.org/
prospects/migrationandremittances.


TABLE TITLE


II.7. Bilateral remittances received by the Asia-Pacific subregions, 2010


Receiving


Sending


East and
North-East


Asia
North and


Central Asia Pacific
South-East


Asia


South and
South-West


Asia Asia-Pacific
East and North-East
Asia


20 935
(38)


9
(0)


139
(3)


1 577
(5)


426
(1)


23 086
(12)


North and Central Asia 10(0)
6 224


(57)
0


(0)
0


(0)
25
(0)


6 259
(3)


Pacific 3 008(5)
20
(0)


1 669
(32)


1 734
(5)


2 332
(3)


8 763
(5)


South East-Asia 6 099(11)
0


(0)
159
(3)


6 471
(20)


2 190
(3)


14 919
(8)


South and South-West
Asia


162
(0)


45
(0)


63
(1)


21
(0)


10 148
(12)


10 439
(6)


Asia-Pacific 30 214(54)
6 298


(57)
2 030


(39)
9 803


(31)
15 121


(18)
63 466


(34)
Canada and United
States


18 551
(33)


538
(5)


1 114
(21)


13 410
(42)


19 350
(23)


52 963
(28)


EU 15 5 735(10)
639
(6)


1 869
(36)


3 624
(11)


12 338
(15)


24 205
(13)


Gulf Cooperation
Council


0
(0)


0
(0)


0
(0)


4 424
(14)


35 029
(42)


39 453
(21)


Rest of the World 1 167(2)
3 515


(32)
250
(5)


565
(2)


1 249
(2)


6 746
(4)


World 55 667(100)
10 990


(100)
5 263
(100)


31 826
(100)


83 087
(100)


186 833
(100)


(Millions of US dollars)




36


In order to regularize migration flows, and
maximize the benefits of labour migration
for source and destination countries, a
number of countries have concluded bi-
lateral agreements, usually in the form of
memoranda of understanding, which are
more effective for the management of labour
migration flows than national actions taken
unilaterally by sending or receiving countries.
They vary significantly in content, and can
cover recruitment, conditions of employment
and measures to protect migrants. Key
destination locations in Asia, such as Malaysia,
the Republic of Korea, Thailand, Hong Kong,
China, Macao, China and Taiwan Province
of China, have concluded memoranda of
understanding with selected countries of
origin in South-East and South Asia.


The most extensive arrangements are be-
tween the Republic of Korea and 15 Asian
countries of origin, namely Bangladesh,
Cambodia, China, Indonesia, Kyrgyzstan,
Mongolia, Myanmar, Nepal, Pakistan, the
Philippines, Sri Lanka, Thailand, Timor-Leste,
Uzbekistan and Viet Nam, based on the
Employment Permit System (EPS). Initiated
in 2004, the programme establishes quotas
of foreign workers per industry and also
oversees pre-departure training of the foreign
workers, including language training. Under
the scheme, the maximum stay is three years,
after which migrants have to return and
remain in their country of origin for one year
before being eligible to re-apply. Moreover,
the programme encourages voluntary return
and encourages a network of returnees,
which again would strengthen the links with
the Republic of Korea.


Thailand has signed memoranda of under-
standing with Cambodia, Lao People’s Democratic
Republic and Myanmar on guidelines and
procedures for employment protection and
return of workers, but the majority of migrants
still continue to migrate through irregular
channels which are easier and cheaper. Thailand
also has a memorandum of understanding with
Taiwan Province of China, but in this case for its
own migrant workers.


Some subregions already have visa-free
regimes, though these do not always include


the right to work. In this respect, several
subregions such as Central Asia or ASEAN
are relatively well integrated. South Asian
countries, on the other hand, are relatively
poorly integrated among themselves and
with the rest of Asia.


North and Central Asia – A mutual interest
among the CIS countries has led to an
agreement on cooperation in labour migration
and on social guarantees for migrant workers
(1994), the agreement between the CIS
countries on cooperation in preventing
irregular migration (1998) and the EurAsEc
Agreement in visa-free trips (2005). There
are also a number of bilateral agreements on
labour migration, such as between the Russian
Federation and Kyrgyzstan and Tajikistan.21
The Russian Federation allows visa-free entry
to migrant workers, while Kazakhstan allows
migrants from CIS countries 90 days to search
for work.22


ASEAN – ASEAN foresees a free flow of skilled
labour by 2020 and is working to facilitate
the issue of visas and employment passes for
ASEAN professionals and skilled labour. As a
first step, the Association has signed mutual
recognition agreements for nurses, dental
and medical practitioners, engineering and
architectural services, surveying professionals
and accountancy services. However, these
agreements do not extend to low-skilled
workers. In addition, there is the ASEAN
Declaration on the Protection and Promotion
of the Rights of Migrant Workers. Signed in
January 2007, the Declaration acknowledges
the “need to adopt appropriate and compre-
hensive migration policies on migrant wor-
kers” and “to address cases of abuse and
violence”.


Pacific – As a result of their historic ties to
Australia, New Zealand or the United States
of America, traditionally it has been easier
for migrants from several Polynesian and
Micronesian economies to access those
countries than for migrants from Melanesia.23
Australia and New Zealand have recently
started opening up to seasonal agricultural
labour from several Pacific countries through
the Pacific Seasonal Worker Pilot Scheme
(Australia) and the Recognized Seasonal




Towards a broader integrated marketCHAPTER TWO


37


Employer Scheme (New Zealand). Although
the number of participants has not being
large, these schemes have had an impact at
the local level when workers return to their
countries. Both seasonal workers schemes
are a step towards connecting all the Pacific
island economies.


Migration is inherently a multilateral concern,
and desired outcomes are most likely to be
achieved if countries of origin and destination
discuss labour migration issues and the best
way to resolve them.24 Regional cooperation,
guided by international principles and norms,
offer the best conduit for improving migration
governance in Asia and the Pacific.


Foreign direct investment


The rapid economic growth in the Asia-Pacific
region has been accompanied by increasing
flows of FDI. Between 1996 and 2000 and 2006
and 2010, FDI inflows to Asia and the Pacific
almost tripled and the region now accounts
for about one-quarter of global inflows, but
FDI outflows from the region have expanded
even more impressively with the emergence
of China, India, Malaysia, Singapore and Hong
Kong, China, joining conventional sources of
FDI, such as Australia, Japan and the Republic
of Korea. Over the same period, FDI outflows
more than quadrupled and accounted for 21
per cent of global outflows (table II.8).


The emergence of new sources in the Asia-
Pacific region is actually a reflection of the
development of large dynamic enterprises


based in the Asia-Pacific economies that tend
to operate globally similar to transnational
corporations (TNCs) originating in advanced
economies. A survey of the top 100 compa-
nies from fast growing emerging economies
included 33 companies from China, 20 from
India, 6 from the Russian Federation, 4 from
Thailand, 2 each from Indonesia and Turkey
and 1 from Malaysia.25 However, it has been
argued that compared with those from
developed countries, TNCs from developing
countries move abroad on the strength of
their frugal engineering or their ability to
deliver value for money. As these companies
operate in an environment with similar input
and output prices, they tend to be more
adept than their counterparts from advanced
countries in introducing more appropriate
products and processes to other developing
countries.26 These TNCs are gaining a stronger
foothold in climate-smart technologies. For
example, Chinese companies, such as Suntech
and Sunergy, are looking to either become or
reinforce their leading position in solar energy,
while the Indian company, Suzlon, is one of
the world’s top-five wind energy companies.27
Many of these companies have developed
globally recognizable brands, including Acer,
Lenovo, Haier, and Tata.


As a result of the rise of new sources of FDI with-
in the Asia-Pacific region, an increasing share
of FDI flows now takes place intraregionally,
reflecting the increasing participation by the
region’s developing economies in regional and
global supply chains. Developing countries
seeking opportunities often find it better to
invest in other developing countries. This is


Source: ESCAP calculations based on UNCTAD (2011a).


Note: Developed Asia-Pacific countries include Australia, Japan and New Zealand.


TABLE TITLE


II.8. Average FDI flows to and from Asia-Pacific countries and their global shares, 1996-2000 and 2006-2010


Average 1996-2000 Average 2006-2010
In billions of US


dollars
Percentage of


world flows
In billions of US


dollars
Percentage of


world flows


FDI inflows


Developing Asia-Pacific countries 115 14 340 22
Developed Asia-Pacific countries 15 2 49 3


FDI outflows


Developing Asia-Pacific countries 53 7 233 15
Developed Asia-Pacific countries 30 4 101 6




38


not only because they offer comparable or
lower wages or prices but as other developing
countries are at corresponding stages of
development, they can absorb similar types
and levels of technology and knowledge.28


However, the situation varies from one
subregion to another.


South-East Asia – Between the periods 1998-
2000 and 2008-2010, the average proportion
of FDI inflows to South-East Asia coming from
the European Union and the United States fell
from 55 to 31 per cent of total inflows to the
region while those from ASEAN+6 countries
(+Australia, China, India, Japan, New Zealand
and the Republic of Korea) increased from 15
to 41 per cent. Among the ASEAN+6 sources,
Japan was the largest contributor at 10 per
cent, followed by China at 5.3 per cent, and
the Republic of Korea at 4.3 per cent.29 It is
also noticeable that an increasing proportion
of intra-subregional flows are going to the
”CLMV” countries – Cambodia, Lao People’s
Democratic Republic, Myanmar and Viet
Nam. In Cambodia, for example, 45 per cent of


FDI inflows are from ASEAN countries though
China is the largest single contributing
economy. Much of the investment has gone
into the garment sector. In the Lao People’s
Democratic Republic, China and Viet Nam are
the largest contributors of FDI, which is mainly
directed to hydroelectricity and mining. For
Viet Nam during the period 1990-2010, the
largest investors were from Japan, Malaysia,
the Republic of Korea, Singapore and Taiwan
Province of China.30 In Myanmar, Chinese
investors contributed the largest amount of
FDI, pledging to invest $20 billion during the
2010-2011 fiscal year, with the main recipients
being the electricity, oil and gas and mining
sectors.31


South Asia – For India, about 57 per cent of the
Asia-Pacific FDI comes from South-East Asia32


and 37 per cent from East and North-East Asia,
with far less from its South Asian neighbours.33
As observed earlier, Indian companies are also
becoming active players in a number of Asia-
Pacific economies including ASEAN countries,
such as Indonesia, Malaysia, Singapore and


FIGURE TITLE


II.9. Top recipients of FDI inflows in Asia and the Pacific in 2010 and FDI outflows from these countries


Source: ESCAP based on UNCTAD (2011a) .


(Billions of US dollars)




Towards a broader integrated marketCHAPTER TWO


39


Thailand and select South Asian economies,
such as Nepal and Sri Lanka. For Pakistan, the
most significant suppliers of greenfield FDI
are from Malaysia, Singapore and Thailand.34


In Bangladesh, during 2009-2010, the largest
contributors of FDI, in terms of proposed
investments, were Saudi Arabia, Republic of
Korea and China.35 In that period Bangladesh
also originated small FDI outflows, 39 per
cent of which went to India.36 Sri Lanka has
benefited from increased investment from
India and as it recovers from its prolonged
conflict it is also expecting increasing inflows
of FDI from other Asia-Pacific countries.


North-East Asia – The largest FDI destination
in Asia and the Pacific is by far China, with
around two thirds of the inflows coming
from East and North-East Asia, the principal
sources being Hong Kong, China, Japan
and the Republic of Korea. Overall, in 2010,
some 72 per cent of the FDI flows to China
were sourced in the Asia-Pacific region, up
from 62.3 per cent in 2000. In addition, FDI
outflows from China have continued to grow,
increasing by 20 per cent in 2010. This growth
is likely to continue due to the country’s high
level of domestic savings and its increasing
need to secure the supply of resources and
access to new markets and technology.37


China is already a large investor in South-Asian
countries and is also increasing its presence in
Central Asia and the Pacific subregions.


Central Asia – Most FDI inflows target the
natural resources sector, oil and gas as well as
minerals and other precious and base metals.
Between 1993 and 2008, this sector witnessed
a ninefold increase in inflows, two-thirds of
which went to the energy sector.38 In 2010,
however, the subregion’s overall FDI inflows
fell by 28 per cent to about $14.8 billion.39 The
dominant investor is the Russian Federation,
which, in 2009, accounted for 68 per cent of
the subregional FDI inflows. Nevertheless, in
addition to traditional sources, such as Japan
and the Republic of Korea, a gradually larger
portion of FDI inflows has recently come from
developing countries, such as China and the
Islamic Republic of Iran, and notably, both
China and India have been pursuing joint
ventures.40 However, South-South investment
links in this subregion have been concentrated


in a handful of countries, such as Kazakhstan
and Turkmenistan, which have vast energy
and natural resources.


Pacific – In 2010 French Polynesia, Samoa
and Solomon Islands experienced the largest
growth in FDI inflows in the subregion. Inflows
to French Polynesia more than doubled to $26
million while inflows to Samoa and Solomon
Islands almost doubled to $238 and $2 million,
respectively.41 The leading sectors for FDI
inflows in the subregion are tourism, fisheries
and mining.42 In addition, liberalization of the
market in Samoa has spurred investment in
telecommunications.43 Most FDI to the Pacific
island economies comes from Australia, New
Zealand, Japan and, increasingly, China. In
Papua New Guinea, Australian companies are
the most active in the mining and petroleum
sectors but China is also increasing its
investment there, including the $1-billion
Ramu nickel mine.44 In Fiji, where Australia is
also the largest investor in the tourism industry
as well as in textiles, garments and footwear,
FDI declined from a peak of $410 million to
$56 million in 2009, although it recovered to
$200 million in 2010 and in 2011, a Chinese
investor group acquired 6,000 acres of land
to establish tourist and other facilities.45 The
Australian S-TCF scheme helped spur FDI to
Pacific island economies by facilitating duty-
free access for textiles, clothing and footwear
products manufactured in the Pacific Island
Forum countries, but it expired in December
2011.


Least developed countries – Flows to the
region’s 14 least developed countries dipped
in 2009 but grew by more than one-third
in 2010 to $3.6 billion. Nevertheless, they
account for only 1 per cent of the region’s
FDI inflows.46 In 2010, more than two-thirds
of the FDI in least developed countries in the
region was placed in Bangladesh, Cambodia
and Myanmar, which have all experienced
significant growth. Outflows of FDI from least
developed countries remain low, at 0.01 per
cent of total FDI outflows from the Asia-Pacific
region. In 2010, FDI outflows from the least
developed countries as a whole fell by 20 per
cent to $42 million, of which two-thirds of
the amount originated from Bangladesh and
Cambodia. Most FDI from Bangladesh goes




40


to India, with some heading to Sri Lanka and
Pakistan. FDI from Cambodia mostly goes to
China, Singapore and Thailand.47


A fragmented region


The extent of tariff and behind-the-border
barriers to trade suggests that there is
still considerable scope for further trade
liberalization in the region. However,
currently, there is not much appetite for
liberalizing unilaterally. Many countries are
willing to continue reforms but only if other
countries reciprocally offer market access. This
is best achieved through multilateral trade
negotiations. However, since the conclusion
of the seventh multilateral round of the
WTO in 1995, there has been little progress
on this front. Countries impatient with the
slow pace have turned, instead, to bilateral
or at best small plurilateral preferential trade
agreements.48


This region has been responsible for around
half of all RTAs. Asia-Pacific economies are
parties to more than 140 agreements and are
contemplating or negotiating many more.
This activism signals a preference for deeper
integration among countries in the region than
currently envisaged in the Doha development
round of the WTO, as well as an attempt to
break multilateral deadlocks, mostly through
bilateral negotiations.49 However, expanding
bilateral deals has the great disadvantage of
increasing regional fragmentation.50


More than three-quarters of all RTAs signed


by countries in the region are bilateral.
There are also 15 plurilateral RTAs, and 15
RTAs between a country and a bloc. Box II-1
provides an overview of the key RTAs in each
of the five subregions of Asia and the Pacific.
The RTAs average eight members, a relatively
small size for a regional bloc.51 Subregional
trade agreements include the ASEAN Free
Trade Area (AFTA) now being transformed
into an ASEAN Trade in Goods Agreement
(ATIGA), the Bay of Bengal Initiative for Multi-
Sectoral Technical and Economic Cooperation
(BIMSTEC) FTA, the Economic Cooperation
Organization Trade Agreement (ECOTA) and
the South Asian Free Trade Area (SAFTA).


Most RTAs whose members are only from
the Asia-Pacific region aim to eliminate tariffs
and other trade barriers. Trade agreements
include rules of origin to avoid trade
deflection to unintended partners. Some
of them, especially the recent ones, extend
their scope beyond trade in goods to cover
trade in services, investments and economic
cooperation to exploit the full potential of
regionalism. Liberalization of trade in goods is
generally on a negative list basis, meaning all
products are covered in an trade agreement
except those on an exclusion or negative list
(except in the case of APTA, which was set on
a positive list basis). On the other hand, trade
in services and investments are liberalized
generally on a progressive or positive list basis,
although some agreements have investment
liberalization on a negative list basis as well,
for instance, the Japan-Singapore FTA.52
Some agreements, however, have provisions


BOX II.1. Key RTAs in each of the five subregions of Asia and the Pacific


As discussed in other ESCAP studies,a the Asia-Pacific region appears to be
fragmented into several geographical subregions characterized by distinct
political, cultural and historical features. In addition, the degree of intra-
subregional trade and economic integration vary substantially across subregions,
though such variation is often unrelated to the number of RTAs signed among
the economies of each subregion. For instance, East and North-East Asia has the
largest intensity of intra-subregional trade in Asia and the Pacific (64 per cent in
2010, see table II.2), which is close to that of Europe (69 per cent in 2010, see table
II.1). Yet, East and North-East Asia is the only subregion in Asia and the Pacific




Towards a broader integrated marketCHAPTER TWO


41


BOX II.1. Continued


East and North-East Asia


As already mentioned, this subregion not only has the most intensive intra-subregional
trade in the region but is also the largest regional market for exports from other Asia-
Pacific subregions (table II.2). However, the only agreements in force involving East and
North-East are three bilateral trade agreements (BTAs): the Closer Economic Partnership
Agreements (CEPA) signed in 2003 between China and Hong Kong, China and between
China and Macao, China, and the Economic Cooperation Framework Agreement (ECFA)
signed in 2010 between China and Taiwan Province of China. Although the three major
economies of the subregon, China, Japan and Republic of Korea, are intensively involved
in negotiating trade agreements with common partners such as ASEAN, the European
Union, Australia, India, New Zealand and the United States, as of the time of writing, they
have not been aggressively pursuing trade arrangements with each other.


However, this could change quickly as an announcement of soon-to-start negotiation of
a tripartite FTA is expected at a May 2012 trilateral summit. This news would follow an
expected announcement that the parties have concluded the negotiation of a three-way
investment treaty, which can be seen as an important stepping stone towards the far
more ambitious goal of establishing a free-trade area among these Asian trade giants.b


In the past few years, these countries have been studying the possibility of creating a
trilateral FTA in which the final joint study meeting on the feasibility of such an agreement
was held in December 2011. A free-trade agreement between the three countries would
be a major achievement, not only in bringing their economies closer together but also
in providing additional drivers for a broader regional integration across the whole Asia-
Pacific region.


North and Central Asia


The primary trade agreement among countries in this subregion (plus three other
former Soviet Union States) was signed at the end of 1994 as CIS. It took almost five years
to notify it to WTO, and much longer to complete negotiations to create a free-trade
zone among its members. The CIS Free Trade Agreement (CISFTA) was finally signed in
2011. It should be pointed out that a number of members in CISFTA have strong trade
and investment linkages with Western Europe and that they look more favourably upon
expanding their trading and financial relations with the European Union. However, the
role of the Russian Federation as the largest market of CISFTA economies is undeniable
not only for trade in goods, but also, as mentioned above, as a major destination for
temporary labour migration.


CISFTA is not the only agreement among economies in the region. In the late 1990s,
these economies established a customs union under the name of Eurasian Economic
Community (EurAsEC) and in 2003, a subgroup of North and Central Asian economies
signed ECOTA with several South-West Asian countries


South and South-West Asia


SAFTA was first signed among the seven South Asian countries which were members
of SAARC. Afghanistan joined in 2010. SAFTA came into effect on 1 January 2006, with
the aim to reduce tariffs for intraregional trade. Pakistan and India are to complete


without any bilateral or plurilateral agreement linking its major economies. In
contrast, the other Asia-Pacific subregions have at least one RTA in force signed
by most or all of its economies.




42


Sources: APTIAD at www.unescap.org/tid/aptiad and Bilaterals.org at www.bilaterals.org.


a ESCAP, Asia-Pacific Trade and Investment Report 2011: Post-crisis Trade and Investment Opportunities (Bangkok, 2011).
b Based on text posted at www.bilaterals.org on 30 March 2012 and attributed to Yuka Hayashi in Tokyo, Min-Jeong Lee
in Seoul and Aaron Back in Beijing.


implementation by 2012, Sri Lanka by 2013 and Bangladesh, Bhutan, Maldives and
Nepal by 2015. SAARC members have established cooperation in standards, customs
procedures and more recently are developing modalities for liberalization in services
trade. Regarding goods, significant progress has been made in reducing sensitive
lists, which has enabled more meaningful merchandise liberalization. Expansion of
SAFTA to cover new areas may eventually lead to a full-fledged South Asia Economic
Union. This is complemented by bilateral agreements between India and Sri Lanka,
Bhutan and Nepal. Another initiative is ECO, initially formed in 1985 by Turkey, Iran
and Pakistan but later expanded to cover Afghanistan and six Central Asian countries
– Azerbaijan, Kazakhstan, Kyrgyzstan, Turkmenistan, Uzbekistan and Tajikistan. In 2003,
members established the ECO Trade Agreement. Some South Asian countries have
trade and economic partnership agreements with East and South-East Asian countries.
India is a summit-level dialogue partner and has signed an FTA with ASEAN, which is
complemented by bilateral FTAs/CEPAs with Singapore, Malaysia and Thailand. India
has CEPAs with Japan and Republic of Korea and is a member of the East Asia Summit.
Pakistan has FTAs with China and Malaysia and Sri Lanka.


South-East Asia


This subregion has been at the forefront of regional integration efforts in Asia since
the signing of AFTA in 1992 and complementary negotiations in other areas, such as
services, investment, recognition of qualifications and standards, all of which have
deepened this agreement. In 2010, all the commitments regarding goods trade
were consolidated in ATIGA, which not only focuses on tariff liberalization and non-
tariff measures but includes matters related to simplification of rules of origin and its
implementation. Under this agreement, various agencies and regulatory bodies dealing
with merchandise imports, including customs, health and agricultural authorities, will
cooperate in ensuring smoother customs operations. ASEAN member countries have
also made significant progress in lowering intraregional tariffs through the Common
Effective Preferential Tariff (CEPT) scheme for AFTA and have agreed to establish
the ASEAN Economic Community by 2015. An impressive achievement of ASEAN’s
contribution to the regional economic integration process is the creation of dialogue
partnerships, which have helped to bring together the major economies of the region,
namely Australia, China, Japan, India, New Zealand and the Republic of Korea that
have ASEAN+1 FTAs.


Pacific


PICTA, signed in 2008, covers trade in goods among 14 members of the Pacific Islands
Forum and does not include Australia and New Zealand. As of 2008, it is being expanded
to trade in services. Based on PACER, as the framework agreement to deepen trade
and investment liberalisation in the broader Pacific on a step-by-step basis, Australia
has started to promote the PACER-plus agreement which includes Australia and New
Zealand. Negotiations are still undergoing.




Towards a broader integrated marketCHAPTER TWO


43


for movement of natural persons, such in
the Japan-Philippines FTA, which covers the
movement of medical caregivers to Japan
subject to a limit. Economic integration in the
region has progressed the most under the
ASEAN process, which will deepen further
with the implementation of complementary
agreements to AFTA, such as the ASEAN
Framework Agreement on Trade in Services
(AFAS), the ASEAN Industrial Cooperation
(AICO) scheme, the ASEAN Investment
Area (AIA), and the formation of the ASEAN
Economic Community planned for 2015.
Following the ASEAN lead, SAARC adopted
the South Asian Agreement on Trade in
Services (SATIS) in 2010 to complement
SAFTA, and is working on an investment
agreement. Agreements such as AFTA, SAFTA,
BIMSTEC-FTA, Pacific Island Countries Trade
Agreement (PICTA) and the Asia-Pacific Trade
Agreement (APTA) provide room for special
and differential treatment (SDT) to least
developed countries, offering them longer
periods to tariff elimination, along with special
measures regarding rules of origin (ROO).


The Asia-Pacific network of FTAs and RTAs
as summarized in figure II.10 presents a
picture of a dense web of trade arrangements
criss-crossing the region, mostly within the
subregions but also linking the subregions,
such as ECOTA linking some Central Asian
countries with some South and West Asian
countries and BIMSTEC linking the South
Asian countries with some South-East Asian
countries. However, the region does not
have a seamless larger market as most of the
agreements are bilateral or subregional in
nature. It is also not conceivable to coalesce
these agreements into a broader arrangement
due to different scopes and coverage and
rules. One of the key components of a scheme
of economic integration is to create a larger
integrated market through trade liberalization
and trade facilitation that enables businesses
in the region to be restructured on the most
efficient basis and to exploit the economies of
scale, scope and specialization. This process


of efficiency-seeking industrial restructur-
ing could have substantial welfare gains
for participating countries. The benefits
of extended markets could be particularly
significant for smaller and poorer economies,
as observed in chapter one. The diversity
in the levels of development across the
region makes regional economic integration
particularly fruitful as the synergies between
factor endowments, production structures
and specializations provide for mutually
beneficial exchanges. Similar synergies exist
between countries in the region and others
outside the region, and recent initiatives such
as the Trans-Pacific Partnership (TPP) expect
to take advantage of them (see box II.2).


In terms of integration across the subregions,
the engagement of ASEAN with neighbouring
countries around the grouping as dialogue
partners has produced ASEAN+1 FTAs with
Australia, China, India, Japan, the Republic
of Korea and New Zealand. The dialogue
partners have also been involved in bilateral
deals among themselves, such at the India-
Japan and the India-Republic of Korea
comprehensive economic partnership
agreements. The dialogue process has also
led to broader groupings. These include
the East Asia Free Trade Agreement (EAFTA)
proposed within the framework of ASEAN+3
Summit; and the Comprehensive Economic
Partnership of East Asia (CEPEA) proposed in
the framework of the East Asia Summit (EAS)
combining ASEAN+6 countries. CEPEA brings
together 16 of the largest and fastest-growing
economies. A RTA among them could create
the third pole of a multi-polar global economy,
along with NAFTA and the European Union.53


The feasibility studies of the EAFTA and CEPEA
were conducted in parallel by the track-II study
groups and their reports were presented to
the leaders at the twelfth ASEAN+3 Summit
and the fourth East Asia Summit, which were
both held in Hua Hin, Thailand in October,
2009. In addition, independent simulation
studies using computable general equilibrium




44


BOX II.2. Trans-Pacific Partnership


The Trans-Pacific Partnership (TPP), also known as the Trans-Pacific Strategic
Economic Partnership Agreement, is a trade agreement currently under
negotiation among the following nine countries: Australia, Brunei Darussalam,
Chile, Malaysia, New Zealand, Peru, Singapore, the United States and Viet Nam. It
aims to be a comprehensive agreement covering the main pillars of a free trade
agreement, including trade in goods, rules of origin, trade remedies, sanitary and
phytosanitary measures, technical barriers to trade, trade in services, intellectual
property, government procurement, competition policy, and engagement with
small- and medium- enterprises.


Formal discussions of TPP were launched on the sidelines of the 2002 Asia-Pacific
Economic Cooperation (APEC) Leaders’ Meeting in Los Cabos, Mexico, by official
leaders of Chile, Singapore and New Zealand. Four rounds of negotiations were
held between 2003 and 2005. At the fifth round of negotiations in April 2005,
Brunei Darussalam took part as a full negotiating party after which the trade
bloc became known as the Pacific-4 or P4. In September 2008, the United States
announced that it would begin negotiations to join TPP in 2009. In November
2008, Australia, Viet Nam, and Peru announced that they would also be joining
the P4 trade bloc. In October 2010, Malaysia announced that it had also joined
the TPP negotiations. Canada, Japan, the Philippines, the Republic of Korea,
and Taiwan Province of China have also expressed interest in TPP membership.
The first round of formal negotiation was held in Melbourne on 15-18 March
2010. From March 2010 to November 2011, nine rounds of TPP negotiations and
four meetings on the sideline of APEC meetings were held. In late 2011, three
additional countries, Japan, Canada and Mexico, announced their intention to
join.


One of the concerns about the TPP is how to relate the new agreement to
existing RTAs. Several TPP countries already have multiple agreements in place
and many of them are agreements between TPP members. As each agreement
has different rules of origin, it is not so easy to simply “stitch them all together” in
a new agreement. Three possible models are possible to deal with this problem:
(1) the TPP agreement would supersede existing bilateral RTAs between
members; (2) the TPP would exist side-by-side with all the existing agreements
and business would be allowed to choose whichever agreement gives them
the greatest benefits; or (3) the TPP would become a hybrid agreement in which
some sections of the TPP replaced existing agreements in some areas while other
portions of existing RTAs that were not covered or covered differently would
continue to exist.


Early discussions in the TPP suggested that the first option was preferable.
Assuming that the new TPP deal provides better, wider-ranging liberalization
and coverage than existing agreements, businesses would likely take advantage




Towards a broader integrated marketCHAPTER TWO


45


BOX II.2. Continued


of the TPP preferences. Thus, a new TPP agreement should replace existing
arrangements as businesses across the nine member countries would be
working from the same agreement. This would streamline trade flows by
allowing exporters to, for example, make only one rule of origin calculation
before shipping goods to multiple TPP members. Another argument for a wholly
new agreement is that it would increase incentives for government officials and
business leaders to take the talks seriously. Ignoring existing agreements and
starting over with new negotiations might be easier for negotiators who could
then aim for an ideal outcome from the beginning.


However, economic and political realities in some member countries make this
approach problematic. Many of the provisions in existing RTA agreements were
carefully crafted compromises, offering a balance of benefits, opportunities
and cost to the economic interests in each member. Thus, replacing existing
agreements with a common one would alter or even undermine the balance of
benefits in place and may unravel the partnerships between States from previous
deals. Therefore, the United States proposed the hybrid model that each country
will conduct bilateral negotiations with TPP member countries with which it does
not already have a RTA. It would then have eight different bilateral deals and
anything not already covered in these bilateral agreements could be addressed
multilaterally among the TPP members. The final document, then, would include
a partially common agreement that would apply to all nine countries as well as
some separate annexes and schedules with specific commitments for individual
countries.


The second round of TPP talks in June 2010 failed to settle the issue of how the
TPP would sit in relation to other RTAs. The United States came out as a strong
supporter of keeping existing market access agreements from bilateral RTAs
while Australia, Singapore and New Zealand argued hard for a comprehensive
agreement in the TPP that would supersede existing RTA agreement. On a
practical level, the amount of work it would take to manage a hybrid system
would be significant. The issue is most stark in market access for goods, since
all of the existing RTAs contain various provisions for reducing barriers to trade
in goods.a Although a deal could not be reached by APEC Leader’s meeting in
November 2011, as targeted, a five-page “broad outlines” of the agreement was
released to the public. The statement noted the following defining features for
the TPP: comprehensive market access; fully regional agreement; cross cutting
trade issues (the ‘horizontal issues’); new trade challenges (digital economy and
green technology); and a living agreement.


Sources: Elms and Lim (2012).
a As an example, suppose a manufacturer of nails was eligible for zero tariffs under the Canada-
U.S. RTA while Mexican nails were still subject to an interim tariff of six percent. Officials had
to create a rule that all incoming products needed to be marked with a country of origin label
in order to differentiate between Canadian, American and Mexican nails crossing the border.
Customs officials then have to apply the correct tariff rates to the particular shipment.




46


models have shown that both EAFTA and
CEPEA hold significant welfare gains for their
member countries. Higher welfare gains were
reported for CEPEA compared with alternative
options because of the larger market size
and synergies brought about by the three
additional members, Australia, India and New
Zealand.54 More recently, at the nineteenth
ASEAN Summit held in Bali, Indonesia in
November 2011, an ASEAN Framework for
Regional Comprehensive Economic Partner-
ship was adopted to broaden and deepen


its engagement with the dialogue partners.
During the Summit, three working groups in
the areas of trade in goods, trade in services
and investment were established to define
the specific principles and a template under
which ASEAN will engage with its partners.
As elaborated below, these proposals could
serve as stepping stones to the development
of a broader and unified Asia-Pacific market
and economic community.


FIGURE TITLE


II.10. Network of trade agreement between countries in Asia and the Pacific


Source: ESCAP based on APTIAD Trade Agreements database; and ASEAN Secretariat. Available from www.aseansec.org/20182.htm and www.
aseansec.org/22765.


Notes: Solid lines represent concluded agreements. Dashed lines represent both agreements formally under negotiation and two proposed
agreements, EAFTA and CEPEA, for which formal negotiations have not started.




Towards a broader integrated marketCHAPTER TWO


47


Cooperation in trade facilitation


Although trade facilitation measures are
implemented by national authorities, their
effectiveness depends largely on the extent
to which regulations affecting trade are
harmonized across countries and on their
cooperation in sharing information. As a
result, bilateral and regional cooperation is
essential. To realize the full benefits of single
windows and other electronic trade data
exchange systems, one of the most important
goals of regional cooperation is to ensure
that all electronic data and documents in
national single windows are accepted by the
authorities of partner countries. However,
while international standards have been
developed to address technical issues
related to cross-border data exchange, there
has been little progress in developing an
appropriate international legal framework
for the cross-border electronic exchange
of trade data and documents. Indeed, the
pioneering ASEAN Single Window initiative
which aims to develop a regional Single
Window environment for its members by
2012 (see box II.3) has experienced difficulties
in establishing the necessary legal basis for
electronic exchange among participating
member countries. An additional challenge is
building capacities for the effective utilization
of single windows and paperless trade, a key
objective of the United Nations Network of
Experts for Paperless Trade for Asia and the
Pacific (UNNExT) (see box II.4).


Most RTAs among economies of the region now
include trade facilitation provisions. The latest
ASEAN Agreement on Trade in Goods (ATIGA),
which came into force in 2010 includes an
entire chapter on trade facilitation. The third
round of negotiations of APTA also resulted
in a Trade Facilitation Framework Agreement
among its six members (Bangladesh, China,
India, the Lao People’s Democratic Republic,
the Republic of Korea and Sri Lanka) in 2009. A
comparative study of recent RTAs conducted
by ESCAP found that all agreements commit
to increasing transparency, including through
an obligation to publish laws and regulations
affecting trade, and recognize the importance
of using international standards for trade
facilitation. Other measures that appear to


be increasingly common include those on
automation/use of ICT risk management,
advance ruling and single windows. 55


An important aspect of trade facilitation
is standards harmonization and mutual
recognition and conformity assessment
procedures. In this direction, SAARC has made
progress. The South Asian Regional Standards
Organisation (SARSO) is being set up in Dhaka
to implement the Regional Action Plan on
Standards, Quality Control and Measures.
Within the SAARC framework, harmonization
of standards in twelve identified products is
being undertaken. In addition, the SAARC
Agreement on Multilateral Arrangement on
Recognition of Conformity Assessment and
the SAARC Agreement on Implementation
of the Regional Standard were signed during
the seventeenth SAARC Summit held in Addu,
Maldives in November 2011. With regard to
customs cooperation, the SAARC framework is
focusing on building infrastructure, including
roads and railways networks near the Land
Border Customs Stations (LCSs), smoothening
of customs clearance procedures at LCSs,
standardization and harmonization of export
documentation, automation in customs
clearance including through electronic data
exchange, and harmonization of tariff lines for
top 100 8-digit tariff lines.56


An essential component of trade facilitation
is transit facilitation measures, although they
are usually not specifically covered in trade
agreements. While separate bilateral and
regional transit agreements are often in place
among developing economies of the region,
the extent to which they are implemented
– as well as their consistency with existing
multilateral trade commitments, such as WTO,
GATT Article V – is not always clear. Significant
barriers to transit trade remain in place in
South and Central Asia.


South-East Asia has made more progress
in facilitating transit trade through a mix of
bilateral, subregional and regional agreements
and initiatives. However, according to a recent
report, the comprehensive GMS Cross-border
Transport Agreement (CBTA) (see box II.5) is
still not fully operational and the transport
industries of the region remain fragmented




48


BOX II.3. ASEAN Single Window project implementation


The ASEAN Single Window (ASW) aims to facilitate international trade and
investment through expeditious clearance and release of cargoes by the Customs,
and constitutes one of the mechanisms to realize the ASEAN economic community.a


The Protocol to Establish and Implement the ASEAN Single Window was signed in
2006 between the Governments of Brunei Darussalam, Cambodia, Indonesia, the
Lao People’s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore,
Thailand and Vietnam.


The summarized signing countries agreed on the following among other points:b


i. To provide a legal and technical framework to establish and implement the
ASEAN Single Window and National Single Windows as regional commitments
towards the establishment of an ASEAN Economic Community;


ii. To develop and implement the National Single Windows based on
international standards and best practices as established in international
agreements and conventions concerning trade facilitation and modernisation
of customs techniques and practices


In May 2008 the ASW Exchange Gateway became operational aiming to facilitate
information exchange (CEPT Form D) on a trial basis.


By 2009, there were major achievements in the activation of NSW in Brunei
Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand and in
implementing the common language of dialogue for the NSW system - the ASEAN
Data Model (Work base 1.0).


The ASW Pilot Project began implementation in seven member states, namely
Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, Thailand and
Viet Nam in November 2011.


ASW is expected to become fully operational in all participating member States
by the end of 2015, enabling ASEAN officials to exchange customs declaration,
preferential certificate of origin, and other trade and customs information through
a single, shared, secure network architecture.


Sources: ASEAN, 2009, ASEAN Single Window Fact Sheet, 2nd Edition, 24 February; ASEAN, 2005, Agreement to
Establish and Implement ASEAN Single Window, Kuala Lumpur; The Jakarta Post, ASEAN Ministers to Finalize
Single Window Project Draft, Mustaqim Adamrah, 13 March 2010, available from www.thejakartapost.com/
news/2010/03/13/asean-ministers-finalize-single-window-project-draft.html, accessed on 19 April 2012;
Asian Development Bank, 2009, CAREC Transport and Trade Facilitation: Partnership for Prosperity; Economic
and Social Commission of Asia and the Pacific and ADB, 2009, Designing and Implementing Trade Facilitation
in Asia and the Pacific; and ASEAN, 2006, Protocol to Establish and Implement the ASEAN Single Window, 20
December; USAID 2011, Press Release, 1 December, available from www.usaid.gov/rdma/articles/press_
release_1508.html. Accessed on 19 April 2012.


a ASEAN Single Window Fact Sheet, 2nd Edition, Association of South East Asia Nations, 24 February 2009.
b Protocol to Establish and Implement the ASEAN Single Window, 20 December 2006.




Towards a broader integrated marketCHAPTER TWO


49


BOX II.4. Achieving paperless trade in Asia and the Pacific


Adopting electronic technologies to move goods and information through
an international supply chain can bring significant efficiency, reliability and
predictability to international trade transaction. UNNExT facilitates peer-
learning and knowledge sharing to help developing countries catch up with
the economies in the region that are most advanced in implementing of trade
facilitation measures and make use of innovations like the Electronic Single
Window and paperless trade.


Electronic information is easier to process and reduces delays and costs
throughout the supply chain. For governments, it can increase security of
international trade and revenue trade transactions. For the private sector, it
brings efficiency and transparency to the process and most importantly can
increase predictability and reduce transaction costs. The implementation
of paperless trade should be carried out in a phased manner. According to
the United Nations Centre for Trade Facilitation and Electronic Business, the
successful implementation of paperless trade systems requires the following
steps: business process analysis, process simplification and harmonization,
documents simplification and alignment, national data harmonization, cross-
border data harmonization and exchange and e-single window and paperless
trading.a


For developing countries, paperless trade can be challenging given the
requirement of robust ICT infrastructure. Still a phased approach may help
eventually reach the goal of establishing paperless trade systems like an
electronic single window. Ultimately, the countries can benefit from greater
efficiency in government agencies and private sectors. Experiences demonstrate
that implementation of paperless trade systems require strong political
and government support and human and financial resources. Governments
should take a leading role in establishing a conducive business environment
for paperless trade. A collaborative public-private approach with effective
stakeholder consultation works best for such an endeavour.


and unsophisticated.57 Apart from political
will, a main issue impeding implementation
of effective transit systems is the lack of
collaboration between trade, transport
and/or customs authorities and the limited
involvement of local (at-the-border) public
and private stakeholders at early stages
of negotiations.58 Another very important
subregional initiative for trade facilitation
is the Central Asia Regional Economic
Cooperation (CAREC) Transport and Trade
Facilitation Strategy (see box II.6).


In search for a broader framework for
regional integration


Bilateral and plurilateral agreements for small
groups of countries help increase trade, but,
as observed earlier, they do not contribute
to the creation of a seamless, region-wide
market because of their differences in scope,
coverage and rules. What is needed is not just
to deepen integration within subregions but
also to foster trade links across subregions
to facilitate exploitation of the synergies
between the subregions and to harness the


a See ESCAP, 2009, Business Process Analysis Guide; ESCAP, 2009-2011, UNNExT Policy Brief Series 1-7, available from www.
unescap.org/unnext/pub/brief.asp; ESCAP and ADB, 2009, Designing and implementing trade facilitation in Asia and the
Pacific.




50


BOX II.5. The Greater Mekong Subregion (GMS) Agreement on Facilitation of
Cross-Border Transport of Goods and People


The Greater Mekong Subregion (GMS) Agreement is a multilateral instrument for
the facilitation of cross-border transport of goods and people. The Agreement
provides a practical approach in the short to medium term, to streamlining
regulations and reducing nonphysical barriers in GMS. It incorporates the
principles of bilateral or multilateral action and flexibility to recognize procedural
differences in each of the GMS countries, and includes references to existing
international conventions that have demonstrated their usefulness. It also takes
into account and is consistent with similar initiatives being undertaken by ASEAN.
The specific aspects which are covered in this agreement are:a


i. single-stop/single window customs inspection;


ii. cross-border movement of people, goods, and vehicles;


iii. simplification and harmonization of border clearance formalities,
procedures and documents;


iv. transit traffic regimes, including exemption from physical customs
inspection, bond deposit, escort, phytosanitary and veterinary inspection;


v. advance exchange of information;


vi. requirements that road vehicles must meet to be eligible for cross border
traffic;


vii. exchange of commercial traffic rights; and


viii. infrastructure, including road and bridge design standards, road signs
and signals.


potential of efficiency seeking industrial
restructuring across the Asia-Pacific region.


To fully exploit the potential of regional
economic integration and for efficiency-
seeking industrial restructuring to take
place, the Asia-Pacific region needs a broader
regional trade and economic cooperation
arrangement that should (i) be wider in
coverage, extending to all economies in the
ESCAP region; (ii) extend to substantially
all trade using a negative list basis, for


a ESCAP and ADB 2009, Designing and Implementing Trade Facilitation in Asia and the Pacific.


consistency with GATT Art. XXIV and GATS
Art. V; and (iii) have comprehensive scope,
covering trade in services, investment, trade
and transit facilitation and cooperation.
Such agreement should be progressively
deepened, and it should also be equitable
and provide special and differential treatment
to poorer countries, as well as assistance for
lagging geographical areas and vulnerable
sections of the population. In this study, we
suggest three possible routes to evolve a
broader integrated market in the Asia-Pacific




Towards a broader integrated marketCHAPTER TWO


51


BOX II.6. Central Asia Regional Economic Cooperation (CAREC) Transport and
Trade Facilitation Strategy


The Central Asian has made some progress in developing transport infrastructure,
customs modernization and trade facilitation. To expand on this, they are
working towards further improving transport infrastructure and to reduce the
cost of trade. Recognizing the synergy between transport and trade, CAREC has
developed a transport and trade facilitation strategy (TTFS) for the period 2008-
2017. This ten-year action plan aims to improve the subregion’s competitiveness
by taking an integrated approach, which entails combining transport investments
with trade facilitation initiatives and enhancing the three pillars of the strategy-
infrastructure, management and technology. Key elements of the strategy are
coordinated improvements of transport infrastructure and trade facilitation,
including harmonized cross border regulations, procedures, and standards
along priority transport corridors. These improvements will result in significant
and measurable reductions in transport costs and time for local, cross-border,
and transit traffic. It will also, as a result, lead to an increase in trade along the
corridors.


The goals of the CAREC trade facilitation component are to:


i. reduce transaction costs and time significantly by improving administrative
efficiency and simplifying, standardizing, and harmonizing trade
procedures;


ii. encourage the free movement of people and goods;


iii. enhance the transparency of laws, regulations, procedures, and forms,
and share information on these and other trade issues.


The trade facilitation component comprises three elements aimed at reducing
trade costs: promoting concerted customs reform and modernization; using
an integrated trade facilitation approach through interagency cooperation and
public–private partnerships; and developing efficient regional logistics.


region:
1. An Asia-Pacific Economic Area,


2. Building on ASEAN+ approach, and


3. A new Asia-Pacific Trade Agreement (APTA II).


An Asia-Pacific Economic Area (APEA): The first
option is to create an APEA as a framework
to connect existing subregional groupings
to exchange trade preferences between
members, similar to the European Economic
Space Agreement that combines the Single
Market of the European Union with members
of the European Free Trade Association. The


major subregional groupings that could be
covered in APEA are ECOTA, AFTA, SAFTA, and
the proposed Pacific Agreement on Closer
Relations-Plus, which encompasses the Pacific
Islands Free Trade Agreement (PICTA) plus
Australia and New Zealand. Overall these four
trade agreements include 43 of the 51 Asia-
Pacific economies.59 A modelling exercise
conducted by ESCAP suggests that member
countries would gain substantially if the four
groupings were joined in APEA (figure II.11).


The potential welfare impacts of the proposals
are analysed using simulations based on data




52


from the Global Trade Analysis project (see
annex for details). For assessing the potential
welfare impacts from the APEA proposal, two
scenarios are considered: “Scenario A”, which
covers full trade liberalization within each
bloc; and ”Scenario B” which adds full trade
liberalization between each bloc. In both
cases, the simulations consider the long-run
effects of a full removal of tariffs on trade
in goods and the implementation of trade
facilitation measures. The two scenarios are
schematically represented in figure II.11.


The results are shown in figure II.12. They
suggest that full trade liberalization under
each of the four agreements would be
beneficial but that the gains would be
significantly greater under the scenario of full
trade liberalization within and between the
blocs: more than tripled for SAFTA, more than
doubled for PACER-Plus, more than 50 per
cent for AFTA and 36 per cent for ECOTA.


While these results are encouraging,
implementation of this approach may,


however, be complicated by the fact that the
four subregional groupings are at different
stages of their evolution with the most
advanced of them, AFTA, targeting to evolve
into the ASEAN Economic Community by
2015 and PACER-Plus still under negotiation.
Furthermore, a major limitation of this
approach is that some of the region’s largest
markets, such as China, Japan and Republic
of Korea, would remain excluded, which
reduces the potential gains of this integration
initiative significantly. In any event, there is
a tremendous potential of mutual learning
across the subregional groupings of the
region and sharing their best practices. Hence,
a consultative committee of subregional
groupings should be constituted to facilitate
that mutual learning.


Building on ASEAN+ approach: The ASEAN
dialogue process has contributed towards a
discussion of broader regional arrangements.
Two proposals are being discussed in the
ASEAN framework include an East Asia
Free Trade Area (EAFTA) among ASEAN+3


FIGURE TITLE


II.11. Scenarios A and B for trade liberalization in AFTA, SAFTA, ECOTA and PACER-Plus


Source: ESCAP.




Towards a broader integrated marketCHAPTER TWO


53


FIGURE TITLE


II.12. Long-run welfare gains for four subregional agreements, including trade facilitation


Source: ESCAP based on John Gilbert (2012).


Notes: The simulations consider the scenario in which trade facilitation measures are included. See annex for further details.


countries, and the Comprehensive Economic
Partnership for East Asia (CEPEA) originating
in the East Asia Summit which additionally
includes Australia, India and New Zealand
(ASEAN+6). One option could be to take the
more inclusive of the two approaches, CEPEA,
and treat it as the nucleus of an incipient Asia-
Pacific RTA to which other countries could
accede (figure II.13).


The advantage of this approach is that a
feasibility study and some subsequent
exploration in ASEAN+ working groups have
been completed. All six dialogue partners
have concluded ASEAN+1 FTAs that can
be easily multilateralized with common
and cumulative rules of origin. Combining
the region’s growth poles, China and India,
with the advanced economies of Japan and
Australia, and the Republic of Korea and those
of ASEAN, could produce a regional grouping,
comparable in stature with the European
Union and the NAFTA but outclassing them
in terms of dynamism by a wide margin


(see table II.9). After accession by additional
countries, it would lead to a broader regional
market.


In the simulation of welfare gains from
expanding the ASEAN FTA to CEPEA two
scenarios were considered: without trade
facilitation and with trade facilitation.
Simulation results find substantial welfare
gains, at close to 0.8 per cent of the GDP of
CEPEA members when trade facilitation
measures are considered (figure II.14).


Overall, the results suggest both the need of
aiming at broader agreements, covering larger
number of countries, and the importance
for such agreements to include provisions
to reduce trade costs through various trade
facilitation measures.


A new Asia-Pacific Trade Agreement (APTA
II): The third option is the creation of a new
broader agreement open to all countries in
the ESCAP region. ESCAP, having sponsored


0.0


0.3


0.6


0.9


1.2


1.5


1.8


AFTA ECOTA SAFTA PACER-Plus


A
nn


ua
l w


el
fa


re
g


ai
ns


fo
r e


ac
h


bl
oc


as
p


er
ce


nt
ag


e
of


e
ac


h
gr


ou
pi


ng
's


G
D


P


Scenario A
full trade


liberalization
within the


bloc


Scenario B
full trade


liberalization
within and


between the
four blocs




54


FIGURE TITLE


II.13. CEPEA as a potential nucleus of a broader integrated market


a pioneering RTA in the region in 1975, could
provide auspices for a region-wide agreement,
which could be called the Asia-Pacific Trade
Agreement II (APTA II) or Asia-Pacific Trade and
Economic Cooperation Agreement (APTEC).
Such agreement is shown schematically in
figure II.15.


APTA II could coalesce the multiple bilateral
and subregional FTAs into a broader
region-wide trade and comprehensive
economic cooperation arrangement. Such
an arrangement would have the broadest


possible coverage of any existing or under
negotiation regional trade agreement in
Asia and the Pacific. As this option would
not have any baggage, it would be possible
for it to have all the desirable features,
including a comprehensive scope, based on a
negative list and trade facilitation, investment
and economic cooperation, including the
flexibilities and special and differential
treatment features for the poorer countries to
make it a RTA with a human or Asia and the
Pacific face and as a model for the regional
economic integration.


Source: ESCAP.


Indicator EU(27) NAFTA CEPEA(16)


Gross national income (PPP) 15 789 (20.03)
18 115


(22.99)
26 136


(33.16)


GDP, current prices (billions) 17 960(25.65)
18 009
(25.72)


19 640
(28.05)


Exports (millions) 6 029(33.09)
2 282


(12.53)
5 126


(28.14)


International reservesa 682 (7.19)
299


(3.15)
5 214


(54.94)


Population (millions) 500 (7.28)
457


(6.65)
3 367


(48.98)


Source: ESCAP based on IFS Database, WEO Database and WTO database.


Note: Percentage of world total in parenthesis.
a International reserves data are for 2010.


TABLE TITLE


II.9. CEPEA in relation to the EU and NAFTA in 2011




Towards a broader integrated marketCHAPTER TWO


55


FIGURE TITLE


II.14. Potential benefits of expanding ASEAN Free Trade Area to ASEAN+6 (CEPEA)


FIGURE TITLE


II.15. Starting afresh through the broadest and most comprehensive possible agreement


Source: ESCAP based on John Gilbert (2012).


Source: : ESCAP.




56


FIGURE TITLE


II.16. Welfare gains from region-wide liberalization


Source: ESCAP based John Gilbert (2012).


Source: ESCAP based on John Gilbert (2012).


Notes: Welfare gains for the GTAP regions included in each grouping. For PACER+, ASEAN, SAFTA and ECOTA the LDCs are Cambodia, Lao People’s
Democratic Republic, Rest of South-East Asia, Bangladesh and Rest of South Asia; the LLDCs are Kazakhstan, Kyrgyzstan, Rest of Central Asia and
Azerbaijan; and the SIDs are the Pacific Islands. For CEPEA, the LDCs are Cambodia, Lao People’s Democratic Republic and Rest of South-East Asia.
For APTA II, the LDCs and SIDs are the same as for PACER+, ASEAN, SAFTA and ECOTA, but the LLDCs also include the Rest of East Asia and Armenia.


TABLE TITLE


II.10. Summary of welfare gains in the simulations


Liberalization
of trade among


PACER+,
ASEAN, SAFTA


and ECOTA


Liberalization
of trade among


and between
PACER+,


ASEAN, SAFTA
and ECOTA


CEPEA (ASEAN plus Japan,
Republic of Korea, China, India,


Australia and New Zealand)


A free trade agreement
encompassing all members of


ESCAP


Region With trade facilitation
Without trade


facilitation
With trade
facilitation


Without trade
facilitation


With trade
facilitation


Millions of US dollars
LDCs 752 936 4 286 395 1 234
LLDCs 1 274 1 256 0 0 840 1 864
SIDs 333 534 0 0 214 526
Other 23 365 46 525 59 247 84 717 101 445 136 609


Percentage of the GDP
LDCs 0.58 0.72 0.01 0.98 0.30 0.95
LLDCs 1.10 1.09 0.53 1.18
SIDs 1.28 2.05 0.82 2.02
Other 0.66 1.32 0.54 0.77 0.78 1.05


0.0 0.4 0.8 1.2 1.6 2.0


North and Central Asia


East and North-East Asia


Pacific


Asia and the Pacific


South and South-West Asia


South-East Asia


Annual welfare gains for the Asia-Pacific subregions, as per centage of the
region's GDP


With trade facilitation
Without trade facilitation




Towards a broader integrated marketCHAPTER TWO


57


Simulation studies indicate that such an
agreement has the potential to generate the
largest welfare gains for the region (figure II.16)
of up to $140 billion or over 1 per cent of the
region’s GDP with broad and comprehensive
coverage. When trade facilitation measures
are also included in the agreement, as it
should be this case, the average gains are 36
per cent higher than without trade facilitation
measures. The additional gains accruing from
trade facilitation are largest in North and
Central Asia (almost 100 per cent higher),
reflecting the potential benefits for the
subregion’s landlocked developing countries,,
but they are also important for South-East Asia
(67 per cent higher), reflecting the potential
gains from integration for countries such
as Cambodia, the Lao People’s Democratic
Republic and Myanmar, whose current trade
costs are very large.


A comparative picture of the welfare impacts
from the three options in absolute terms and
as percentages of the GDP are summarized
in table II.10. It shows that even though the
overall magnitude of the welfare gains would
be at nearly $50 billion, APEA could be highly
rewarding for the members participating in
subregional groupings of ASEAN, SAARC, ECO
and PICTA. The ASEAN plus approach could
bring in up to $85 billion worth of welfare
gains with the accession of other economies.
The APTA-II approach, due to its universal
coverage, would generate the larger welfare
gains, of $140 billion, of the three approaches
considered. In addition, countries with special
needs such as least developed countries,
landlocked developing countries (LLDCs) and
small island developing States (SIDS), tend
to have higher welfare gains as a proportion
of GDP than others, corroborating results
discussed in chapter one. Furthermore, the
welfare gains for the countries with special
needs would rise if special and differential
treatment, technical and economic assistance
is provided to poorer regions, as proposed in
this study.


Reaching out across the region


As this chapter has highlighted, the Asia-
Pacific region has steadily been integrating


its markets for trade and investment, and to
a certain extent for labour is now a good time
to consolidate these initiatives and build on
them a broader integrated market that would
unleash the huge potential of efficiency-
seeking industrial restructuring for creating
value for all the participating economies
and subregions. A key factor supporting a
successful integration is infrastructure, which
is the focus of the next chapter.


ENDNOTES


1 ESCAP, 2011a and 2011b.


2 An important caveat is that this indicator does not
take into account the costs of trade and transportation.


3 Among the earliest initiatives is UNCTAD’s TRAINS
which is accessible through the World Bank’s WITS
software application but it has not been regularly
updated. A multiagency initiative (MAST) was started in
2006. A report on pilot studies, with new definition and
classification of NTMs was issued in 2010 (see UNCTAD,
2010b; and Basu, Kuwahara and Dumesnil, 2011).


4 For details, see ESCAP, “Facilitating Intraregional
Trade”, in Asia-Pacific Trade and Investment Report
2011: Post-crisis Trade and Investment Opportunities
(Bangkok, 2011a), pp. 89-100.


5 ADB and ESCAP, 2009.


6 The comprehensive trade cost estimate is an
objective measure based on macroeconomic data
rather than perception survey data. It is a very broad
aggregate measure of international trade costs
including, inter alia, direct and indirect costs related to
fulfilling regulatory import and export requirements as
well as costs resulting from differences in currencies,
languages, culture and geographical distance.
Domestic and international shipping and logistics costs
associated with imports and exports are also included.


7 Duval and Utoktham, 2011a.


8 Duval and Utoktham, 2011b.


9 For more details on this issue, see ESCAP, 2011c.


10 Source: WTO and UNCTAD, WTO International Trade
Statistics online (accessed 12 April 2012).




58


11 All these numbers are underestimates because of
the limited number of trading partners for which data
are available.


12 UNWTO, “UNWTO and Asia Pacific Ambassadors
Discuss Global Tourism Issues,” March 2012. Available
from http:// asiapacific.unwto.org/en/news/2012-
03-23/unwto-and-asia-pacific-ambassadors-discuss-
global-tourism-issues.


13 Because of the non-standardize reporting across
countries, it was not possible to obtain information
for all the Asia-Pacific subregions. For example,
the Pacific island developing economies and the
countries of North and Central Asia other than the
Russian Federation were not included systematically
by all reporting countries. Thus, the share of tourism
arrivals originated in the region reported in the table
underestimates the actual share.


14 Available from www.uis.unesco.org/Pages/default.
aspx.


15 Denisenko, 2010.


16 Mahapatra et. al. ,2011.


17 ESCAP, 2012.


18 The member States of the GCC are Bahrain, Kuwait,
Oman, Qatar, Saudi Arabia and United Arab Emirates.


19 Regional Thematic Working Group on International
Migration Including Human Trafficking, 2012; Huguet,
Chamratrithirong and Kerry Richter, 2011.


20 Denisenko, 2010.


21 Ivakhnyuk, 2006.


22 ESCAP, 2010a.


23 Hayes, 2010.


24 Regional Thematic Working Group on International
Migration Including Human Trafficking, 2012.


25 Boston Consulting Group, “Global Challengers 2011”.
Available from https://www.bcgperspectives. com/
content/articles/globalization_companies_on_ the_
move_2011_global_challengers/.


26 Kumar, 2008.


27 Ramamurti, 2011.


28 ESCAP, 2011a.


29 ESCAP calculations based on ASEAN, 2006 and
2011a.


30 Available from www.vietpartners.com/Statistic-fdi.
htm.


31 Majumdar and Verma, 2008.


32 Singapore has dominated South-East Asia’s FDI to
India. It accounted for 81 per cent of it in 2010.


33 This issue may be revisited to examine if India’s
neighbouring countries may also use Mauritius as an
intermediary to facilitate their investment to India. In
addition to India, Mauritius holds the double tax treaties
with four South Asian countries, i.e., Bangladesh, Nepal,
Pakistan and Sri Lanka (LOWTAX, 2011).


34 fDi Intelligence, 2011.


35 Bangladesh, Board of Investment, 2012.


36 IMF, Coordinated Direct Investment Survey 2011.
Available from http://cdis. imf.org/ (accessed 4 January
2012).


37 Salidjanova, 2011.


38 OECD, 2011.


39 UNCTAD, 2011a.


40 According to UNCTAD, 2011d.


41 UNCTAD, 2011a.


42 Pacific Trade and Invest, 2010.


43 Wesley, 2011.


44 Available from www.state.gov/r/pa/ei/bgn/2797.htm
#econ.


45 Available from www.pacifictradeinvest.com/wp/?p
=278.


46 ESCAP calculations based on UNCTAD, 2011a.


47 IMF, Coordinated Direct Investment Survey 2011.
Available from http://cdis. imf.org/ (accessed 4 January
2012).


48 Hoekman 2011; Baldwin, 2011.


49 Trejos, 2005.


50 ESCAP, 2011a.




Towards a broader integrated marketCHAPTER TWO


59


51 The 15 regional trade agreements include also three
plurilateral cross-continental trade agreements. For
more details, see Asia-Pacific Trade and Investment
Agreements Database (APTIAD), http://www.unescap.
org/tid/aptiad/.


52 See Kumar, 2007a.


53 See Kumar, 2007b.


54 see Kawai and Wignaraja, 2010.


55 For more details see Duval, 2011.


56 SAARC Secretariat. Available from http://www.saarc-
sec.org/areaofcooperation/detail.php?activity_id=47,
and http://www.saarc-sec.org/areaofcooperation/
detail.php?activity_id=42.


57 The CBTA was signed by Lao People’s Republic,
Thailand, and Viet Nam in 1999. Subsequently,
Cambodia (2001), China (2002) and Myanmar (2003)
acceded to the CBTA. For a recent critical view of
the degree of implementation of the CBTA, see e.g.
Greater Mekong Subregion Business Forum, “Articles of
Association of the Greater Mekong Subregion Freight
Transport Association (GMS – FRETA)”, November 2011.


58 See chapter three for more information on cross-
border and transit facilitation issues.


59 The members of these four agreements are the
following. AFTA: Brunei Darussalam, Cambodia,
Indonesia, Lao People’s Democratic Republic, Malaysia,
Myanmar, Philippines, Singapore, Thailand and Viet
Nam; ECOTA: Afghanistan, Azerbaijan, the Islamic
Republic of Iran, Kazakhstan, Kyrgyzstan, Pakistan,
Tajikistan, Turkey, Turkmenistan and Uzbekistan;
PACER-Plus: Australia, Cook Islands, Federated States
of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru,
New Zealand, Niue, Palau, Papua New Guinea, Samoa,
Solomon Islands, Tonga, Tuvalu, Vanuatu; SAARC:
Afghanistan, Bangladesh, Bhutan, India, Maldives,
Nepal, Pakistan and Sri Lanka.




60


Photo by R. Manowalailao




Building seamless connectivityCHAPTER THREE


61


UN Photo - Kibae Park




62


Three Building seamless connectivity
Economic integration depends critically on the
development of infrastructure that will strengthen
connectivity both within and between countries,
freeing up the flows of goods and services,
investment, people and ideas.


Growth in Asia and the Pacific has been strongly
influenced by the quality of infrastructure. Economies that
develop better infrastructure grow faster.1 Investment
in infrastructure not only increases an economy’s capital
stock but also broadens the reach of economic activities
and trade, creating opportunities for the realization of
economies of scale. This, in turn, lowers production and
distribution costs, which allows more goods to reach more
people across greater geographic areas. The gains appear
to be greatest for large-scale civil engineering projects,
such as those related to transport and utilities.2 But even
small, low-cost investments can have significant impacts,
especially when they reach out to remote or poorer areas.


Though more difficult to quantify, countries also gain
further benefits from infrastructure development through
network externalities, which contribute to growth by
allowing economies of specialization, encouraging the
clustering of businesses and facilitating information
exchanges. Moreover, in the Internet age, connectivity
expands in many dimensions beyond physical links to
encompass more complex and dynamic relationships that
affect how networks operate.3 Even small connections
between one network and another can quickly create
wider, more valuable networks.4 That is why the issue of ICT
infrastructure development is quickly gaining importance
in discussions about regional connectivity. The region
also has vast potential to utilize its energy resources more
efficiently through the interconnection of producers and
consumers of energy by oil and gas pipelines and electricity
grids. Such interconnection could be cost-effective and
offer opportunities in reducing the cost of energy, which is
a critical input for development.




Building seamless connectivityCHAPTER THREE


63


There are clearly wide disparities in the
breadth and quality of infrastructure between
countries of the region. From the perspective
of regional connectivity, the gap between
the few wealthier countries and the middle-
and lower-income countries is hindering the
full participation of countries in the region’s
economic dynamism. Improving regional
connectivity will allow countries in Asia
and the Pacific to take full advantage of the
region’s diverse natural endowments and
productive capacities.


Against this backdrop, this chapter will explore
issues of connectivity for three major sectors,
namely transport, energy and ICT.


Transport


Transport is the backbone of economic
activity and social development. Since ancient
times, the availability and cost of transport
have influenced both the location of trade
centres and the volume of trade. Large-scale
increases in production and trade have been
made possible with advances in transport,
such as the diffusion of containerization.
Most governments recognize that the respon-
sibility for developing transport infrastructure
lies with them, and are therefore investing in
ambitious medium- to long-term transport
strategies and programmes. However, when
it comes to improving connectivity, each
mode of transport – roads, railways, maritime
shipping and aviation – has its own physical
and operational characteristics which require
different considerations.


Aviation and maritime shipping, for example,
essentially move people and goods from
point-to-point without intervening infra-
structure. Consequently, investment in these
sectors has focused on individual airports
and maritime ports. In the past century, mari-
time ports dominated international trade
and, as a result, attracted investment from
both the public and the private sector. Land-
based modes and inland water transport, on
the other hand, require the development of
roads, railway tracks and inland waterways
across vast geographic areas. The sheer scale
of these networks means that the cost of
maintaining them is much greater than that


for airports and maritime ports. Non-physical
barriers to the movement of people and
goods are also greater for overland crossings
as compared with maritime ports or airports
because the risk of damage and theft is higher
and more difficult to monitor.


In the Asia-Pacific region, the maritime and
aviation sectors are relatively well connected to
their respective global networks. There is also
a higher degree of private sector involvement
in developing and managing infrastructures
in these sectors. From a regional perspective,
therefore, the priority should be given to
the development and upgrading of land-
based transport infrastructure. Tremendous
efficiency gains could also be realized by
removing non-physical barriers to transport
and improving intermodal connectivity. Both
of these steps would improve the efficiency
of transport services and raise the utilization
rates of existing infrastructure.


Maritime transport


The expansion of international trade in Asia
and the Pacific has depended on building the
capacity and efficiency of its major seaports,
particularly container ports. For the past two
decades, the region has dominated global
container handling, led first by Hong Kong,
China and Singapore in the early 1990s
and followed by China from the mid-1990s
to today. In 2011, the world’s eight busiest
container ports were in the ESCAP region:
Shanghai (China); Singapore; Hong Kong,
China; Shenzhen (China); Busan (Republic of
Korea); Ningbo (China); Guangzhou (China);
and Qingdao (China).5


Asia’s most important liner routes, by volume,
still run from Asia to Europe and North America.
But there has been a substantial increase in
intra-Asian shipping, particularly between
China, Japan and the Republic of Korea, and
between these countries and South-East Asia.
Almost all the region’s coastal countries are
now linked by direct shipping services or by
transhipment and transit operations through
hub ports. Nevertheless, there is significant
intercountry variation; shipping connectivity
is still poor between many neighbouring
countries.6 The Pacific island developing
economies have the added disadvantage of




64


Sources: ESCAP based on UNCTAD, Review of Maritime Transport (Sales No. E.09.II.D.11), Review of Maritime Transport (Sales No. E.10.II.D.4), Review of
Maritime Transport (Sales No. E.11.II.D.4); and Containerisation International, Containerisation International Yearbook 2011 (London, 2011).


Note: The index has five components: (a) the number of ships; (b) the total container-carrying capacity of those ships; (c) the maximum vessel
size; (d) the number of services; and (e) the number of companies that deploy container ships on services from and to a country’s ports.


being located at a long distance from the fast-
growing economies in the rest of the region.
Because of their remoteness, relatively small
populations and low trading volumes, it is
difficult for shipping companies to maintain
regular services to them.


One measure of shipping connectivity is
the United Nations Conference on Trade
and Development (UNCTAD) Liner Shipping
Connectivity Index, which includes measures
of the number and capacity of ships and the
extent of services.7 This shows that between
2006 and 2011, shipping connectivity increased
markedly in a number of the Asia-Pacific
economies. The highest value of the index as
of 2011 is for China, followed by Hong Kong,
China; and Singapore (figure III.1). The value of
the index has grown spectacularly fast in Viet
Nam, which as of 2011 was ranked seventh in
the region.


An ESCAP study which analyses differences
in trade costs found that liner shipping
connectivity accounts for about 25 per


cent of the changes in trade costs that are
unrelated to non-tariff policies.8 Thus, as a
country’s liner connectivity index improves,
the cost of shipping declines, boosting
competitiveness and increasing container
traffic. Data presented in table III.1 support
this observation, suggesting that as liner
connectivity increases, so does the volume of
container traffic.9 Conversely, those countries
which have witnessed a decline in liner
shipping connectivity, such as several island
developing countries in the Pacific are likely
to have faced higher trade costs in 2011.


Governments can attract more ships, and
a wider range of ships, by investing and
maintaining their maritime ports. They may
also improve competitiveness by improving
the efficiency of onward land transport,
particularly through railways. More ambitious
programmes of upgrading and modernization
could be accelerated, however, through the
greater participation of the private sector in
the development of ports and provision of
port services.


FIGURE TITLE


III.1. UNCTAD liner shipping connectivity index, 2006 and 2011


0


20


40


60


80


100


120


140


160


Ma
ldiv


es


My
anm


ar
Sam


oa


Ca
mb


odi
a


Ba
ngl


ade
sh


Pap
ua


Ne
w G


uin
ea Fiji


Ne
w Z


eal
and


Ph
ilip


pin
es


Ru
ssi


an
Fed


era
tion


Ind
one


sia


Iran
(Is


lam
ic R


epu
blic


of)


Pak
ista


n


Tha
ilan


d
Tur


key


Sri
La


nka Ind
ia


Vie
t N


am
Jap


an


Ma
lay


sia


Re
pub


lic
of


Ko
rea


Sin
gap


ore


Ho
ng


Ko
ng,


Ch
ina


Ch
ina


2006 2011




Building seamless connectivityCHAPTER THREE


65


Meanwhile, to address the issue of insufficient
services, countries can achieve economies of
scale through collective shipping arrangements.
This has been piloted in the Pacific with the
establishment of the Micronesian Shipping
Commission, which aims at improving regu-
lations and encouraging competition of
shipping services in the Marshall Islands, the
Federated States of Micronesia and Palau. In
2010, Kiribati, Marshall Islands, Nauru, and
Tuvalu launched a similar arrangement called
the Central Pacific Shipping Commission.
While these initiatives are still relatively
new, there is scope to improve connectivity,
particularly for small island developing
economies through practical and collective
approaches.


Air transport


Despite the global economic downturn, there
have been increases both in the number of


air passengers and the volume of air cargo.
Between November 2010 and November
2011, for example, international passenger
traffic on Asia-Pacific airlines increased by 4
per cent to 15.7 million.10 Much of this reflects
strong intraregional traffic, which between
1982 and 2009 rose on average by 5.1 per cent
annually to 101.7 million passengers.11 For
example, passenger traffic increased by 8 per
cent per annum or more between 2005 and
2009 in regional routes, such as Singapore-
Jakarta, Hong Kong-Seoul or Singapore-Kuala
Lumpur.


Air freight has also grown substantially,
especially from China, Viet Nam, Malaysia and
the Russian Federation. Freight, however, has
been more sensitive than passenger traffic
to the global economic slowdown: between
November 2010 and November 2011 demand
per freight ton kilometre declined by 6.5 per
cent.12


UNCTAD liner index Container traffic


2006 2011


Growth rate
2006-2011
(per cent) 2006 2010


Growth rate
2006-2010
(per cent)


Bangladesh 5.3 8.2 9.0 902 1 350 10.6
Cambodia 2.9 5.4 12.8 .. 224 ..
China 113.1 152.1 6.1 84 811 128 544 11.0
Fiji 7.2 9.2 5.0 .. .. ..
Hong Kong, China 99.3 115.3 3.0 23 539 23 532 0.0
India 42.9 41.5 - 0.7 6 141 8 942 9.8
Indonesia 25.8 25.9 0.1 4 316 8 960 20.0
Iran (Islamic Republic of) 17.4 30.3 11.7 1 529 2 592 14.1
Japan 64.5 67.8 1.0 18 470 ..
Malaysia 69.2 91.0 5.6 13 419 17 976 7.6
Maldives 3.9 1.6 - 16.1 .. .. ..
Myanmar 2.5 3.2 4.9 .. 166 ..
New Zealand 20.7 18.5 - 2.2 1 807 .. ..
Pakistan 21.8 30.5 7.0 1 777 2 151 4.9
Papua New Guinea 4.7 8.8 13.6 .. 268 ..
Philippines 16.5 18.6 2.4 3 676 5 048 8.3
Republic of Korea 71.9 92.0 5.1 15 514 18 488 4.5
Russian Federation 12.8 20.6 10.0 2 266 3 091 8.1
Samoa 5.1 4.6 - 2.2 .. .. ..
Singapore 86.1 105.0 4.1 24 792 29 178 4.2
Sri Lanka 37.3 41.1 2.0 3 079 4 000 6.8
Thailand 33.9 36.7 1.6 5 574 6 648 4.5
Turkey 27.1 39.4 7.8 3 683 5 508 10.6
Viet Nam 15.1 49.7 26.8 3 000 5 474 16.2


TABLE TITLE


III.1. Liner shipping connectivity index and container traffic for selected countries


Source: ESCAP based on UNCTAD, Review of Maritime Transport (Geneva, 2009, 2010a and 2011a), and Containerisation International Yearbook 2011
(London, 2011).


Note: Figures for 2010 container traffic are preliminary estimates.




66


The increase in passenger and cargo transported
by air is partly due to the improvement of air
transport connectivity in the region. During
the past decade, more low-cost carriers have
entered the market, flight frequencies have
increased, and countries have invested in
new and existing airports. Most countries are
now linked, either directly or through hubs,
and have taken progressive steps towards
developing air service agreements and li-
beralizing their air transport markets. The
most notable example from the region is the
ASEAN Multilateral Agreement on the Full
Liberalisation of Air Freight Services, adopted
in Manila on 20 May 2009. This Agreement is
one of the components of the Roadmap for
Integration of Air Travel Sector and the Action
Plan for ASEAN Air Transport Integration and
Liberalisation 2005-2015, adopted at the
Tenth Transport Ministers Meeting in Phnom
Penh in 2004.


It is clear that increasing connectivity boosts
traffic: one study suggests that improvements
in air connectivity have resulted in a 22 per
cent increase in global traffic.13 Nevertheless,
measuring connectivity, even in a well-
regulated industry such as aviation, is still
challenging. One index of air connectivity
suggests that the world’s most connected
countries in 2007 were the United States
of America and Canada, while the most
connected Asian countries were China, Japan,
Singapore, and the Republic of Korea.14 But
this index ignores connections through hubs.
Even the United States, for example, has direct
air links with only 101 out of 210 possible
countries. A more useful indicator may be
the index developed by the International Air
Transport Association (IATA), which is based
on flight frequency, seats per flight, number
of destinations and a weighting factor to
measure the importance of each airport. 15


Air traffic in Asia and the Pacific is poised to
continue to grow strongly. For the period
2009-2020, the International Civil Aviation
Organization estimates that passenger aircraft
movement will increase annually by 5.6 per
cent, while between 2009 and 2014, passenger
traffic on many intraregional routes is
projected to increase annually by 6 to 7 per
cent.16 For many countries in the region,


per capita air travel is still very low, so any
improvement in connectivity that reduces the
time and cost for air travel could stimulate a
considerable increase. But while investment
in airports is important, governments should
also consider the transport infrastructure
needed to link them to their production and
population centres by developing their land-
based transport networks.


Land transport


Maritime shipping has historically been the
main mode of transport in international
trade due to its ability to transport large
volumes at low cost per unit of freight.
As a result, land transport development
patterns have tended to lead to major urban
or trading centres in coastal areas. Thus,
intercountry land transport linkages are
particularly underdeveloped in Asia and the
Pacific region. In recent decades, however,
governments across the region have made
considerable efforts to extend national road
and railway systems and in some cases, inland
waterways, both within their countries and by
connecting to their neighbours.


Much of this investment has been directed
into the road sector. Governments have
invested in major national roads, as well
as rural road networks.17 Some major rural
road development initiatives have been
implemented in, for example, Bangladesh,
China, India and Sri Lanka. In addition,
the Intergovernmental Agreement on the
Asian Highway Network, adopted under the
auspices of ESCAP on 18 November 2003,
established technical specifications for the
regional road network. The Asian Highway
Network now extends through 32 member
States and comprises 142,000 km of highways
(figure III.2).18 Currently, about 32 per cent of
the network is classified as Primary and Class I
standards, the two highest categories of road
class.


However, there are still 11,500 km of Asian
Highway routes that need to be upgraded
to meet the minimum standards. Although
the network does not have “missing links”,
the poor quality of some road segments is a
deterrent for international transport because it
increases transport time and operating costs for




Building seamless connectivityCHAPTER THREE


67


vehicles. Countries are also struggling to maintain
their Asian Highway routes due to limited
finances and institutional capacity. Furthermore,
as in the case of other infrastructure networks,
it is often difficult to fund cross-border
projects unless such projects are part of a
broader integration strategy, such as the
Almaty-Bishkek Regional Road Rehabilitation
project funded by ADB under the Central
Asia Regional Economic Cooperation (CAREC)
programme, or more recently the Northern
Economic Corridor of the Greater Mekong
Subregion. This underlines the critical role
played by regional cooperative frameworks,
such as the Intergovernmental Agreement
on the Asian Highway Network, as well as
the many subregional initiatives promoted
by subregional organizations and multilateral
financing institutions.


The situation is similar for railways. Some
countries are expanding and improving their
networks through the construction of new
tracks, double tracking or electric signalling,
but the region as a whole has yet to realize
its rail potential. The Intergovernmental


Agreement on the Trans-Asian Railway
Network, which entered into force in 2009,19
has raised the profile of the region’s railways
and is encouraging governments and financ-
ing institutions to increase investment in the
sector. Other subregional and regional
initiatives have also been catalytic in improv-
ing railway network connectivity. For example,
the Master Plan on ASEAN Connectivity
launched in 2010 has renewed interest in the
Singapore-Kunming Rail Link (SKRL) Project.
As part of this project, the towns of Thanaleng
in the Lao People’s Democratic Republic and
Nong Khai in the north of Thailand were
linked by rail, providing the landlocked
country easier access to the maritime ports of
Thailand.


However, railways face the challenge of
missing links, which prevent the network from
functioning as a continuous system (table III.2
and figure III.3). According to ESCAP estimates,
these constitute about 10,500 km of rail track,
mostly located in the ASEAN subregion. While
these links can be filled by transshipments to
trucks, shippers are discouraged from using


AH1


AH1


AH1


AH1


AH84


AH84


AH86


AH84


AH81


AH82


AH82


AH2


AH2


AH70


AH2


AH75


AH
78


AH75


AH5 AH
5


AH77


AH
5


AH63


AH62


AH63
AH


62


AH66


AH1


AH
71


1


AH7


AH76


AH77


AH2


AH
2


AH4


AH5
1


AH1


1


AH1


AH4


AH1


AH1


AH2


AH43
AH43


AH43
AH43


AH
47


AH
47


AH47


AH4
5


AH46 AH46 AH4
5


AH42


AH1


AH2


AH2


AH42


AH43
AH43


AH
44


AH41


AH41


AH1


1


AH2


AH1


AH1


AH1


AH1


AH2


AH1


AH1


AH15


AH18AH
2


AH
2


AH2


AH25


AH25


AH1


AH1


AH11


AH1
1


AH11


AH15


AH3


AH
1


AH1


AH1


AH
26


AH26


AH
26


AH4


AH4


AH5


AH68


AH5


AH5


AH5


AH14


AH14


AH1


AH
3


AH3


AH1
AH1


AH
1


AH3


AH1


AH1


AH
31


AH
31


AH32


AH6


AH
31


AH32


AH31


AH6


AH6


AH30


AH1


AH6


AH
6


AH3


AH3


AH32


AH4


AH32


AH30


AH30


AH30


AH6


AH
3


AH6AH4


AH
64


AH4


AH6AH6


AH60AH6
AH6


AH7


AH6


AH63


AH6


AH6


AH8


AH61
AH61


AH70


AH60


AH60


AH60AH
64


AH64


AH5
AH5AH5


AH
62


AH62


AH
62


AH
67


AH67


AH5AH5


AH61


AH61


AH61


AH63


AH63


AH70


AH70
AH63


AH65
AH65


AH61
AH7


AH7


AH7


AH7


AH7


AH7


AH7
AH7


AH7


AH7


AH5


AH5


AH8


AH8


AH8


AH8
AH8


AH8


AH6AH1


AH5


AH14


AH64


AH61


1


AH5AH5
AH85


AH1


AH14
AH14


AH19


AH
19


AH16 AH16 AH16


AH48


AH1


AH78


AH75


AH1


AH87


AH1


AH5


AH2 AH2


AH60


AH
7


AH70


AH72


AH
70


AH3


AH
45


AH2


AH3
3


AH34


AH5


AH34


AH42


AH
1


AH67


AH
12


AH1


New Delhi


Islamabad
IndianKabul


Kandahar
Lahore


Mashhad


Bandar Abbas


Bandar Emam


Esfahan


Qazvin


Bushehr


Tehran


Izmir


Istanbul


Ankara


Icel


Poti


Yerevan


Tbilisi


Turkemenbashi
Baku


Ashgabat
Kashi


Jammu


Kashmir


Mary


Bukhara


Dushanbe


Shymkent


Tashkent Osh


Karachi


Agra


Mumbai


Kolkata


Nagpur


Kathmandu


ChennaiBangalore


Colombo
Sri Jayawardhanapura-Kotte


Dhaka


Lhasa


Thimphu


Mandalay


Seoul


Bangkok


Phnom


Sihanoukville Vung Tau


Hat Yai


Singapore


Banda Aceh


Jakarta


Denpasar


Vientiane


Hanoi


Kuala
Lumpur


Kalimantan


Borneo


Bandar Seri
Begawan


Surabaya


Penh


Manila


Zamboanga


Tokyo


Bishkek
Almaty


Urumqi


Lanzhou


Zhengzhou


Shanghai


Shenzhen


Kunming


Changsha


Beijing


Changchun


Harbin


Vladivostok & Nahodka


Ulaanbaatar


Irkutsk Chita


Hovd


Novosibirsk


Semipalatinsk


Pavlodar


Omsk


Astana


Yekaterinburg


Samara


Ural'sk


Chelyabinsk


Moscow


Krasnoe


St. Petersburg


Vyborg


Krupets


Donetsk
Volgograd


Male


Aktau


Kapikule


Chabahar


Pyongyang


Laoag


Herat


Petropavlovsk


Ulan-Ude


Belogorsk


Dhule


Gwalior


Kerman


Zahedan


Dashtak


Khosravi


Atyrau


Karaganda


Zhezkazgan


Kyzylorda


Barnaul


Rohri


Quetta


Beyneu


Guangzhou


Teknaf


Krishnagiri


ShabzevarIskenderun


Astrakhan


Tanggu


Nanjing


Xi'an


Hoi An
Tak


Dispur


ImphalBarhi


Ucharal


Voronezh


Line


Chinese
Line


Line
Indian


Line
Chinese


Shiderty


Shenyang


Khabarovsk
Manzhouli


Meiktila


Davao


Bandung


Matara


Trincomalee


Jinghe


Kharagpur


Hangzhou


Nanchang


Ho Chi Minh


Burubaital


Anar


Batumi


ROMANIA
BULGARIA


UKRAINE


Yazd


Qom
Salafchegan


Saveh


Dilaram


Polekhumri


Cagayan de Oro


Cebu


Merke


Turgat
Yi'erkeshitan


Alashankou


Horgos
Kuitun


Baketu


Honqiraf


Lianyungang


Xinyang


Eranhot


Heihe


Tongjiang


Suifenhe


Quanhe


Dandong


Zhangmu


Hekou Nanning


Youyiguan


and


Taskesken


Ussuriysk


QiqiharArshan


Dalian


Golmud


Dili


Dumai


OndorhaanNalayh


Borysoglebsk


Tambov


Merzifon


Refahiye


Tejen


Torpynovka


Leselidze


Blagoveshchensk


Vinh


Dong HaSeno
Payagyi


Narayanghat
Pathlaiya


Veseloyarskyj


Isilkul


Pnirtyshskoe
Kaerak Cherlak


Bakhty


Sonbong


Zamin-uud


Zabaykalsk


Tacloban
Allen


Matnog


Merak
Bakauheni Cikampek


Troitsk


Kotyaevka


Bekdash


Serdar
Alat


Farap


Palembang


Lioan
Sungao


General Santos


Moc Bai


Kabin Buri
Bang Pa-in


Jinghong


Kyahta
Altanbulag


Sumber


Ulaanbaishint
Tashanta


Yarantai


Lao Cai


Attari


Ozinki


Kamenka


Tamu


Pitsanulok


Nakhon Sawan


Port Moresby


Katchpur


Dhanushkodi
Talaimannar


Ruili


Johor Bahru
Serembang


Medan


Semarang


Khon Kaen


Sayanshand


Shijiazhuang


Raxual BirganjSiliguri


Hyderabad
Kanpur


Kurlin


Hyderabad
Vijayawada


Madurai


Visakhapatnam


Muse


Mongla


Termez


Mazar-i-Sharif


Aralsk


Toprakkale


Gerede


Arkalyk


Jambi


Thane


Xining


Uliastay


Xianglan


Tulufan


Fukuoka


Busan


Naypyitaw


Yangon


Aktobe


Zhaisan


Takeshkan


Takeshkan


Phulbari Jaigaon


TURKEY


ARMENIA


GEORGIA


DEMOCRATIC
LAO PEOPLE'S
REPUBLIC


THAILAND


MYANMAR


BANGLADESH


INDIA


MALDIVES


SRI LANKA


NEPALPAKIST N


REPUBLIC OF IRAN
ISLAMIC AFGHANISTAN


BHUTAN


C MBODIA


VIET NAM


MALAYSIA


SINGAPORE


INDONESIA


INDONESIA


MALAYSIA


BRUNEI DARUSSALAM


DEMOCRATIC
PEOPLE'S REPUBLIC OF


KOREA
JAPAN


TAJIKISTAN
CHINA


MONGOLIA


TURKMENISTAN


KAZAKHSTAN


RUSSIAN FEDERATION


UZBEKISTAN
KYRGYZSTAN


AZERBAIJAN


PHILIPPINES


REPUBLIC OF


OF KOREA


R.F


TIMOR-LESTE


PAPUA
NEW GUINEA


Gazi Mammed


Kazmalyarskiy


Yerevan


Agarak


Ferry to Kazakhstan


Tabriz ISLAMIC REPUBLIC
OF IRAN


Sarpi


Nour Douz


Gumri


Erzurum


Trabzon


Askale


Vale


Horasan Ashtarak


Dogubayazit
TURKEY


Bitlis


Alat


Sumgayit
Baku


Bilasuvar


Julfa


Eraskh Ferry to Turkmenistan


ARMENIA


Khashuri


Akhaltsikhe
Red Bridge


Kazakh


GEORGIA


Tbilisi


RUSSIAN FEDERATION


Poti
Senaki


Larsi


Ferry to Bulgaria,
Romania, Ukraine


Batumi


Leselidze Hasavjurt


Mahachkala


AH81


AH82


AH5


AH
81


AH5


AH82


AH8
2


AH5


AH84


AH81


AH81


AH82
AH1


AH
83


AH1


AH8
1


AH8
1


AH1


AH8


AH5


AH8


AH82


AH5


AH5


AH1


AH86


AZERBAIJAN


Sadarak Goradiz


Samur


Akurik


Nakhchivan
Goris


Astara


Sarp Sadakhlo
Bagratashen


Jolfa


Sukhumi


Uzungala
Paravakar


Vanadjon


Bazargan
Gurbulak


Aghband


Mengri


Mtskheta


Ganja


Eyvoghli


Asian Highway Route
Legend


Potential Asian Highway Route
Ferry Link
Capital City


UNITED NATIONS
2011


The designations employed and the presentation of material on this map
do not imply the expressing of any opinion whatsoever on the part of the
Secretariat of the United Nations concerning the legal status of any country,
territory, city or area or of its authorities, or concerning the delimitation of its
frontiers or boundaries.
Dotted line represents approximately the Line of Control in Jammu and
Kashmir agreed upon by India and Pakistan. The final status of Jammu and
Kashmir has not been agreed upon by the parties.


ASIAN HIGHWAY ROUTE MAP


Mandalay


Meiktila


Payagyi


Kyaing Tong


Myanmar


Chiang Rai


Tak
Udonthani


Khon Kaen


Bang Pa-in


Chumphon


Laem
Chabang


Lao P.D.R.


Sihanoukville


Hai Phong


Vinh


Da Nang


Dong Ha


Kunming


Jinghong


Viet Nam


Vung Tau


Thaton


Bangkok


Pakse
Hin Kong


Kabin Buri


Nakhon
Ratchasima


Nakhon
Sawan


Qudomxai


Phitsanulok


Hanoi


AH14


AH1
4


AH14


AH
1


AH1


AH1


AH1


AH1


AH
1


Thailand


Huai
Kon


AH13
AH1


AH14


AH
1


AH1


AH1


AH1


AH1


AH11
AH11


AH11


AH1


AH16


AH15


AH15


AH11


AH16


AH
12


AH
12


AH
12


AH
13 Vientiane


AH16


AH12


AH
19


AH1


AH2


AH2


AH3


AH3


AH3


AH
2


AH19


Nanning


AH1


Phnom Penh


Mae Sai
Tachilek


Muse
Ruili


Hekou
Lao Cai


Huu Nghi Youyiguan


Poipet
Veunkham


Trapeangkreal


Moc Bai
Bavet


Ban Lao


Daluo


Mongla


Savannakhet


Nateuy
Boten


Mohan


Houayxay
Chang Khong


Nong Khai


Cau TreoKeoneua


Nakhon
Phanom


Mukdahan


Lao Bao


Densavanh


Aranyaprathet


Cambodia


Mae Sot
Myawadi


Muang Ngeon


Sino


Thakhek


Bien Hoa


Ho Chi Minh


Stung Treng


Hoi An


Kratie


Uttaradit


Hoa Binh


Naypyitaw


Yangon


FIGURE TITLE


III.2. Asian Highway network


Source: ESCAP.




68


TABLE TITLE


III.2. Missing links in the Trans-Asian Railway network, end 2011


Source: ESCAP.


Note: .. indicates that data are not available.


Link Countries concerned Distance (km)
Estimated cost (millions of


US dollars)
Central Asia and the Caucasus region, including the Islamic Republic of Iran and Turkey


Gagarin - Meghri Armenia – Islamic Republic of Iran 469.6 2 000.0
Tatvan – Van Turkey 240.0 ..


Qazvin - Rasht - Anzali - Astara
Islamic Republic of Iran 370.0 969.0
Azerbaijan 8.2 12.4


Total 378.2 981.4


Kars - Akhalkalaki
Turkey 76.0 ..
Georgia 29.0 ..


Total 105.0 420.0


Uzgen - Arpa - Torugart - Kashi
Kyrgyzstan 270.0 2 000.0
China .. ..


Arak - Khosravi - Khaneghein Islamic Republic of Iran – Iraq 566.0 (up to border) 820.0


Sangan - Herat


Islamic Republic of Iran 77.0 78.0
Afghanistan 114 .0


(61.0 + 53.0)
75.0


(for 61.0km)
Total 191.0 153.0


China/North/North-East Asia


Thannaleng - Kunming
Lao People’s Democratic Republic 570.0 1 000.0
China 599.0 2 980.0


total 1 169.0 3 980.0


Lashio - Dali
Myanmar 142.0 480.0
China 350.0 2 162.0


Total 492.0 2 642.0


Denchai - Tachilek - Jinghong


Thailand 326.0 ..
Myanmar 195.0 ..
China 141.0 ..


Total 589.0 2 138.0


Nariin Sukhait - Numrug, with
links to Chaibalsan and border
of China


Mongolia 2484.0 ..


South-East Asia


Sisophon - Aranyaprathet
Cambodia 48.0 80.0
Thailand 6.0 0.5


Total 54.0 80.5


Bat Deng - Trapeang Se / Loc
Ninh - Hanoi


Cambodia 257.0 480
Viet Nam 129.0 949.0


Total 385.0 1 429.0


Vientiane - Mu Gia - Vung An
Lao People’s Democratic Republic 450.0 2 342.0
Viet Nam 119.0 143.0


Total 569.0 2 485.0


Bua Yai - Savannakhet
Thailand 283.0 908.0
Lao People’s Democratic Republic 4.0 6.3


Total 287.0 914.0


Ubonratchatani - Pakse -
Savannakhet - Devsavanh -
Dong Ha


Thailand 90.0 288.0
Lao People’s Democratic Republic 415.0 710.0
Viet Nam 84.0 226.0


Total 589.0 1 224.0


Namtok - Thanpyuzayat
Thailand 153.0 491.0
Myanmar 110.0 246.0


Total 263.0 737.0
South Asia


Dalbandin - Gwadar Pakistan 515.0 1 250.0
Dohazari - Gundum Bangladesh 129.0 300.0


Kalay - Jiribam
Myanmar 127.0 98.0
India 219.0 649.0


Total 346.0 747.0




Building seamless connectivityCHAPTER THREE


69


rail because of the longer transit time and
higher costs. In addition, interoperability
across borders remains a problem.


Given the expected growth in intraregional
trade, as well as heightened awareness
about the transport sector’s contribution to
climate change, the railways could capture a
greater proportion of intraregional transport,
particularly for freight. But there is a need
to demonstrate this potential, for example,
through demonstration runs of container
block trains. The Economic Cooperation
Organization (ECO) has been particularly
active in this area, starting with demonstration
runs between Istanbul and Almaty in 2002,
followed by Islamabad and Istanbul via Tehran
in 2009.


Countries can also increase rail connectivity
by developing more inland container depots
and dry ports with rail connections. The
Navoi inland container depot in Uzbekistan,
for example, now serves as a subregional
air hub with rail links to Central Asia and
Afghanistan. Similarly, Nepal has developed
an inland container depot at Birgunj, which is
connected to the vast Indian railway network.


C r o s s - b o r d e r a n d t r a n s i t t r a n s p o r t
f a c i l i t a t i o n


Due to the increase in intraregional trade
during the last two decades, countries have
opened more border crossings and domestic
routes for international transport, and are
using bilateral and multilateral agreements
on transport facilitation to improve the
conditions for international land transport.
Ambitious initiatives include the customs
union among Belarus, Kazakhstan and the
Russian Federation, joint customs controls
between Georgia and Turkey and the
modernization of border gates in Turkey. To
deal with challenges of coordination among
different agencies dealing with transport
facilitation, many countries have set up
national coordination mechanisms.


Nevertheless, cross-border and transit transport
is still hampered by many non-physical barriers
that lead to excessive delays, high costs and
uncertainties. These are multiple technical
standards, inconsistent and complex
border-crossing procedures and excessive
documentation. In addition, goods are often
inspected on both sides of the borders
by different authorities, and sometimes


FIGURE TITLE


III.3. Trans-Asian Railway network


TRANS-ASIAN RAILWAY NETWORK


1,676 mm
1,520 mm
1,435 mm
1,067 mm
1,000 mm
1,000/1,435 mm
TAR LINK - PLANNED/UNDER CONSTRUCTION
POTENTIAL TAR LINK
POTENTIAL TAR LINK TO BE CONSIDERED
BREAK-OF-GAUGE
FERRY CROSSING


Track Gauges


UNITED NATIONS
2011


Zahedan


Sarakhs


Bandar-e-Abbas


Tehran


REPUBLIC OF IRAN
ISLAMIC


Istanbul


Ankara
TURKEY


Razi


Dogukapi


Bandar-e-
AmirabadToprakkale


Iskenderun


Malatya


Samsun
Kapikule


Qom


Bafq


Cetinkaya


Mirjaveh


Izmir


Bandar Emam


Garmsar


Mersin


Khorramshahr


Eskisehir


Tatvan Van
Kapikoy


Astara
Bandar-e-Anzali


Ahvaz


Qazvin
Mashhad


FarimanKashmar
Torbat
Heidarieh


Badrud


Ardakan
Esfahan Chadormalu


Khosravi
Khaneghein Arak


Jolfa


Sangan


New Delhi
NEPAL


Islamabad
Peshawar


Indian Line


Chinese Line


Kabul


PAKISTAN


Quetta


Rohri


Jammu
and
KashmirAFGHANISTAN


Karachi


INDIA
Mumbai


Kolkata


Raxaul


Kathmandu


Chennai


Tuticorin
Talaimannar


SRI LANKAColombo
Sri Jayewardenepura
Kotte Matara


BANGLADESH
Dhaka


BHUTAN


Chittagong


Male
MALDIVES


Indian Line
Attari


Wagah


Koh-i-Taftan


Bangalore


Rameswaram


Nagpur


Thimphu


Darsana


Birol


ShahbazpurGwadar


Lodhran


Bhopal


Birgunj


Brahma Mandi


Kakarvitta
Mathura


Vijayawada


Sitarampur


Mughalsarai


Kanpur Patna


Wardha


Madurai


Jolarpettai


Trincomalee


Chaman


Multan


Hyderabad


Khokropar


Dalbandin


Herat


Mahisasan
Jiribam


Hairaton


Spezand
Khanewal


Kataragama


CHINA


Chinese Line


Seoul
REPUBLIC OF
KOREA


Tokyo
JAPAN


Alataw Pass
Urumqi


Zhengzhou


Shanghai
Nanjing


Kunming


Beijing
Tianjin Dalian


Pyongyang


Harbin


Rajin


Erenhot


DEMOCRATIC


OF KOREA
PEOPLE'S REPUBLIC


Manzhouli


Lianyungang


Qingdao


Dandong


Mokpo


Changsha


Dong Dang


Changchun


Shenyang


Turpan


Kashi


Ruili


Baoji


Hengyang


Hong Kong, China


Suifenhe


Gwangyang


Lanzhou


Xian


Jinan


Guangzhou
Nanning


DaliKachang


Baoshang


Daejeon


Tumangang


Chongjin


BusanIksan


Shenzhen


Yuxi


Nakhodka


Khabarovsk
Ulaanbaatar


Ulan-Ude Karimskaya


MONGOLIA


Novosibirsk
Omsk


Yekaterinburg


Ozinki


Moscow


Krasnoe


Syzemka


Astrakhan


Volgograd


RUSSIAN FEDERATION


Zamyn Uud


St. Petersburg


Zabaykalsk


Tayshet


ChitaIrkutsk


R. F.


Likhaya


Buslovskaya


Samur


Veseloe


Lokot


Sukhbaatar


Olya


Ussurijsk


Kotelnich


Krasnodar
Novorossiisk


Kavkaz


Grodekovo


Rostov


Naushki


VostochnyKhasan


Vladivostok


Shiveekhuren
Gashuun Sukhait


Tavantolgoi
Sainshand


Nariin Sukhait


Bichigt


NumrugKhuut


Choibalsan


Ereen tsav


AZERBAIJAN


Poti


Yerevan


Tbilisi


Turkmenbashy
Baku TURKMENISTAN


Ashgabat


Batumi
GEORGIA UZBEKISTAN


Tashkent


TAJIKISTAN


KYRGYZSTAN


Bishkek


Astana


Petropavlovsk


Aktogai


KAZAKHSTAN


Aktau


Dostyk


Arys


Makat


Beyneu


Kandagach


Dushanbe


Tobol


Ganushkino


Uralsk


Mointy


Bukhara
ARMENIA


Lugovaya


Yalama


Kurgan
Tube


Yangi Bazar


KulyabYavan


Dashowuz


Turkmenabad


Osh


Tamu


MYANMAR


Lashio


CAMBODIA


THAILAND


Bangkok


Phnom


Sihanouk Ville Ho Chi Minh City


Hat Yai


MALAYSIA


SINGAPORE
Singapore


Banda Aceh


Merak


INDONESIA


Banyuangi


VIET NAM
Hai Phong


Hanoi


Kuala


Kalimantan


INDONESIA


Borneo
MALAYSIA


BRUNEI DARUSSALAM
Bandar Seri
Begawan


Surabaya


Penh


Manila


PHILIPPINES


Lao Cai


Poipet


LAO PEOPLE'S
DEMOCRATIC
REPUBLIC


Lubuklinggau


Kertapati


Rantauprapat


Belawan


Namtok


Medan


Butterworth


Chiang Mai
Nong Khai


Chiang Rai


TIMOR-LESTE


Panjang


Bandung


Vientiane


Lumpur


Jakarta


Mandalay


Johor Bahru


Padang Besar Sungai Kolok
Tumpat


Port
Klang


Nakhon
ratchasima


Sattahip
Port


Lamchabang
Port


Kalay


Thanphyuzayat


PAPUA NEW GUINEA


Suvannakhet


Mukdahan


Boten


Dili


Halong


QuanTrieu


Teluk Bayur
Muaro


Nakhonsawan
Mae Sod


Naras


Naypyitaw


Yangon


Ipoh


Source: ESCAP.




70


Country or area
Convention


on Road
Traffic (1968)


Convention
on Road


Signs and
Signals
(1968)


Customs
Convention


on the
International
Transport of
Goods under


Cover of
TIR Carnets


(1975)


Customs
Convention


on the
Temporary


Importation of
Commercial


Road
Vehicles
(1956)


Customs
Convention


on
Containers


(1972)


International
Convention


on the
Harmonization


of Frontier
Controls of


Goods (1982)


Convention
on the


Contract
for the


International
Carriage of
Goods by


Road (CMR)
(1956)


Group I: Mainland Asia
Afghanistan x x
Armenia θ θ θ θ θ
Azerbaijan θ θ θ θ θ θ θ
Bangladesh
Bhutan
Cambodia x
China x
Democratic People's
Republic of Korea
Georgia θ θ θ θ θ θ
India x
Iran (Islamic Republic of) x x x θ θ
Kazakhstan θ θ θ θ θ θ
Kyrgyzstan θ θ θ θ θ θ θ
Lao People's
Democratic Republic


θ


Malaysia
Mongolia θ θ θ θ θ
Myanmar
Nepal
Pakistan x x


Republic of Koreaa S S x x


Russian Federation x x x x x x
Singapore x
Tajikistan θ θ θ θ θ
Thailand S S
Turkey x θ x θ θ
Turkmenistan θ θ θ θ
Uzbekistan θ θ θ θ θ θ θ
Viet Nam


Group II: Island countries
Brunei Darussalam
Indonesia S S x x
Japan
Maldives
Philippines x x
Sri Lanka


TABLE TITLE


III.3. Status of accession of ESCAP regional members to the seven international conventions related to land transport
facilitation listed in Commission resolution 48/11, as of 14 February 2012


Sources: United Nations Treaty Collection. Available from http://treaties.un.org/Pages/Treaties.aspx?id=11&subid=A&lang=en; and Summary list
of International UNECE Transport Agreements and Conventions. Available from http://www.unece.org/trans/conventn/legalinst.html.


Notes: x = acceded before adoption of resolution 48/11, θ = acceded after adoption of resolution 48/11, S = signature
a The Republic of Korea acceded to the Convention on Road Traffic (1949), while it remains as a signatory of the new version of the convention
(1968).




Building seamless connectivityCHAPTER THREE


71


even while in transit, rather than being
inspected either at loading or unloading
points. Experience has shown that unilateral
measures have had a limited impact on
transport facilitation, since gains on one side
of the border may be lost on the other – thus,
cooperation is essential.


Landlocked countries, which depend on
intercountry land transport for much of
their external trade, could benefit the most
from multilateral facilitation; despite being
connected to regional networks, they still
depend on their transit neighbouring countries
for their goods to reach sea ports and beyond.


Many organizations have been bringing
stakeholders together to remove these
barriers. ESCAP, for example, through
resolution 48/11 adopted in 1992, has been


urging member countries to accede to seven
international conventions related to land
transport facilitation (table III.3).20 To ensure
that these efforts converge over the long
run, the secretariat has prepared a Regional
Strategic Framework for Facilitation of
International Road Transport (box III.1). The
framework was recently adopted by the
Ministerial Conference on Transport held in
Bangkok in March 2012. Its adoption by the
member States will pave the way for dealing
with non-physical barriers comprehensively,
which is of critical importance to enhance
trade and boost regional integration.


Dynamic effects of improved regional
transport connectivity


Given the high cost of transport infrastructure
development, governments should exercise


The ESCAP Ministerial Conference on Transport held at Bangkok in March 2012
adopted the Regional Strategic Framework on Facilitation of International
Road Transport. It consists of long-term, common targets as well as desirable
strategies for fundamental elements of international road transport and
essential facilitation approaches. This could help ensure convergence of efforts
to facilitate transport by countries by avoiding inconsistencies and possible
conflicts between different facilitation agreements and measures.


The framework identifies major challenges to international road transport
and provides possible solutions for them. It covers road transport permits and
traffic rights, visas for professional drivers and crew, temporary importation of
road vehicles, third-party liability insurance, vehicle weights and dimensions,
and vehicle registration/inspection certificates. It also includes measures to
mitigate transport delay by promoting international conventions, coordinating
legal instruments, applying new technologies, developing professional
training, strengthening national coordination mechanisms, promoting joint
border controls and economic zones at borders.


One of the important proposals in the framework is the establishment of a
regional network of legal and technical experts to help countries upgrade the
capabilities of their officials and experts, and provide professional support to
the development of transport facilitation agreements, measures and projects.


Source: ESCAP.


BOX III.1. Regional Strategic Framework for Facilitation of International
Road Transport




72


a high degree of caution and also think
strategically about the type of infrastructure
they develop. The rationale for having intergovern-
mental agreements on the Asian Highway and
Trans-Asian Railways is to allow countries to
coordinate their infrastructure development,
particularly for sections which lead to
international borders. It is, however, not easy to
assess the impact of such projects across more
than one country.


Many studies have explored the impacts
of changes in trade and transport costs
on industrial distribution and subnational
economies. An increasing number of such
studies use computable general equilibrium
(CGE) models to investigate the impact
of various policies to improve transport
connectivity within and across countries. The
Institute of Developing Economies (IDE), for
example, has developed a CGE model which
uses data on the Asian Highway to look not
only at the impact of physical infrastructure
improvements on economic growth in Asia,
but also at other factors which affect trade
costs and therefore the choice of mode by
business.


To demonstrate this approach, IDE conducted
simulations on three routes which make up
part of the Asian Highway network:


• AH1: Mae Sot (Thailand) – Mandalay
(Myanmar) – Dhaka (Bangladesh) – Delhi
(India);


• AH1 + AH2 Chiang Rai/Mae Sai (Thailand)
–Mandalay (Myanmar) – North East India –
Dhaka (Bangladesh) - Delhi (India) – Amritsar
(India, near the border of Pakistan);21


• AH1 + AH14: Kunming (China) – Muse
(Myanmar) – Mandalay (Myanmar) – North
East India – Dhaka (Bangladesh) – Delhi
(India).


The simulations consider construction and
improvements in physical infrastructure,
the implementation of custom facilitation
measures and permitting through traffic in
Myanmar and Bangladesh. Further details of
the model and these simulations are included
in the annex. The results are summarized
in table III.4. They show that most regions
included in the model are unaffected by these
projects, and that these unaffected regions


tend to be the ones with the highest regional
gross domestic products (RGDPs) per capita.
As explained in the annex, gains and losses
are defined as differences in the simulated
RGDPs in 2030 between the baseline scenario
and each specific project scenario. Because
improvements in land routes typically create
businesses and employment opportunities in
the regions where these routes are located,
some redistribution of economic activity and
population towards these regions is possible,
which, in turn, could adversely affect regions
farther away from the improved routes.


Table III.4 shows that some districts are indeed
negatively affected, but their average losses
compared to the baseline scenario are very
small, of the order of 0.3 to 0.4 per cent. In
contrast, the gains of the positively affected
regions are significantly larger, between 2.2
and 2.8 per cent. Interestingly, the positively
affected regions have, on average, a lower
RGDP per capita than the negatively affected
regions, implying that these projects have
positive distributional impacts, a result that
is confirmed by the negative correlation
coefficients between the gains in RGDP and
the initial RGDPs per capita (no. 4 of table III.4).


The results of simulations using CGE models
should be interpreted with caution as they
depend on the assumptions and parameters
of the model, but they can, nevertheless,
provide a useful input for policy discussions. In
principle, the results of the three simulations
show that investments in the Asian Highway
can have large net positive gains and
favourable distributional effects, but that
attention should also be given to anticipating
and planning for possible negative effects in
other regions.


Connectivity for energy security


Energy resources are distributed unevenly
around the region. Asia and the Pacific has
major energy exporters such as Australia,
Indonesia, Kazakhstan and the Russian
Federation along with large energy importers
such as China, India, Japan and the Republic
of Korea. Buoyant economic growth in the
region has, therefore, been accompanied by
an expansion in energy trade, which between




Building seamless connectivityCHAPTER THREE


73


of a regional agreement setting out consis-
tent rules for energy trade. There are also
geopolitical and security considerations that
discourage investors from exploiting poten-
tially profitable opportunities.


Most energy trade involves the bulk transport
of products, especially by sea and particularly
in the case of liquefied natural gas (LNG).
However, greater economies of scale could
be derived from enhancing international
physical energy infrastructure, such as cross-
border energy grids and pipelines.


Cross-country energy infrastructure can be
bilateral, as with the Nepal-India bilateral
power trade or the Indonesia-Philippines
pipeline gas trade, or subregional, as with the
East Siberia-Pacific Ocean oil pipeline or the
SAARC power grid (see box III.2). The following
is a brief overview of recent developments on
subregional energy infrastructure in Asia and
the Pacific.


East and North-East Asia – The East Siberian
and Sakhalin reserves of hydrocarbons in the
Russian Federation offer opportunities for
infrastructure development. In that regard,
the Russian Federation has launched several
pipeline projects, including the East Siberia
Pacific Ocean pipeline, which will connect


2000 and 2010 grew by almost 60 per cent
(figure III.4).22 The total volume of energy
traded in 2010 – 3,056 million tons of oil
equivalent (Mtoe) – represented almost
54 per cent of the region’s primary energy
consumption and more than a quarter of the
world’s total primary energy consumption.
The largest increase, 126 per cent, was for gas,
followed by coal at 106 per cent and oil at 33
per cent.


According to ADB, Asia-Pacific energy demand
is projected to grow by 2.4 per cent a year
during the next 20 years with the highest
growth in East Asia at 4.8 per cent and
South Asia at 3.5 per cent.23 Total demand is
expected to reach 7,215 Mtoe by 2030,
compared to 5,380 Mtoe for total supplies,
implying that the region has enormous
potential for increasing energy trade.


Nevertheless, intraregional energy trade faces
a number of obstacles. The most important
ones is the lack of energy supply infrastructure,
which often prevents countries from accessing
even their own domestic resources. Address-
ing this deficit would require vast investment;
according to the International Energy Agency
(IEA), between 2010 and 2035, the cumulative
requirement could exceed $32 trillion (2009
US dollars). Another impediment is the lack


AH1 AH1 + AH2 AH1 + AH14
1. Non affected regions
Number of regions 1 065 1 063 950
Average per capita RGDP 2 946 2 966 3 040
2. Negatively affected regions
Number of regions 226 208 230
Average per capita RGDP 987 898 1 219
Average loss (per cent) -0.3 -0.3 -0.4
3. Positively affected regions
Number of regions 408 428 519
Average per capita RGDP 607 628 848
Average gain (per cent) 2.8 2.6 2.2
4. Correlation between change in RGDP
and RGDP per capita -0.099 -0.078 -0.105


TABLE TITLE


III.4. Simulation model of benefits from three Asian Highway routes


Source: ESCAP based on S. Kumagai, “Geographical simulation analysis on the economic impacts of improved regional transport connectivity be-
tween ASEAN and India”, background paper prepared for ESCAP, Bangkok, 2012.


Notes: Regional GDP per capita values are for the year 2005 and expressed in current US dollars. Average losses and gains are based on annual
values in billions of US dollars of 2005 for the year 2030, the final one of the simulation period. The simulations use local administrative units (“re-
gions”) which differ in size and population from country to country. It should also be noted that the simulations do not take into account the cost
of the infrastructure projects and only estimate percentage change relative to each other. The simulations only focused on specific sections of the
Asian Highway.




74


fields in Irkutsk to the Pacific ocean via China
by pipeline,25 a joint China-Russian Federation
gas pipeline project, which will connect
East-Siberian gas fields with China, and the
development of the Russian Sakhalin project,
which already supplies both oil and gas.26 It
is worth to note that important agreements
were signed in 2011 to build a gas pipeline
from the Russian Federation to the Republic
of Korea through the Democratic People’s
Republic of Korea. The project aims to supply
12 billion cubic meters of natural gas annually,
and is expected to cut the price of gas for the
Republic of Korea by one-third, as compared
to the current cost of delivering LNG from
Sakhalin.27 This would be a prime example of
international cooperation furthering physical
and economic connectivity.


North and Central Asia – The western part of
the subregion forms a strategic corridor for
the export of Caspian and Arab States oil and
gas supplies to Europe, with Turkey serving
as a connecting hub. The main pipeline trade
projects in the subregion include the existing
Blue Stream gas pipeline, the Baku-Tbilisi-


FIGURE TITLE


III.4. Energy trade in the Asia-Pacific region24


Source: ESCAP based on data from EIA online statistical data and BP Statistical Review of World Energy.


Note: Data of electricity trade for year 2010 is not available.


Ceyhan Export Oil Pipeline, the Baku-Supsa oil
pipeline, the Baku-Tbilisi-Erzurum gas pipeline
and the Tabriz-Ankara gas pipeline. Proposed
projects include the Nabucco gas pipeline, the
Persian gas pipeline and the Trans-Caspian
gas pipeline that will connect Turkmenistan
with Europe. A planned pipeline will also
enable Turkey to send oil from Samsun on
the Black Sea to the Ceyhan Oil Terminal. In
addition, Turkey plans to develop a network
of LNG terminals to export gas to European
markets.28


Central Asia has about 14 per cent of the oil
reserves of Asia and the Pacific as well as 11
per cent of the gas reserves and 7 per cent
of the coal reserves, making the subregion a
key part of the Asia-Pacific energy landscape.
The subregion’s five States, as former Soviet
Republics, are interlinked through electricity
grids and pipeline systems that lead to the
core consumer, the Russian Federation.
Kazakhstan, with almost 3 per cent of the
world’s oil reserves, currently supplies
international oil market: (i) by pipeline to the




Building seamless connectivityCHAPTER THREE


75


Major routes are the CAC pipeline through
Kazakhstan to Russian Federation; the
Korpezhe–Kordkuy pipeline,31 and the Central
Asia-China gas pipeline. Another route will
be the East-West pipeline, which will boost
westward exports by transporting gas from
the country’s Dauletabad field through the
Russian pipeline system or through the
prospective Trans-Caspian pipeline to Turkey.
Once completed, it will have the capacity to
transport 30 billion cubic metres of natural
gas per year. Another major new project is the
Central Asia-China gas pipeline which extends
from Turkmenistan to Xinjiang in north-west
China, and is designed to carry 30 billion
cubic metres of gas from Turkmenistan and 10
billion cubic metres from Kazakhstan. There
was also an agreement in 2010 to construct a
pipeline from Turkmenistan to India through
Afghanistan and Pakistan.32


Black Sea ports through the Caspian Pipeline
Consortium and the Russian mainland
pipeline grid, (ii) by barge, and through the
Baku-Ceyhan pipeline, to the Mediterranean,
(iii) by barge and rail to Batumi (Georgia) and
(iv) by pipeline to China.29 In 2010, Kazakhstan
provided 2 per cent of the foreign crude oil
supplies sent to China. Kazakhstan also exports
gas to the Russian Federation and imports it
from Uzbekistan through the Central Asia –
Center (CAC) gas pipeline system, connecting
Kazakhstan, Turkmenistan, Uzbekistan and
the Russian Federation. An agreed expansion
of the Western branch and a new parallel
pipeline will give the system the total capacity
to carry 78 billion cubic metres of natural gas
per year.30


Turkmenistan, with the world’s fourth-largest
gas reserves, exports to China, the Islamic
Republic of Iran and the Russian Federation.


BOX III.2. SAARC Energy Ring


Asia and the Pacific remains characterized by lack of access to modern
services. South-Asia, in particular, has been an unenviable symbol of this
inadequacy. More than 400 million people in the subregion continue to live
without access to electricity. With a growing population and strengthening
economies, energy cooperation among the eight SAARC countries, namely
Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri
Lanka, is gaining recognition.


In order to promote cooperation among the SAARC member States, the
Islamabad Declaration of the Twelfth SAARC Summit, held in January 2004,
mandated South Asian energy cooperation including, the concept of an energy
ring, a common regional highway of energy within and across the region
for the movement of energy (including both commodity and services),
in a market-based environment that all participants would benefit from.
The SAARC Energy Ring, endorsed by the member states as a dynamic and
evolving concept, is perceived to reduce supply disruptions and delivery
constraints in a sustainable manner.


To facilitate the creation of this energy ring, ministers of the SAARC
member States decided recently to finalize the SAARC Intergovernmental
Framework Agreement (IFA) for Energy Cooperation by June 2012.


Sources: IEA Electricity Information database, 2011. Available from www.esds.ac.uk/international/support/
user_guides/iea/iea.asp; SAARC, 2009; and Shahiduzzaman, 2012.




76


systems in Uzbekistan, Islamic Republic of
Iran and Turkmenistan. This would allow
Afghanistan, at least in the short- to medium-
term, to concentrate on the reconstruction
of its damaged distribution system rather
than trying to attract investment for energy
generation plants.36 Pakistan could also import
electricity, especially during the summer, from
Kyrgyzstan and Tajikistan, and lines could also
be extended to India, which could provide
both countries more opportunities to meet
peak demands. Meanwhile, Bhutan and Nepal
could sell more electricity to India and start
supplying Pakistan as well.37 Energy systems
optimization and two-way cross-border trade
may also be cost-effective for Nepal, which
could benefit from exporting its hydropower
to India during the high-water season and
importing thermal energy from India during
the dry season. Myanmar has hydroelectric
potential of around 40 million kW of which
only 5 per cent has been developed and some
of which could be exported to India. Moreover,
interconnection among Bangladesh, Bhutan
and Nepal through India could also be
feasible, with a possible underwater cable to
Sri Lanka.


South-East Asia – This subregion is unevenly
endowed with energy resources. Brunei
Darussalam, Indonesia, Malaysia, Thailand
and Viet Nam together hold about 5 per cent
of the Asia-Pacific region’s oil reserves. Their
production of 120 million tons of oil in 2010
covered around a half of the subregion’s
demand. The net exporters in the subregion
are Brunei Darussalam, Timor-Leste and
Viet Nam while the main net importers are
Indonesia,38 Singapore and Thailand.


South-East Asia is better endowed with natural
gas. It had 6.7 trillion cubic metres of proven
reserves in 2010, of which 82 per cent of it was
in Indonesia and Malaysia. The subregion’s
gas production is one-third higher than
consumption while its largest net importers
are Singapore and Taiwan Province of China.
The main gas export routes for the subregion
are LNG deliveries to China, Japan, Kuwait,
Mexico, the Republic of Korea and Taiwan
Province of China and pipeline deliveries to
Malaysia, Singapore and Thailand.


In addition, there are good prospects for
exporting hydroelectricity, particularly from the
mountainous eastern regions of Kyrgyzstan,
Tajikistan and Uzbekistan to neighbouring
countries within and beyond the subregion.
The proposed Central Asia Power System
project aims to unite the Central Asian
electricity grids.


South and South-West Asia – Countries in
this subregion have very different energy
endowments. The Islamic Republic of Iran,
for example, has almost 10 per cent of the
world’s oil reserves and within Asia and the
Pacific exports to China and Japan, as well
as to India to which it supplies 11 per cent of
the country’s oil demand. 33 The country is
also endowed with 16 per cent of the global
gas which is exported primarily to Armenia,
Azerbaijan and Turkey. The Islamic Republic
of Iran also exports electricity to Afghanistan,
Armenia, Iraq, Pakistan and Turkey and imports
electricity from Azerbaijan and Armenia.


India’s reserves of oil and gas constitute
less than 0.7 per cent of the world’s total. At
present, over 50 per cent of its energy needs
are met through abundant coal reserves with
much of the rest met by importing oil, gas,
coal and electricity. The subregion’s main
energy trade corridors will continue to be
between the Islamic Republic of Iran, and
between India and Turkmenistan.


There are also two long-standing pipeline
projects. One is the Iran-Pakistan-India gas
pipeline with an ultimate capacity of 55
billion cubic metres yearly.34 This has been
delayed several times due to geopolitical
considerations, but in January 2011 the Islamic
Republic of Iran announced that most of the
work on its side had been completed and
Pakistan is planning to finish its part by 2014.35
Another project is the Turkmenistan-Afghanistan-
Pakistan-India pipeline. This could deliver 33 billion
cubic metres of gas yearly from Turkmenistan but
has been challenged by the continuing unrest in
Afghanistan and north-west Pakistan.


In addition, there could be substantial benefits
from greater trade in electricity. Afghanistan,
for example, could import hydro-generated
supplies from Tajikistan or from heat-based




Building seamless connectivityCHAPTER THREE


77


resolution mechanisms. Commercial factors
include gas price mechanisms, demand
stability, competition, commercial viability,
financing transit rights, third-party access to
common gas carriers and tax incentives.39


In 2009, the economies of the subregion
accounted for 3.2 per cent of Asia-Pacific
electricity trade. The Lao People’s Democratic
Republic is the largest exporter of electricity
while Thailand is the largest importer. The major
programme promoting the interconnection
of the power grids in South-East Asia is the
ASEAN Power Grid, which has four ongoing
interconnection projects and an additional


A major gas trade development project in the
subregion is the Trans-ASEAN Gas Pipeline
Project (TAGP). This project, which aims to link
almost 80 per cent of the subregion’s total
gas reserves, includes the construction of 13
cross-border pipelines (figure III.5). It faces a
series of technical as well as institutional and
commercial challenges. The technical factors
include harmonization and standardization
of technical matters, gas quality specification,
geo-sequestration of CO2, and environmental
regulation and standards. Institutional factors
include law and regulation of cross-border
trade, the title and ownership of the pipelines,
the harmonization of tax systems and dispute


1. Malaysia to Singapore
(commissioned 1991)


2. Myanmar (Yadana) to
Thailand (Ratchaburi)
(commissioned 1999)


3. Myanmar (Yetagun) to
Thailand (Ratchaburi)
(commissioned 2000)


4. Indonesia (West Natuna) to
Singapore (commissioned
2001)


5. Indonesia (West Natuna)
to Malaysia (Duyong)
(commissioned 2002)


6. Indonesia (Grissik) to
Singapore (commissioned
2003)


7. Trans Thailand - Malaysia
(commissioned 2005)


8. Indonesia (South Sumatra)
to Malaysia


9. Indonesia (Arun) to Malaysia


10. Indonesia (East Natuna and
West Natuna) to Malaysia
(Kerteh) and Singapore


11. Indonesia (East Natuna) to
Thailand (JDA - Erawan)


12. Indonesia (East Natuna)
to Malaysia (Sabah) and
the Philippines (Palawan -
Luzon)


13. Malaysia - Thailand (JDA) to
Viet Nam


2


7


5


4 10


13


11


12


8


1


6


3


9


DEMOCRATIC
LAO PEOPLE'S


REPUBLIC


THAILAND


MYANMAR


INDIA


CAMBODIA


VIET NAM


MALAYSIA


MALAYSIA


SINGAPORE


INDONESIA


INDONESIA


BRUNEI
DARUSSALAM


CHINA


PHILIPPINES


FIGURE TITLE


III.5. The proposed Trans-ASEAN gas pipeline grid


Source: ESCAP based on data from ASEAN Centre for Energy. Available from http://aseanenergy.org.




78


11 planned through 2015 (figure III.6). The
total investment required is estimated at $5.9
billion.40


Australia – The country has the world’s
thirteenth-largest gas reserves and exports
more than half its production to China, Japan,
Kuwait, the Republic of Korea, and Taiwan
Province of China. It is also one of the world’s
largest exporters of coal, accounting for over
28 per cent of the global exports; in 2010,
almost 40 per cent of the value of its coal
shipments went to Japan with most of the
rest going to the Republic of Korea (15 per
cent), China (12 per cent), India (10.9 per cent)
and other Asian countries (9.5 per cent).


Pacific – According to an ADB study, fossil
fuels accounted for 85 per cent of the total
energy supply of the Pacific island Countries
and Territories (PICTs) during 1990-2006, with
biomass representing about 11 per cent of
the total. However the subregional picture for


both supply and consumption is dominated
by Papua New Guinea, which accounts for
60 per cent, and by Fiji for almost all of the
remaining 40 per cent. Over the period as a
whole, average energy consumption for the
PICTs grew by 3.8 per cent annually, but this
figure drops to only 1.1 per cent if Papua New
Guinea and Fiji are excluded. For the other
countries and territories, fossil fuels accounted
for around 99 per cent of commercial energy
use – compared with an average of 45 per
cent for the Asia-Pacific region and about 34
per cent globally.


A high proportion of imported petroleum
is used for transport – about 42 per cent
in Papua New Guinea, 54 per cent in Fiji,
and 75 per cent on average for others. The
increase in the price of petroleum from 2002
to early 2008 cost most PICTs about 10 per
cent of their gross national incomes, with
the impacts falling disproportionately on


Source: ESCAP based on data from ASEAN Centre for Energy. Available from http://aseanenergy.org.


FIGURE TITLE


III.6. Proposed ASEAN Power grid


Vientiane


Manila


Bandar Seri
Begawan


Hanoi


Yangon


Jakarta


Bangkok


Phnom
Penh


Kuala
Lumpur


Singapore


Legend
Power Grid
Natural Gas Fields


MYANMAR LAO PEOPLE'SDEMOCRATIC
REPUBLIC


CAMBODIA


VIET NAM


MALAYSIA


SINGAPORE


INDONESIA
INDONESIA


MALAYSIA


BRUNEI DARUSSALAM


PHILIPPINES


TIMOR-LESTE


PAPUA
NEW GUINEA


THAILAND




Building seamless connectivityCHAPTER THREE


79


people with low incomes. Around one-fifth of
petroleum consumption is used to generate
electricity. Nevertheless, access is still low in
some countries. The average is 30 per cent,
ranging from less than 25 per cent in Papua
New Guinea, Solomon Islands and Vanuatu,
to more than 95 per cent in Cook Islands,
Guam, Nauru, Niue, Northern Mariana Islands,
Samoa, Tonga, Tokelau and Tuvalu.41


In April 2011, energy ministers of Pacific
island economies endorsed the Framework
for Action on Energy Security in the Pacific
and its associated implementation plan. The
framework promotes a ”whole-of-sector”
approach, based on the concept of ”many
partners – one team”. It offers guidance to
national efforts to achieve energy security
and, in line with the principles of the Pacific
Plan, also indicates how national plans can be
complemented by regional services.


Towards a regional framework for energy
connectivity


Because energy is a critical production input,
and disruptions to either its availability or price
can have serious economic consequences,
energy security – understood as both a
stable supply for importing countries and
a stable demand for exporting countries –
is a fundamental goal. As discussed above,
the Asia-Pacific region includes both large
energy-importing and large energy-exporting
countries. Therefore, the region’s energy
security could be increased by enhancing
physical connectivity and building institutions
to promote cooperation between the region’s
energy importers and energy exporters.


While no region-wide institutions currently
exist to promote connectivity, a number of
subregional initiatives could serve as building
blocks for a regional energy cooperation
framework. A subregion that has built strong
institutions over the years for cross-country energy
cooperation is South-East Asia. Because, as
mentioned above, this subregion includes
both net exporters and net importers of
energy, cooperation among them has been
particularly fruitful.


The same rationale applies at the regional
level, where the development of a regional


platform for energy cooperation could
support the consolidation of subregional
efforts to enhance energy connectivity and
security. The Asian and Pacific Energy Forum
organized by ESCAP (box III.3), which will
meet at the ministerial level in May 2013
in Vladivostok, Russian Federation could
provide the basis for institutional cooperation
to harmonize policies, share knowledge and
facilitate investments in physical connectivity.


Enhancing physical connectivity infrastructure
across countries is one important objective
of regional energy cooperation. As the
number of pipelines planned or currently
being constructed increases, it may be
useful to identify missing infrastructure links
and investment needs from a region-wide
perspective, taking into account projected
increases in the demand for energy within
the region. In this respect, the modalities
developed for the previously mentioned
intergovernmental agreements on the Asian
Highway and on the Trans-Asian Railway
networks could provide useful models for the
development of an integrated regional power
grid linking multiple demand and supply
sources or “Asian Energy Highway” (box III.4).


Regional cooperation could also be greatly
beneficial for undertaking longer term multi-
lateral projects, such as joint research on energy
technologies relevant to the region, or for the
formation of joint ventures of regional energy
companies for joint prospecting and exploration.
Further, regional cooperation could play an important
role for the development, commercialization
and dissemination of energy-efficient techno-
logies, such as solar panels, wind turbines and other
technologies that take advantage of renewable
resources. Such an approach will be increasingly
needed, given the region’s economic dynamism,
the imperative of making energy available to all
and the expectation that the price of crude oil will
continue to increase over the next two decades.42


In order to promote energy cooperation
and trade in the region, it is also necessary
to develop a deep, liquid and transparent
market for crude oil, petroleum products
and gas. Building blocks of such a market
include identifying a benchmark price for
crude oil or marker crude that is relevant




80


for the region, obtaining support from key
buyers and sellers to ensure adequate trading
volumes, securing adequate physical storage
infrastructure, establishing a conducive re-
gulatory framework and being able to
access robust financial markets to support
hedging and trading.43 Other fruitful areas
for regional energy cooperation are sharing
detailed information on demand, supply and
inventory positions and building emergency
response mechanisms by increasing physical
supply security in Asia and the Pacific
through strategic reserves and cross-border
inventories.


Overall, a region-wide framework could encourage
further investments in energy infrastructure with
a more systematic involvement of the private sec-
tor, resulting in increasing volumes of intraregional
energy trade and enhanced energy security for
both importing and exporting countries.


Information and communications
technology and digital connectivity


The growing importance of ICT supply
chains in the region is not only contributing
to increasing levels of trade and FDI but also
boosting employment and the GDP. In China,
for example, employment in the telecommuni-


cations sector has grown at an annual average
rate of 3.7 per cent between 2002 and 2008,44
compared to an annual average growth rate of
1 per cent for total overall employment in that
country between 1995 and 2008. Similarly,
Internet consumption and expenditures are
estimated to contribute 4 per cent of GDP
in Japan, 2.6 per cent in China, 3.2 per cent
in India, and 4.6 per cent in the Republic of
Korea.45


In addition to its direct impact on trade, FDI,
employment and income, the development
of high-speed communication networks and
improved Internet interoperability are enabling
productivity gains in virtually every sector
of the economy and creating demand for
new services and content. In addition, ICT
innovations are fuelling further connectivity
and integration among economies and people,
as evidenced by the increasing efficiency of
logistics services and the expansion of supply
chains.


Particularly significant has been the spread
of mobile phones spurred by the production
of inexpensive and locally adapted models.
With an average of 61 subscriptions per 100
inhabitants in the region, the expansion
of mobile phones is helping to empower


BOX III.3. Asian and Pacific Energy Forum


Multiple regional and subregional organisations and
initiatives in Asia and the Pacific are paying close attention
to energy security including ADB, APEC, ASEAN, SAARC,
ECO, SCO and SPC. ESCAP as a regional body could link
these subregional bodies and initiatives. In this regard,
the ESCAP resolution to convene, in 2013, the Asian and
Pacific Energy Forum at the ministerial level is especially
noteworthy. According to ESCAP Resolution 67/2 adopted
in May 2011, the scope of the Forum is “to discuss the
progress achieved in the Asia-Pacific region in addressing
the energy security challenges at the regional, national
and household levels, and facilitate continuous dialogue
among member states with a view to enhancing energy
security and working towards sustainable development.”


Source: ESCAP Commission, resolution 67/2 of 25 May 2011. Available from www.
unescap.org/EDC/English/AnnualReports/2011-Resolutions-E67_23E.pdf.




Building seamless connectivityCHAPTER THREE


81


people hitherto marginalized and boost the
productivity of small and medium enterprises,
which can now use systems of communication
comparable to those of large enterprises.


Equally promising has been the development
of new software applications by young
entrepreneurs, who are willing to take the
risks and capitalize on big trends that meet
the local needs of the region’s increasingly
prosperous consumer base. Companies in
countries such as Bangladesh, China, India,
the Philippines and Viet Nam are providing
novel ICT solutions through both applications
developments and the provision of content to
gaming, social networking, music and news
websites, which are experiencing exponential
increases in subscriber bases. Furthermore,
content is becoming more localized and as
the Internet connection becomes faster, more
ubiquitous and more mobile, further increases
are expected.


In addition, ICT has much potential to help
businesses and consumers adopt more


sustainable and less carbon-intensive
patterns of production and consumption.
A case in point is the use of smart electricity
grids, which allow two-way, real-time
information exchanges between generators
and customers, thus reducing the need for the
former to hold excess capacity. In addition,
videoconferencing and the sharing and
exchanges of documents remotely through
the Internet could significantly reduce the
need for commuting and travel, allowing for
savings in transport, vehicle maintenance and
fuel consumption.


The digital divide


Although the information technology revo-
lution has greatly benefitted Asia and the
Pacific, such benefits have been rather un-
equally distributed. Beyond the growth in
mobile phones mentioned above, the digital
divide has actually increased in the region.
At one extreme of the divide are countries
such as the Republic of Korea, the world’s


BOX III.4. Asian Energy Highway


Following the successful experience of the Asian Highway and the Trans
Asian Railway, another intergovernmental framework could be developed
for an integrated regional power grid, which could be termed as the “Asian
Energy Highway”. The experience of developing intercountry agreements
and addressing technical standards of the Asian Highway and Railways,
could be an effective model to enhance the energy security through
regional collaboration.


The proposed Asian Energy Highway could provide a system that
enables countries to maximize the supply and demand of electricity by
taking advantage of the broader geographical coverage by optimizing
the available resources and encourage utilities to pursue clean fossil
technologies and renewable energy resources. It would also provide
better opportunities for smart grid including the decentralized systems
to be connected to a greater system that would ensure the stability of
the grid. The development of the ASEAN Energy Highway should also
include the facilitation of energy trade among developing countries
and stimulate investments in energy infrastructure. This initiative would
connect existing subregional inter-connections under way, such as
ASEAN’s planned integrated electricity grid, with the long term goal of
reaching all countries in the region.


Source: ESCAP.




82


most advanced country for ICT; at the other
extreme, countries such as Papua New Guinea
rank among the lowest.46 Part of this divide
is attributable to differences in per capita
income. This is illustrated in figure III.7 in
which the size of a country bubble is
proportional to its per capita gross national
income, and its vertical position corresponds
to its value on the ICT develop-ment index
devised by the International Telecommunica-
tion Union. Unsurprisingly, the largest bubbles
cluster towards high ICT development, reflect
ing a strong correlation between ICT develop-
ment and per capita incomes (correlation value
of 0.885).


Figure III.7 also shows the importance of ICT
usage prices, indicated here as the percentage
of average income required to pay for a
representative basket of ICT services – ranging
from less than 1 per cent in Singapore, for
example, to over 40 per cent in Cambodia and
Papua New Guinea. As illustrated in figure III.7,
as ICT prices rise, there is a sharp fall in the
ICT development index. Furthermore, at very
low levels of the development index, there
is a group of countries in which the ICT price
basket rises exponentially (inset countries).
These are also the countries with very low
per capita incomes, pointing to the fact that
ICT prices absorb the highest percentages of
average income in those very countries where
people are least able to afford them.


On average, less than 20 per cent of people
in Asia-Pacific have access to the Internet
– far lower than in North America (78%),
Europe (62%) and even Latin America and
the Caribbean (33%).47 However, of note,
this may underestimate the extent of
disconnectedness in the poorest countries.
In Asia and the Pacific, only 4 per cent of the
population is believed to have access to the
high-speed broadband needed to exchange
content-rich materials through data-intensive
streaming. As a result, it is largely only the
wealthier citizens who can connect and
broadcast ideas, potentially magnifying socio-
economic disparities and deepening divi-
sions between the connected and the un-
connected.


There are significant differences in the
bandwidth available to different countries.48


This is derived from wired connections,
primarily terrestrial and submarine fibre-
optic cables, terrestrial wireless transmission,
or satellite-based transmission. Each type
provides services at different quality and
costs.


Similar to the direction of exports, most of
the region’s data transmitting routes link to
markets in Europe and North America. In
fact, around four-fifths of the high-capacity
international routes in Asia are trans-Pacific.
Hong Kong, China; Seoul; Singapore and
Tokyo have emerged as the core global
hubs of Asia where international carriers
have established points of presence. The
rest are mainly through the Indian Ocean/
Mediterranean routes (figure III.8).


Some least developed economies in the Pacific
have made progress in getting connected
with submarine cables to the rest of the world.
Samoa and American Samoa, for example, are
connected through the American Samoa-
Hawaii submarine cable. The Marshall Islands
and the Federated States of Micronesia are
connected via Guam through the HANTRU-1
submarine cable. Other Pacific island
economies are also connected via submarine
cables – such as French Polynesia through
the Honotua cable to Hawaii, New Caledonia
through Australia using the Gondwana-1
cable, and Fiji through the Southern Cross
cable. Thus far, however, these connections
are mostly confined to capitals and densely
populated areas and have yet to be extended
to more remote areas.


Telecommunication costs in the region are
higher than in European and North American
Internet hub cities. For example, while
Hong Kong, China is regarded as the most
competitive Internet transit market in Asia,
prices are still 2.5 to 3.5 times higher than in
London. Costs are even higher in cities far from
major Internet exchanges, such as Bangkok
and Manila due, at least in part, to the cost of
transport back to the primary exchange.


Integrating regional information and
communications technology infrastructure


Internet traffic volumes are expected to
continue to increase exponentially both




Building seamless connectivityCHAPTER THREE


83


within and between regions, demanding
infrastructure that connects Asia-Pacific
countries with each other directly and in
affordable, reliable and secure ways. In fact,
the landmass of Asia offers huge opportunities
to provide secure broadband access. To take
advantage of this, the region needs to invest in
additional terrestrial fibre-optic cable routes
and in the development of new Internet hub
cities.


This would bring a number of development
gains. For example, landlocked countries
that carry telecommunications traffic would
gain additional sources of revenue. It could
also reduce dependence on incumbent
carriers and drive down prices. These new
Internet hubs need not be clustered around
the region’s congested megacities so to
offer opportunities for a more inclusive and
geographically balanced development. This is
similar to the idea of building dry ports close
to land transport border points. Indeed there
could be cross-sectoral synergies between dry


ports and the Internet hub cities, which could
enhance the commercial viability of both.


For this purpose, there have already been a
number of subregional initiatives. For example,
the Greater Mekong Subregion Information
Superhighway Network, is an ongoing ADB-
funded project to develop the backbone of
telecommunications connectivity.49 Similarly,
in South Asia, ADB has funded the South
Asia Sub Regional Economic Cooperation
Information Highway initiative, which aims to
boost data connectivity among Bangladesh,
Bhutan, India, and Nepal, for which $16 million
in grants and loans have been approved.50


This initiative may serve as a preliminary
phase for the development of an extended
SAARC information highway.


There have also been efforts to link research
institutions. The third generation of the Trans-
Eurasia Information Network, for example,
provides high-capacity connectivity among


FIGURE TITLE


III.7. Relationships between connectivity, usage prices and income, selected economies, 2009


0


0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%-2.0%-4.0%


1


2


3


4


5


6


7


8


9


10


ICT Price Basket (IPB)


IC
T


D
ev


el
op


m
en


t I
nd


ex
(I


D
I)


Republic of Korea, $19 830


Russian Federation, $9 340


Malaysia, $7 350


Maldive, $3 970


Thailand, $3760


Sri Lanka, $1 990


Bhutan, $2 030


India, $1 180


Fiji, $3 840 Viet Nam, $930


Indonesia, $2 050


Philippines, $2 050


Bangladesh, $580


Hong Kong, China, $31 420


Macao, China, $35 360


Singapore, $37 220
Japan, $38 080


2.5


2


1.5


1


0.5


0
20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%


Nepal, $440


Lao PDR, $880


Cambodia, $610


Papua New Guinea, $1 180


Sources: ESCAP based on data from International Telecommunications Union, Measuring the Information Society 2011. Available from www.itu.int/
ITU-D/ict/publications/idi/2011.


Notes: The size of the bubble refers to GNI per capita, USD, 2009. The ICT Price Basket (IPB) is a composite basket based on the user prices for
fixed-telephony, mobile-cellular telephony and fixed-broadband Internet services, computed as percentage of average income level. The ICT
Development Index (IDI) is a composite index combining 11 indicators related to the level of networked infrastructure and access to ICT, the level
of ICT use in society, and the level of ICT skills.




84


Source: TeleGeography. Available from www.telegeography.com.


research institutions in Australia, China,
India, Indonesia, Japan, the Lao People’s
Democratic Republic, the Republic of Korea,
Malaysia, Nepal, Pakistan, the Philippines,
Singapore, Sri Lanka, Thailand, Viet Nam,
Australia and Taiwan Province of China.51 This
network, which was recognized at the eighth
Asia-Europe Summit at the level of Heads
of State and Government,52 is expanding to
include Bangladesh, Bhutan and Cambodia. A
similar initiative is the €6 million Central Asia
Research and Education Network which came
into operation in 2010; currently connecting
Kyrgyzstan, Tajikistan and Turkmenistan, it is
expected to be extended to Kazakhstan and
Uzbekistan.53


These developments have opened up more
opportunities for the private sector. By the end
of 2009, Asia and the Pacific had nine of the
world’s top 30 telecommunications service
providers by revenue.54 China and India have
primarily been connected by undersea cables


through Hong Kong, China or Singapore, but
2010 saw the launch of an underground high-
speed network connecting Yadong in China
with Siliguri in India.55 Other private-sector
initiatives are under way; for instance, in 2011
the national Russian telecommunications
operator Rostelecom and China Telecom
agreed to expand the bandwidth of the
terrestrial Transit Europe-Asia cable system.
This provides the shortest route between
Europe and Asia, running mainly over the
territory of China and the Russian Federation
and connecting countries in Central Asia
such as Azerbaijan, Georgia, Kazakhstan and
Ukraine.56


Despite this range of private and public
initiatives, the region still lacks infrastructure
commensurate with its growing global influence, or
its expected surges in Internet traffic. This would
require more systematic intergovernmental
cooperation to provide an organizing frame-
work for expanding ICT connectivity.


FIGURE TITLE


III.8. Submarine telecommunications cables landing in Asia and the Pacific




Building seamless connectivityCHAPTER THREE


85


Moving towards an integrated regional
infrastructure


The Asia-Pacific region has huge potential for
developing all forms of infrastructure. However,
progress in cross-border infrastructure develop-
ment has sometimes been hampered by socio-
political differences across this very diverse
region.


The need for stronger institutional frameworks
for regional infrastructure


To foster deeper collaboration between
governments, as well as between the public
and private sectors, appropriate institutional
frameworks need to be strengthened, or
when missing, created. Such institutional
frameworks already exist in some sectors.
In the case of transport, for example, many
subregional organizations have developed
transport strategies and intergovernmental
agreements, particularly for roads. Thus,
ECO, for example, has a transit transport
framework agreement, while countries of the
Greater Mekong Subregion have adopted
the Greater Mekong Subregion (GMS) Cross-
Border Transport Facilitation Agreement for
road transport. Similarly, the development
of energy infrastructure is progressing
in the region under various subregional
and other multi-country frameworks.


Notably, subregional approaches may prove
counterproductive in the longer-term if they
result in a series of unaligned agreements
with overlapping memberships, or with
different governance structures. The final
result could be small and isolated blocs of
countries or subregions that fail to reap
the wider benefits of larger integration.
To overcome this potential problem,
governments may consider acceding to
existing international conventions, protocols
and agreements. For example, when looking at
developing subregional transport agreements,
governments should be aware of the seven
international transport conventions identified in
ESCAP resolution 48/11, which are universal in
scope.


Meanwhile, with regard to ICT infrastructure
development, where there are few formal
intergovernmental mechanisms at the regional
level for policy coordination, countries of the


region should consider a terrestrial tele-
communication network agreement that
provides for an interconnected regional
infrastructure. Europe, for example, has already
adopted a Pan-European mobile satellite
services programme which allows satellite
operators to realize economies of scale from
a Europe-wide network (box III.5).


Similar frameworks in Asia and the Pacific
would allow countries to remove barriers to the
provision of telecommunication services across
borders, thus promoting competitiveness and
improving services.


Integrating infrastructure across sectors


Infrastructure within different sectors is often
developed independently. Instead, there
should also be opportunities, for example,
to piggyback ICT connectivity infrastructure
with some transport and energy systems. The
Republic of Korea, the region’s digitally most
advanced country according to the ITU, has
deployed ICT fibre-optic cable infrastructure
along its backbone highway network.
Electricity and ICT transmission lines can also
run alongside railway lines, allowing them
to use established rights of way. India, for
example, is using its vast railway network to
extend ICT fiber optic cables (box III.6). Energy
and ICT infrastructures offer potential areas for
synergies as well. For example, one approach
would be to provide consumers with modern
energy access and basic ICT services in one
package.


Similarly, at the regional level, governments
could agree to extend ICT cable conduits
through the Asian Highway or Trans-Asian
Railway networks. This could avoid time-
consuming and costly negotiations between
the private sector and government, as well
as between governments when borders are
crossed, and enable connectivity routes to be
built in a rapid, cost-effective and rationally
coordinated manner. One option might be to
add an ICT regional connectivity protocol to
existing intergovernmental agreements on
transport developed under ESCAP auspices.


Another approach, which has been piloted in
several subregions, is the “corridor approach”,
whereby a certain route or set of routes




86


are designated as a corridor of economic
importance, and governments focus their
collective efforts in developing and upgrading
the corridors. GMS and CAREC programmes
supported by the ADB use this approach,
particularly for transport infrastructure
development and facilitation efforts. The
International North-South Transport Corridor
(INSTC) which stretches from the Russian
Federation to the Islamic Republic of Iran
is another example. Corridor approaches
are advantageous from the perspective of
addressing both the physical aspects of
infrastructure development and institutional
and regulatory aspects governing the services
along the corridor. However, because they
try to be comprehensive, these initiatives
require a high degree of coordination and
cooperation across all stakeholders, including
government agencies and institutions and
the private sector, which adds to the time
and cost of decision-making processes and
implementation.


Leveraging network externalities


Infrastructure development can result in
network externalities which, even if difficult
to quantify, can further enhance growth. This
is most applicable to ICT, which can facilitate
and improve the efficiency in the provision
of many services, such as health, education
or microfinance. Many of these sectors


already operate their own networks to fulfil
their needs. Some examples are electrical
substations, railway stations and highway toll
booths. However, these could now be shared
between services. In India, for example,
the Ministry of Railways leveraged its infra-
structure to extend the telecommunications
network. Another example is the modernization
of border crossings, which, if supported by an ICT
network infrastructure that connects countries
directly and in affordable, reliable and secure
ways, allows the introduction of ICT applications
for customs clearance and other processes
relating to the movement of goods.


Dry ports represent an interesting microcosm
of intersectoral integration. In order to
maximize their efficiency and compete with
maritime ports, they should offer a wide
variety of services over and above storage
facilities. ESCAP is currently developing a draft
agreement on dry ports, which, if adopted,
would establish dry ports as an integral
part of the regional transport networks.
The integration of these transport networks
can lead to an extended market size and
thus contribute to creating an environment
which allows a higher level of international
specialization. Dry ports have an additional
value arising from network externalities: by
offering services over and above transport,
they can stimulate local area development.


BOX III.5. Intraregional connectivity in Europe


Countries in Europe are cooperating to improve intraregional
ICT connectivity, to even the most remote areas. One initiative is
the pan-European mobile satellite services programme, which
aims to encourage private investment across the European
Union in satellite-based systems for Internet access, television
and radio, and emergency communications. To this end, the
European Commission harmonized the use of radio spectrum
in the 2 GHz frequency bands and authorized two private
companies to act as pan-European systems providers. These
measures were designed to encourage satellite operators to
realize economies of scale by reaching a European-wide market
with technically seamless interoperability. Similar mechanisms
may be explored for this region.




Building seamless connectivityCHAPTER THREE


87


In order to be competitive, such facilities need
a guaranteed energy supply and good transport
links as well as modern ICT infrastructure
networks and equipment. By combining
these sectors, new forms of regional integration
can be forged. For example, Internet hubs,
unlike other infrastructure hubs, do not need
to be located in physical proximity to the
congested mega-cities of Asia, with their high
operation costs and increased exposure to
disasters. Due to their virtual functions, these
hubs can be located in remote areas and, as with
dry ports, could offer new and cost-effective
ways of decentralizing economic activities for
more inclusive and geographically balanced
development. Furthermore, the possibility of
developing cross-sectoral synergies between
dry ports and Internet hub cities could further
enhance the commercial viability of both.


Involving the private sector


Building and integrating major infrastructure
assets involves high capital costs and long
gestation periods. Therefore, governments
should embark now on broader and more
comprehensive regional infrastructures in
transport, energy and ICT. By participating
in regional institutional frameworks, govern-


ments may be able to shape developments
for their own benefit, and avoid being locked
into certain technologies or conditions that
do not support their development goals.


Given the rapid pace of change in the global
economy, governments should also work
together with the private sector to plan and
implement regional infrastructure initiatives.
Private businesses are already moving ahead
with integration in their own spheres. This
has both positive and negative effects: on the
positive side, they are investing and providing
the services which use the infrastructure
laid down by governments, thereby creating
network externalities; on the negative side,
the integration of businesses into global
markets can make economies more open to
external shocks, as was demonstrated with
the disruption of global supply chains by
natural disasters in 2011. Regional cooperative
frameworks can help governments plan for
these possibilities and minimize the effects.


Infrastructure investment is, however, gene-
rally lumpy and has long gestation lags.
The next chapter will therefore examine
the potential for developing the necessary
financial architecture.


BOX III.6. Sharing railway and telecommunications infrastructure in India


The Ministry of Railways of India created RailTel Corporation of
India Limited India in 2000 in order to fulfil communication needs
for administration, ticketing and efficient railway operations. By
taking advantage of its access to railway lines, RailTel has now
laid down a network of more than 34,000 kilometres of cables. In
addition to modernizing the Indian Railway’s telecommunications
network, RailTel has become a leading telecommunications
provider and is earning revenue by marketing surplus bandwidth
and other infrastructure to other service providers like AirTel,
Hutch, Tata, BSNL and financial entities such as the State Bank of
India, Dena Bank, and Amar Ujala.


Sources: India, Ministry of Railways, Indian Railways Year Book 2008-09 (2008-09). Available
from www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_econ/pdf/Year_Book_
English2008-09.pdf; and RailTel Corporation of India. Available from www.railtelindia.com.




88


ENDNOTES


1 ADB and ADBI, 2009.


2 For example, in a recent ex-ante study of the
proposed Padma Bridge (a 5.8-km bridge with an
estimated cost of $1.8 billion across the Padma River) in
Bangladesh, an analysis was made of the effects of the
investment. It showed that the bridge would produce
new demand/output in related economic sectors,
generate additional factor incomes in the value chain
and create new jobs. In total, the construction of the
bridge was expected to raise GDP growth by 1.2 per
cent through the multiplier effects. See, ADB, 2007, p.
21.


3 See, for example, Easley and Kleinberg, 2010.


4 A phenomenon known as Metcalfe’s Law. The so-
called “Metcalfe’s Law” states the value of a network
grows as the square of the number of users.


5 Containerisation International, 2011b, pp. 4-5.


6 Consolidation of shipping industry and increasing
size of ships also contributes to this because shipping
companies aim to maximize their cargo/profits.


7 The index is generated as follows: for each of the
five components, a country’s value is divided by the
maximum value of that component in 2004, and for
each country, the average of the five components
is calculated. This average is then divided by the
maximum average for 2004 and multiplied by 100.
In this way, the index generates the value 100 for the
country with the highest average index of the five
components in 2004.


8 ESCAP Asia-Pacific Trade and Investment Agreements
database. Available from www.unescap.org/tid/aptiad/
agg_db.aspx.


9 The correlation coefficient between changes in the
index and changes in container traffic is 0.37.


10 Association of Asia Pacific Airlines, 2011.


11 ICAO, 2010.


12 Association of Asia Pacific Airlines, 2011.


13 Gillen, 2009.


14 Arvis and Shepherd, 2011.


15 This connectivity index is designed to capture
service improvements, route extensions and increased
frequency; for instance, the value of the index increases
with increases in the range of destinations and/or the
frequency of services.


16 ICAO, 2010, p. 28, table 12.


17 The Agreement specifies four road classes: (i)
“Primary” class refers to access-controlled highways,
used exclusively by automobiles; (ii) “Class I” is 4 or
more lanes with asphalt or cement concrete pavement;
(iii) “Class II” is 2 lanes with asphalt or cement concrete
pavement; and (iv) “Class III” is 2 lanes with double
bituminous treatment pavement.


18 For more information, see www.unescap.org/ttdw/
common/tis/ah/Member%20countries.asp.


19 As of March 2012, there were 17 parties to the
Intergovernmental Agreement on the Trans-Asian
Railway Network.


20 Convention on Road Traffic (Vienna, 8 November
1968); Convention on Road Signs and Signals (Vienna,
8 November 1968); Customs Convention on the
International Transport of Goods under Cover of TIR
Carnets (TIR Convention) (Geneva, 14 November 1975);
Customs Convention on the Temporary Importation
of Commercial Road Vehicles (Geneva, 18 May 1956);
Customs Convention on Containers (Geneva, 2
December 1972); International Convention on the
Harmonisation of Frontier Controls of Goods (Geneva,
21 October 1982); and Convention on the Contract for
the International Carriage of Goods by Road (CMR)
(Geneva, 19 May 1956).


21 Data on Pakistan are not included in the model,
so it is not possible to include the Amritsar – Lahore
segment in the simulation.


22 Latest complete data available in July 2011.


23 ADB, 2009.


24 2010 electricity trade data extrapolated.


25 The project’s first stage was completed in 2009,
connecting Irkutsk to the Skovorodino hub, from
where oil is currently transported to the Pacific coast
by rail. The second stage will connect Skovorodino to
the Pacific by pipeline. When completed in 2025, it is
expected that the project will cover more than 5 per
cent of the oil demand of Asia.


26 According to Topalov, 2009, the total Sakhalin
reserves are estimated to be 3.3 trillion cubic meters
of gas and 900 million tons of oil. Currently, 2 out of 9
Sakhalin projects are active with Sakhalin-2 supplying
nearly 8 million tonnes of oil and 12 billion cubic meters
of gas.


27 Chichkin, 2011.


28 There are currently two LNG terminals functioning in
the country: a Marmara LNG terminal (Cerrahogullari,
2006) with the yearly regasification capacity of 6 billion
cubic meters and Izmir LNG terminal (Global LNG Info,
2011) with yearly regasification capacity of 7.4 billion
cubic meters.




Building seamless connectivityCHAPTER THREE


89


29 EIA, 2010b.


30 EIA, 2010b.


31 This is a 200-kilometre long natural gas pipeline
from Korpezhe field north of Okarem in western
Turkmenistan to Kordkuy in the Islamic Republic of
Iran, complemented in 2010 by a line from the giant
Dovletabad field in eastern Turkmenistan.


32 Newsroom Magazine, 2011.


33 EIA, 2010a.


34 Majumdar and Verma, 2008.


35 Khan, 2011.


36 ESMAP, 2008.


37 ESMAP, 2008, p. 37.


38 Indonesia is one of the largest exports of energy in
the region, but most of them consist of coal.


39 ASEAN, 2004.


40 ASEAN, 2009d.


41 SPC, 2011.


42 Tuli, 2008.


43 ESCAP calculations based on International Energy
Agency database, 2010. Available from www.iea.org/
stats/rd.asp.


44 See ITU, World Telecommunications/ICT Indicators
database 2011, for data on full-time telecommunication
employment; and ESCAP Statistical Yearbook for
Asia and the Pacific 2011e, p. 220, for data on total
employment.


45 McKinsey Global Institute, 2011, p. 15, exhibit 4.


46 ITU, 2011, p. 29.


47 ESCAP, 2011e, p. 238.


48 International Internet bandwidth is the capacity
which telecommunication operators have to carry
Internet traffic internationally. It is measured as the
sum of capacity of all Internet exchanges. See ITU
definition, unit of measure (mega bits per second
(Mbit/s). Available from www.itu.int/ITU-D/ict/
material/TelecomICT%20Indicators%20Definition_
March2010_for%20web.pdf.


49 GMS, 2010.


50 ADB, 2007c.


51 The third generation of the Trans-Eurasia Information


Network (TEIN3). Available from www.tein3.net
(accessed 3 January 2012).


52 ASEM, 2010.


53 European Commission (2009).


54 Telegeography, 2009.


55 Airtel, 2010.


56 Rustele.com, 2011.




90


Photo by Warren Field




Enhancing regional financial cooperationCHAPTER FOUR


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92


The economies of Asia and the Pacific have been
integrating rapidly in terms of trade and investment.
But, they have made less progress in finance, for which
regional cooperation has largely been confined to
mechanisms to provide short-term liquidity support.
In future Asia and the Pacific could reap substantial
economic and financial returns by enhancing
cooperation in multiple areas of finance, including a
more effective liquidity provision, trade finance and
infrastructure financing.


The Asia-Pacific region boasts large official foreign
exchange reserves, exceeding $6 trillion in 2011. Indeed,
some countries are holding reserves well in excess of what
is required for liquidity purposes. In addition, individuals
as well as corporations in the region also hold substantial
private savings outside the region. At the individual level,
the Asian wealthy,1 who in 2008 represented 28 per cent of
the world’s wealthy individuals, controlled $7.4 trillion or 23
per cent of the total assets invested worldwide.2 Only 6 per
cent of these funds are managed in the region, mainly in
developed economies.


One reason for investing outside of the region is the small
size of their securities markets and their small secondary
markets. The Asia-Pacific debt market in 2010 stood at $1.14
trillion, but most of this – $846 billion – was denominated in
Chinese yuan (RMB), which is not fully traded or marketed.
Investors also face capital controls and other obstacles.
Bonds from the Republic of Korea, for example, have high
yields and potential gains through currency appreciation
but as a result of a lack of liquidity in swap markets, they
are expensive to convert to hard currency. However, some
progress has been made; there are now currency-linked
bonds and corporate hybrids, along with a range of other
high-yield, investment-grade bonds with long maturities.


Four Enhancing regionalfinancial cooperation




Enhancing regional financial cooperationCHAPTER FOUR


93


Nevertheless, the markets for covered bonds
and asset-backed securities are still in their
infancy. As commercial banks and insurance
companies issue relatively few bonds, the
markets are also relatively small. In fact, Asia-
Pacific bond markets are only around one-
tenth the size of the region’s equity markets.


The pooling of regional funds to provide
liquidity, boost trade financing and increase
the amount of funds available for closing
staggering infrastructure gaps would be
beneficial for the whole region. The extension
and operationalization of existing agree-
ments, as well as any new initiative, should
seek synergies with existing schemes and be
complementary to them. The deepening of
integration in other areas of finance that do
not involve the pooling of funds, such as the
harmonization of regulatory measures or the
coordination of policy changes, should also
support this process.


Financial cooperation


The high degree of integration among the
Asia-Pacific economies through trade and
investment links makes the region vulnerable
to large spillover effects stemming from
global or local shocks. For instance, large
external shocks or swings in capital flows
could destabilize exchange rates and disrupt
trade and investment flows across countries.
By the same token, crises in final export
destinations may disrupt production in
countries integrated into global or regional
supply chains. Coordination of financial and
monetary policies may therefore be necessary
to make regional economies resilient to
such external shocks as well as to mitigate
the harmful effect of heightened global risk
aversion and a credit crunch. Cooperation,
including in the areas of trade financing and
settlement, is clearly necessary to avert these
types of risks.


Cooperation, however, cannot be confined
to emergency support alone. There is also
a strong case for cooperation to boost long-
term growth in the region, an important
example of which is by pooling regional
funds for infrastructure investment. Investing
in infrastructure has growth-enhancing


effects coming through various channels
beyond the addition to the capital stock. First,
infrastructure enhances market access and
reduces trade costs, allowing trade volumes
to multiply and trade to reach larger areas.
Better physical infrastructure could also
enable middle-income countries to move up
on the value chain by reducing the relocation
and outsourcing costs of lower value-added
activities to countries with lower labour costs,
a path taken by higher-income economies in
the region and which some middle-income
economies may need to consider in the
medium term. In addition, better physical
infrastructure can foster a deeper degree
of integration of economies and industries
into regional supply chains, which could
enhance the region’s competitiveness in
the global economy. Moreover, by opening
up new opportunities for employment and
businesses, infrastructure development could
boost incomes and purchasing power in the
less developed countries, speeding up their
convergence to higher levels of income per
capita and closing their development gaps.


As the experience of the European Union
shows, channelling funds to less developed
regions pays off. By linking those areas
more closely to the core, new markets, new
destinations for industry relocation and new
efficiency gains can be realized. In the case
of the European Union, funds have been
channelled to less developed regions through
fiscal transfers, the so-called Structural and
Cohesion Funds that require matching by
subnational units’ own funds and through
loans by the European Investment Bank (EIB).


Integration needs to proceed prudently


Although financial cooperation could be
very useful to help the region meet its
short-term and long-term financing needs,
financial integration needs to proceed
prudently. Progress in the integration of
financial markets has been limited because
of the painful consequences of a too rapid
liberalization of the capital account in several
countries of the region before the Asian
financial crisis of 1997-1998. As a result, the
Asia-Pacific economies are cautious about
promoting financial integration. Many forms




94


of financial integration involve cross-border
flows through the capital account and,
hence, require the liberalization of the capital
account. These flows include cross-border
direct and portfolio investments, as well as
cross-border lending by financial institutions
and corporations. While a few Asia-Pacific
economies such as Brunei Darussalam,
Singapore or Hong Kong, China have some
of the most liberalized markets in the world,
others such as Bhutan, Kazakhstan or the
Lao People’s Democratic Republic impose
controls on all types of capital transactions.
In addition, the trend of lifting controls on
capital account transactions that began in the
1980’s experienced a reversal, first as a result
of the 1997-1998 Asian financial crisis and a
decade later as a result of the global financial
crisis of 2008-2009.


Due to minimal availability of financial
instruments and lack of confidence in
those instruments, insufficient governance
structures and capital controls, the bulk of
portfolio investment from the region flows to
other regions. As shown in table IV.I, only 15.8
per cent of the region’s portfolio capital stocks
was invested within the region as of 2009.
However, some subregions are more active
providers of portfolio capital than others.


About one-third of the portfolio securities
investment made by the economies of East and
North-East Asia excluding Japan, are placed in
Asia and the Pacific, with almost half of the
total invested in South-East Asia. At the other
extreme, North and Central Asia and South
and South-West Asia direct only 5 to 7 per
cent of their portfolio securities investment to
the Asia-Pacific region. Furthermore, the two
subregions that invest intensively in Asia and
the Pacific, non-Japan East and North-East
Asia and South-East Asia, concentrate their
portfolio investments in non-Japan East and
North-East Asia, primarily in China. North and
Central Asia and the Pacific are the only two
subregions that do not concentrate their Asia-
Pacific portfolio investments on non-Japan
East and Northeast Asia, but also invest heavily
in Japan and the Pacific. This latter pattern may
be attributed to the larger choice of available
portfolio securities in Japan and Australia and
may reflect portfolio diversification motives.


Learning from the Asian financial crisis, in
which foreign exchange management and
capital flows were at the heart of the problem,
most countries have taken a more prudent
approach towards these issues. In particular,
offshore markets, which had been designed
for offshore transactions but ended up


Originating from


Invested in


Shares of portfolio capital stock assets as of 2009 (percentage)


Asia-Pacific


East and
North-East


Asia


East and
North-


East Asia
excluding


Japan
North and


Central Asia Pacific


South and
South-West


Asia
South-East


Asia
Asia-Pacific 15.8 12.9 32.3 5.5 12.4 6.8 47.2
East and North-
East Asia 8.7 7.1 24.0 2.5 7.1 4.7 26.5


East and North-
East Asia excluding
Japan


7.3 6.5 21.7 0.1 2.3 4.7 20.8


North and Central
Asia 0.2 0.1 0.2 0.6 0.2 0.4 0.4


Pacific 4.2 4.2 4.8 2.2 3.6 0.1 5.9
South and South-
West Asia 1.0 0.5 1.1 0.1 0.4 0.8 6.1


South-East Asia 1.7 1.1 2.2 0.0 1.0 0.8 8.3


Source: IMF, Coordinated Portfolio Investment Survey (CPIS) (2009). Available from www.imf.org/external/np/sta/pi/cpis.htm.


Notes: The shares in the table refer to total portfolio capital including equity and debt stocks. Data are derived from the creditor side.


TABLE TITLE


IV.1. Interdependence in portfolio capital investment in Asia and the Pacific




Enhancing regional financial cooperationCHAPTER FOUR


95


intermediating large amounts of funds into
the domestic economies in the wake of the
1997-1998 crisis, have been scaled back or
virtually shut down.3


Since the 1997-1998 crisis, economies in
the region have become increasingly wary
of maturity or currency risks and have thus
equipped themselves with an arsenal of tools
to make their economies more resilient to
any similar attacks in the future. These tools
include a rapid accumulation of foreign
exchange reserves and the development of
hedging instruments. Foreign exchange risk
is typically hedged through well-developed
non-deliverable forward (NDF) markets or
through forward markets, while the markets
for swaps, another hedging vehicle, are
relatively less developed and hence less
liquid in the region.4 Several economies, such
as China, India, Indonesia, the Philippines,
the Republic of Korea and Taiwan Province
of China have well developed NDF markets,
while Thailand has developed an effective
forward market.


Making local currencies deliverable offshore
reduces the need for NDF markets, as is
illustrated by China, which made the RMB
officially deliverable in Hong Kong, China
since July 2010. Offshore markets also reduce
transaction costs. However, they could also
provide a vehicle for destabilizing currency
speculation. The development of such markets,
thus, requires the introduction of measures to
reduce such risk, including an initial limitation
of the channels through which a domestic
currency can flow to offshore markets, and
stringent requirements of documentation of
the underlying transaction.


Furthermore, the establishment of offshore
markets for different products should also
be gradual. As evidenced by the recent
experience of China with the so-called dim-
sum market for RMB denominated bond issues
in Hong Kong, China, offshore bond markets
can grow rapidly. On the other hand, offshore
equity markets may take longer to establish
because the functioning of any equity market
depends on the facilitation of secondary
market trading, a piece of infrastructure which
has not yet been developed offshore. Finally,


to boost offshore lending in local currencies,
it is crucial to enhance efficiency in the
domestic banking system to make interest
rates attractive compared to other currencies.


In any event, the consensus across the region is
that any steps towards liberalization of capital
flows should be gradual and taken with great
care. There is no one-size-fits-all recipe for
the process. Robust regulatory frameworks,
supervisory systems and the development of
deep financial markets capable of absorbing
potentially large capital flows are prerequisites
to move in that direction. While putting in
place these prerequisites, it should be noted
that the liberalization of capital flows is a long
term undertaking and that there are other
urgent priorities for which regional financial
cooperation is much needed. These are (i)
strengthening resilience to external shocks,
(ii) realizing efficiency gains and (iii) using
regional funds more effectively.


Financing infrastructure development


Across the region, infrastructure is financed
from a variety of sources. These include
governments, national, bilateral and
multilateral development agencies, and
financial markets. More recently, private
investors have been taking a greater
share, especially through public-private
partnerships (PPPs) in providing financing.
Notwithstanding the multiplicity of financing
sources, there are large financing gaps in the
Asia-Pacific region.


Direct disbursement from the budget


Governments are often the best placed to
invest in infrastructure because, compared
with the private sector, they can look beyond
financial returns. Indeed, government
financing is justified when it corrects for
market failures, such as in the case of public
goods, natural monopolies or externalities.
Governments are also best placed to finance,
for instance, rural roads which are accessible to
all users and where no fees are charged. Some
services such as water supplies are natural
monopolies that are more appropriately
delivered by central or local governments.
And in several cases, it is only the government




96


that can account for externalities, both
positive, such as network externalities, or
negative, such as emissions of pollutants or
other damaging environmental effects and,
therefore, it is best placed to provide the
financing.


However, even if governments wish to invest
in infrastructure, they may have limited
capacities to do so. One constraint could be
difficulties in accessing funding or a desire
to limit the size of the public debt. Although
public debt ratios are not particularly high in
the Asia-Pacific region, governments wishing
to take on significantly more debt to invest in
infrastructure would need to ensure that they
can do so in a sustainable way in projects with
high social returns. In general, government
financing is desirable as long as the social
return is higher than the private return.
Beyond that, government expenditure can
lead to an inefficient allocation of funds.


National development bank lending


Many governments invest in infrastructure
through national development banks. This
may help reduce governments’ budget
constraints because development banks are
generally funded not only from government
budgets but also by issuing government-
backed bonds – although the guarantees
still constitute a contingent liability for the
government. Development banks have
institutional advantages since they can
employ specialized personnel to manage
funding and lending activities.


In addition to funding national infrastructure
projects, national development banks
typically invest in other development-
related activities, such as agriculture, rural
development and public services, and finance
small and medium-sized enterprises or
micro-enterprises. Some development banks
are extremely large and during the global
financial crisis were used for countercyclical
spending. The Brazillian Development Bank
(BNDES) is the world’s largest and most
effective development bank. In 2010, it lent
more than five times as much as the World
Bank (table IV.2).


Bilateral and multilateral agencies


Poorer countries tend to rely on bilateral
and multilateral agencies for investment in
infrastructure. Some of these agencies offer
support, especially to the neediest countries,
in the form of grants, but more typically they
provide long-term loans, usually co-financing
with national governments, other agencies or
the private sector. In Asia and the Pacific, ADB
is one of the principal multilateral sources.
It signs country partnership strategies with
governments and subsequently offers them
funding for infrastructure projects according
to country allocations and sectoral priorities.
Most ADB loans are on commercial terms
from its ordinary capital resources (OCR), but
the Bank also offers loans on concessional
terms through its Asian Development Fund.
The ADB also finances private-sector projects
without government guarantees, though in
2010, such lending made up less than 15 per
cent of its new lending. Such loans are also
often accompanied by technical assistance to
help design and implement projects.


In addition to supporting national govern-
ments, the ADB promotes regional
cooperation in infrastructure. The CAREC
programme, established in 1997, for example,
focuses on infrastructure projects in the area
of transport, energy, trade facilitation and
customs services. Since 1991, there have also
been proposals to set up a North-East Asia
Bank for Cooperation and Development with
the participation of China, the Democratic
People’s Republic of Korea, Japan, Mongolia,
the Republic of Korea, and the Russian
Federation, but the idea has yet to bear
fruit. More recently, the leaders of Brazil, the
Russian Federation, India, China and South
Africa (BRICS) proposed at their March 2012
Summit in New Delhi to establish a BRICS
Development Bank to finance infrastructure
development in developing countries.


Private-sector funding


Infrastructure investment also comes from
the private sector. Indeed, this is generally
more efficient than public disbursement,
particularly when the financial returns
are likely to be high and investment costs




Enhancing regional financial cooperationCHAPTER FOUR


97


can subsequently be recouped through
user charges – by collecting road tolls, for
example. Many governments have been
keen to encourage private participation in
infrastructure, seeing this as a way to reduce
fiscal burdens. Consequently, since the 1980s,
they have privatized some infrastructure,
notably in telecommunications and power
supplies. By doing this, the state, instead
of being an owner and provider, serves as
the regulator for privately provided public
services. This has paved the way for many
private-sector companies to own and manage
infrastructure assets, with expectations of
attractive returns.


While this model has been employed
extensively in developed countries, it has
been slower to get off the ground in poorer
developing countries, where the private
sector has more limited access to funds. Such
funds come from four main sources: banks,
institutional investors, bond markets and
equity markets.


Bank lending


Commercial banks may be wary of lending
for infrastructure since they are likely to
face a maturity mismatch. Infrastructure
requires long-term funding while the bank
funds are primarily short-term in the form of
deposits and interbank borrowing. Nor do
banks necessarily have the skills to assess
the risks related to such lending. Risk officers


with limited experience will find it difficult
to price the risk involved in infrastructure
projects in which there is often a high degree
of uncertainty. In these circumstances,
when funds are offered, they are likely to
be expensive. As indicated in figure IV.1, in
projects with lower ratings the credit spread
can be higher than 20 percentage points.


Institutional investors


An alternative to bank funding is to seek
other investors that take a longer-term view.
Insurance companies, pension funds and other
institutional investors are likely to have a more
suitable asset-liability maturity structure, but
this assumes that these institutions have the
necessary in-house resources for acquiring,
managing and disposing of infrastructure
assets. The Asia-Pacific region has relatively
few institutions with this capacity.


Bond markets


In many countries, privately developed
infrastructure has been funded by issuing
bonds. In most Asia-Pacific countries, however,
bond markets are either non-existent or in
their infancy. Moreover, most projects in less
developed Asia-Pacific countries are likely
to be rated below a single B, for which the
premia charged over government bonds
can be prohibitively high (figure IV.1). An
alternative would be to issue bonds in
international markets, though few companies
in Asia and the Pacific have sufficient access


TABLE TITLE


IV.2. Comparison of selected regional and national development banks


(In billions of US dollars)


Year established
EIB


1958


EBRD


1991


WB


1944


ADB


1966


BNDES


1952


CAF


1970
Total assets 563 52 283 100 331 18.5
Total loans 482 20 120 46 218 13.9
Subscribed capital 311 28 190 144 n.a. 2.8
Paid-up capital 16 8 12 7 .. ..
Equity 54 17 38 16 40 5.7
Loans disbursed 2010 79 12 29 6 101 7.7
Net income 2010 3 2 -1.1 0.6 6 0.2
Return on equity 5.3 % 10.8 % -2.9 % 3.8 % 15.2 % 3.0 %


Source: 2010 financial statement of each institution.

Notes: The abbreviations are: EIB: European Investment Bank; EBRD: European Bank for Reconstruction and Development; WB: World Bank; ADB:
Asian Development Bank; BNDES: Brazillian Development Bank; and CAF: Development Bank of Latin America. Data for EIB, EBRD and BNDES
converted into US dollars using market exchange rate of 31 December 2010: US$/Euro = 1.3412 and US$/Real = 0.6024




98


to them. In addition, international issues are
often denominated in foreign currencies,
raising the prospect of currency mismatches,
of which many countries are very wary after
the experience of the Asian financial crisis.
This could be addressed by issuing bonds
in domestic currency, though this would
effectively pass the foreign exchange risk
to foreign investors, which would require
effective hedging facilities. Bond financing is
likely to become more important in the future
as bond markets become more efficient,
though this is unlikely to happen quick
enough to fund urgent infrastructure projects.


Equity markets


Similar constraints apply to equity markets.
Equity funding could be attracted either
through investment in infrastructure
companies or through the securitization of
infrastructure assets. At present, however, only
a few infrastructure companies in the Asia-
Pacific region are listed on stock markets. With
the exception of activity in Australia and Japan,


there has been relatively little securitization
of infrastructure assets; globally listed Asia-
Pacific infrastructure securities make up only
3 to 4 per cent of global market capitalization.
At present, without the necessary market and
regulatory infrastructure and improvements
in corporate governance, equity funding is
unlikely to finance infrastructure needs in the
poorer developing countries.


Public-private partnerships


O n e way o f a d d re s s i n g g ove r n m e n t
budgetary constraints and opening up more
opportunities for private sector participation
is through public-private partnerships
(PPPs). A major motivation for using PPPs
is to improve the value for money of service
delivery. Another is affordability. Because
of their ability to relieve pressures on
government budgets and improve service
delivery, PPPs are a promising avenue of
infrastructure financing. To make it an effective
tool, a robust legal and regulatory framework
must be set up. In addition, it is crucial to follow


FIGURE TITLE


IV.1. Credit spreads and bond premia for five-year term loans or issues, for different ratings of borrowers or issuers,
January 2012


Source: HSBC, “Asian curve”. Available from www.hsbcnet.com/research/asian-curve (accessed February 2012).


Note: One basis point is equal to 1/100th of 1per cent. Credit spread is the difference between US treasury yields and the lending rate for borrowers with
different credit rating. Bond premia are the differences between US treasury yields and those for Asian issuers with different ratings.




Enhancing regional financial cooperationCHAPTER FOUR


99


best practices in reporting PPPs in government
accounts to avoid using them for creative
accounting purposes to hide government
debt. The experience of developed countries
shows that this threat is indeed real: only
about a third of OECD countries follow best
practices in reporting, and countries that
diverge from best practices appear to be
active users of PPPs. Many economies in Asia
and the Pacific are already active users of PPPs
for infrastructure financing. PPPs have been
significant contributors to gross fixed capital
formation in Armenia, Cambodia, Georgia,
Malaysia, Pakistan and the Philippines (figure
IV.2). In terms of absolute size, India is the
biggest market.


Many innovative products taking the form of
PPPs tailored to specific country circumstances
have been proposed and implemented
recently. In Turkey, for example, infrastructure
funds have been proposed that would use
the legal form of real estate investment
trust funds (REITs) and would operate as
PPPs.5 The country’s well-developed capital
markets would facilitate the securitization of
infrastructure assets and direct financing by
a public offering would economize on credit
cost and eliminate credit risk. Partnering
between the public (mainly at the subnational
level) and private sector would be crucial as
public participation would allow to accelerate
business procedures and ensuring land that
could be provided in kind, while the private
sector would engage in the delivery of the
infrastructure.


Another example, which has been widely
put in practice in developed and developing
economies in the region, is revenue bonds.
Revenue bonds can be used in any type of
infrastructure project with user charges. They
were designed to overcome the budgetary
constraints of governments by mobilizing
private funds. In comparison to standard
PPPs in which private funds can come from
the general public. It is the users that finance
the project in the revenue bond scheme. This
structure has the advantage of providing
stronger monitoring incentives for investors,
as they are at the same time the users,
thereby increasing the success rate of project
implementation. The investors’ return is


linked to revenues from user charges. The co-
financing share between the public and the
private sectors can be determined in different
ways. One possibility is to determine the share
and derive the user fee revenue according to
this split (figure IV.3.). Alternatively, a certain
rate of return can be targeted and the public-
private share derived from that.


The emergence of PPPs has been rather slow
in many countries, mainly because of the
difficulties in creating an appropriate legal and
regulatory framework. Even in countries where
PPPs are common tools for infrastructure
financing, they have their limits owing to
both constraints on government budgets
and on the amount of available private funds.
For example, India aims at meeting 50 per
cent of financing needs from PPPs in the five
years to come (approximately $100 billion
annually), which is an impressive share in
international comparison but nevertheless
falls short of meeting the country’s large-scale
infrastructure needs.


I nit iatives for regional f inancial
cooperation in Asia and the Pacific


It is widely recognized that a regional
financial architecture could complement
the international financial architecture. As a
result, the Asia-Pacific countries have taken
a number of initiatives to foster regional
financial cooperation.


Early Initiatives: The Asian Development Bank
and the Asian Clearing Union


The idea of establishing a development bank
for Asia and the Pacific was first publicly
mentioned by the Sr i Lank an Premier
Solomon Bandaranaike in 1959. In December
1963, the First Ministerial Conference on Asian
Economic Cooperation, held in Manila under
the auspices of the Economic Commission
for Asia and the Far East (ECAFE), as ESCAP
was known then, adopted a resolution that
called for the establishment of the Asian
Development Bank. In March 1965, at its
twenty-first session, held in Wellington, New
Zealand, ECAFE approved a resolution to
set up a high-level consultative committee
of experts to draft the charter of the Bank,




100


FIGURE TITLE


IV.2. Public-private partnerships as a percentage of fixed capital formation, selected countries


which was subsequently endorsed by the
Second Ministerial Conference on Asian
Economic Cooperation, held in Manila in
November 1965. A year later, in December
1966, the opening ceremonies and official
commencement of operations of ADB were
held in Manila, the selected headquarters site
for the Bank.6 Another institution for regional
financial cooperation, established in 1974 on
the initiative of ESCAP, was the Asian Clearing
Union (ACU).7 The objective of ACU has been
to facilitate intraregional trade through the
periodic settlement of debits and credits
accumulated by each member against the
other members using a single unit of account.


The Chiang Mai Initiative and its
multilateralization


Between the mid-1970s and the late 1990s,
the regional financial cooperation agenda
was not very active in Asia and the Pacific. This
changed as the economic disruption caused
by the Asian financial crisis of 1997-1998


Source: ESCAP, based on data from World Bank, Private Participation in Infrastructure database. Available from http://ppi.worldbank.org.


underlined the need for greater cooperation
to provide liquidity support across the
region. One of the most significant responses
emerged at the ADB annual meeting in May
2000 in Chiang Mai, Thailand. This was the
ASEAN swap agreement, a set of bilateral
agreements which established a pool of
foreign exchange reserves, starting at $200
million and raised in 2005 to $1 billion. In
2007, at the ASEAN+3 Finance Ministers’
Meeting in Kyoto, Japan, the swap agreements
were multilateralized in 2009 as the Chiang
Mai Initiative Multilateralization (CMIM)
Agreement, which increased the value of its
multilateral swaps to $120 billion. Of this pool,
80 per cent is contributed by the ”plus three”
countries – China, Japan, and the Republic of
Korea – while the ASEAN countries provide
the remaining 20 per cent. An independent
regional surveillance office, the ASEAN+3
Macroeconomic Research Office (AMRO)
was set up in 2010 and is responsible for
conducting surveillance for CMIM operations.




Enhancing regional financial cooperationCHAPTER FOUR


101


FIGURE TITLE


IV.3. A possible scheme of revenue bonds


In 2009, the original 10 per cent ceiling of
agreed amounts of currency swaps not
subject to IMF conditionality was raised to 20
per cent. Nevertheless, 80 per cent of funds
that could be made available are still subject
to IMF conditionality. Another limitation is
that participating countries need to agree to
contribute on each occasion when a member
requests support. This provision may allow
countries not to contribute in cases when
they face liquidity shortages, but at the same
time it makes the system too slow to provide
rapid liquidity support. Furthermore, the
scale of funds available is relatively small
(table IV.3).


Possibly because of these limitations,
especially the link with IMF conditionality,
the countries in the region needing liquidity
support during the 2008/2009 financial
crisis, such as Indonesia, the Republic of
Korea and Singapore, approached the United
States Treasury and Japanese Treasury for
bilateral swaps rather than utilizing the
CMIM. However, the leaders of ASEAN+3 have
recently announced measures to strengthen
CMIM, including (i) the doubling of the fund
to $240 billion, and (ii) allowing member
countries to tap as much as 30 per cent of
their own quota without an IMF aid package,
a percentage that will rise to 40 per cent in
2014.8


Source: N. Yoshino, “Raising market quality - integrated design of ‘market infrastructure’”, Centre of Excellence Newsletter, No. 11, 2011.


Development of regional bond markets


The other initiative for financial cooperation
resulting from policy discussions in the
aftermath of 1997-1998 crisis has focused on
the development of regional bond markets,
which provide a relatively more stable source
of debt financing than bank loans. Two
initiatives have been taken in this regard.


Asian Bond Fund (ABF): The ABF was
established by the Executives Meeting of
East Asia-Pacific Central Banks (EMEAP), an
association of central banks of 11 economies in
the region (Australia, China, Indonesia, Japan,
the Republic of Korea, Malaysia, New Zealand,
the Philippines, Singapore, Thailand and Hong
Kong, China). The first stage of the ABF was
launched in 2003 with voluntary contributions
of members to a dedicated fund with an
initial size of $1 billion, to purchase regional
bonds denominated in United States dollars
and managed by the Bank for International
Settlements (BIS). The second ABF issue was
denominated in member currency funds.
Overall, the main goal of the ABF has been to
further enhance the underdeveloped bond
markets of member countries by enhancing
the efficiency of financial intermediation and
promoting financial stability.9




102


TABLE TITLE


IV.3. Access to funds under the Chiang Mai Initiative Multilateralization and short-term liabilities, 2010


Asian Bond Market Initiative (ABMI):
Launched by ASEAN+3 in 2003, the ABMI
aims to develop local-currency bond markets
to make private savings available for regional
investment needs. Efforts are being made
to promote the demand for and issuance of
such bonds. The relevant infrastructure and
regulatory framework also needs to be put
in place. In this connection, ASEAN+3 has
recently endorsed the establishment of a
$700 million Credit Guarantee and Investment
Facility (CGIF) that will provide guarantees on
local currency denominated bonds issued by
companies in the region. It is expected that
such initiatives will help channel money into
regional investment needs and also reduce
the currency and maturity mismatches which
made the region more vulnerable to external
shocks in the past.


As a result of these and other efforts, Asian
bond markets have expanded. Since 1997, the
siz e o f b o n d m a r k e t s h a s i n c r e a s e d
30-fold, but there is still a long way to go.
Given, however, the slow progress in the
adoption of the necessary national legislation
and regulation, it will be some time before
Asian bond markets offer a substantial source
of financing for infrastructure development.


The Association of Credit Rating Agencies in
Asia


Both credit and bond markets rely on rating
agencies to ensure an efficient flow of
information and as a common yardstick for
measuring credit risk. Similarly, a regional
bond market benefits from cross-national
cooperation between rating agencies. For
this purpose the Association of Credit Rating
Agencies in Asia (ACRAA) was established in
2001. At present, the ACRAA encompasses
28 members from 14 countries in Asia and
the Pacific. The members represent different
accounting standards, legal frameworks,
domestic capital market developments
and business cultures. Owing to these
discrepancies, however, the attitude of
members towards the whole process also
varies, with some countries promoting a more
rapid harmonization process while others
taking a more cautious approach.


In 2003, under the aegis of the ABMI, the
ACRAA was tasked with strengthening
domestic credit rating agencies and
embark ing on a process to harmonize
their methodologies, criteria, definitions,
benchmarks, policies and disclosures.


Country


Contribution
(billions of US


dollars) Borrowing multiplier


Available funds
(billions of US


dollars)


Available funds as
percentage of short-
term liabilities, 2010


Brunei Darussalam 0.01 5.0 0.05 24.45
Cambodia 0.12 5.0 0.60 118.51
China 38.40 0.5 19.20 8.71
Hong Kong, China 4.20 2.5a 10.50 8.78
Indonesia 4.77 2.5 11.93 62.90
Japan 38.40 0.5 19.20 6.21
Republic of Korea 19.20 1.0 19.20 51.72
Lao PDR 0.03 5.0 0.15 ..
Malaysia 4.77 2.5 11.93 213.46
Myanmar 0.06 5.0 0.30 103.84
Philippines 3.68 2.5 9.20 73.44
Singapore 4.77 2.5 11.93 32.26
Thailand 4.77 2.5 11.93 58.47
Viet Nam 1.00 5.0 5.00 81.45


Sources: C. Sussangkarn, “The Chiang Mai Initiative Multilateralization: origin, development and outlook, Working Paper, Series No. 230 (Tokyo:
Asian Development Bank Institute, 2010); and IMF BOP Statistics. Available from http://elibrary-data.imf.org/.


a The borrowing of Hong Kong, China is limited to the IMF delinked portion as Hong Kong, China is not a member of IMF.




Enhancing regional financial cooperationCHAPTER FOUR


103


Subregional Infrastructure Investment Funds


ASEAN and SAARC have set up investment
funds to finance infrastructure projects.


SAARC Development Fund (SDF) – The SDF
was set up in 2010 as a part of SAARC financial
cooperation, with an authorized capital of
one billion SDRs and paid-up capital of $300
million. The fund will finance infrastructure
projects in the region, including the prepa-
ration of feasibility studies. It has three win-
dows for financing: the social window for
poverty alleviation and social development
projects; the infrastructure window for
projects in the energy, power, transportation,
telecommunications, environment, touri-
sm and other infrastructure areas; and
the economic window devoted to non-
infrastructural economic projects. The Secre-
tariat of the SDF has been established in
Thimphu, Bhutan.


ASEAN Infrastructure Fund (AIF) – The AIF
was created as a part of an ASEAN initiative
to mobilize resources for infrastructure
development in 2010 with an initial equity
base of $485 million, of which $335 million
is provided by ASEAN members and the
remaining $150 million from the ADB. Malaysia
and Indonesia are the major contributors
of the equity capital of AIF, providing $150
million and $120 million, respectively.
Based in Malaysia, the fund functions as a
limited liability company and strives to have
a total lending commitment of $4 billion
by 2020, which will be co-financed by the
ADB to the tune of 70 per cent. Therefore, it
expects to catalyze more than $13 billion in
investments in realizing the Master Plan on
ASEAN connectivity adopted in 2010. The AIF
will be administered by the ADB in terms of
due diligence of the projects identified for
funding.


Trade finance


The Asian financial crisis also highlighted
the need to cooperate in trade financing,
particularly in refinancing, rediscounting and
reinsurance. The first step in this direction was
taken in 2000 with the signing of bilateral
memoranda of understanding on letter-of-


credit confirmation and risk sharing. These
bilateral agreements were multilateralized
two years later in Kuala Lumpur. In 2003,
in Manila, three bilateral agreements were
signed between India and Malaysia, India and
Thailand, and Malaysia and the Republic of
Korea. The 10th Annual Meeting of the Asian
Exim Banks Forum held in Beijing in 2004,
discussed the idea of a regional export credit
agency for Asia to enhance credit, mitigate
risks and finance exports.10


The recent global crisis has also spurred a
number of initiatives. Among them is a trade
finance programme set up by the ADB, which
provides financing and guarantees through
more than 200 banks for up to three years.
In 2010, the programme supported 783
trade transactions worth $2.8 billion with
Bangladesh, Nepal, Pakistan, Sri Lanka and
Viet Nam as the largest beneficiaries. Asian
exporters are likely to need such a facility even
more in the near future, since the European
banks that traditionally finance about one-
third of world trade, need to build up their
capital bases to meet Basel III requirements,
and thus are likely to provide less credit in
Asia. A recent, novel initiative under the ADB
programme involves a private insurance
company that guarantees exporters’ and
importers’ financing risks.


At the same time, to encourage trade
within the region, a number of settlement
procedures are being eased. As part of its
strategy to internationalize its currency, China
now encourages the use of local currencies
(either currency of the two sides in bilateral
trade) instead of United States dollars or
other international currencies. This should
help boost trade since smaller enterprises
find it difficult to manage foreign-exchange
transactions and to hedge against risk even
though most currencies are convertible
on the current account. In addition, the
Asian Exim Banks Forum, formed in 1996, is
comprised of the export credit agencies of
Australia, China, India, Indonesia, Japan, the
Republic of Korea, Malaysia, the Philippines
and Thailand. Apart from sharing information
and training resources, the Forum has fostered
mutual cooperation among its members by
facilitating lines of credit on a reciprocal basis.




104


Cooperation between stock exchanges


In pursuit of economies of scale and
reductions in costs, stock exchanges across
the world have been merging. Two examples
are the formation in 2003 of Euronext through
the merger of the Paris, Amsterdam and
Brussels exchanges and the ongoing merger
of the exchanges in New York and Frankfurt.
Mergers, however, should proceed with care,
as they can transform national monopolies
into regional ones. This would not reduce
costs for consumers as there would be less
competitive pressure to pass on the realized
cost advantages to them. The conditions for
successful mergers between stock exchanges
appear to be location in the same region and
small pre-merger scales. Mergers, therefore,
should not be considered as the only route
for achieving integration. The ASEAN model
for regional integration, for instance, has
a cross-sectoral approach covering equity,
bonds, derivatives and collective investment
schemes. The pace of integration in each
sector is tailored to the absorptive capacity
of each sector and where relevant major
regional players, such as Australia, China,
Japan and the Republic of Korea, are also
consulted. The main vehicles of integration of
the seven ASEAN markets are harmonization
of listing rules, creation of products favoured
by ASEAN investors and joint promotional
activities. The ASEAN Trading Link, which
creates a single access point for ASEAN stocks,
will become operational in mid-2012. Linking
stock markets has great potential. The ASEAN
area itself boasts over 3,600 listed companies.
An important issue for cooperation between
stock markets should be to enable cross-
border listings and facilitating initial public
offerings by companies of neighbouring
countries. This could be extremely helpful for
enterprises of the least developed countries
to raise capital within the region.


Other initiatives


In addition to the above, there are several
initiatives taking shape for regional co-
operation in the fields of finance and macro-
economic policy. Within the framework of
groupings such as ASEAN, SAARC, ASEAN+3,
the East Asia Summit and the Asian


Cooperation Dialogue (ACD), finance has
been identified as an area of cooperation.
Cooperation takes the form of periodic
meetings of finance ministers and central
bank governors (as in ASEAN and SAARC),
as well as exchange of information and
expertise. Central banks of the region have
four groupings or cooperative associations
with different permutations of membership,
namely South-East Asia, New Zealand, and
Australia (SEANZA), Southeast Asian Central
Banks (SEACEN), the Network of Central Bank
Governors and Finance Secretaries of the
SAARC Region (SAARCFINANCE) and EMEAP,
all of which promote cooperation between
members with a focus on capacity-building
and sharing of expertise. Finally, in December
2011 Japan and India instituted a bilateral
swap arrangement worth $15 billion.


Towards a development-fr iendly
regional financial architecture for Asia
and the Pacific


Although a number of initiatives have been
taken in the area of financial cooperation in
the region, most are in their early stages and
have limited scope and coverage. There is a
lot of room for enhancing cooperation in the
region to exploit the opportunities. Possible
elements of a regional financial architecture
to support the region’s development needs
include, in addition to liquidity support, trade
finance and capital markets cooperation,
the creation of a large-scale facility for
infrastructure financing. These elements are
further elaborated below.


A large infrastructure financing facility


The region needs to further develop its
financial architecture for development
financing, which would include systems of
intermediation between its large savings
and its unmet investment needs. Lack of an
appropriate mechanism is the reason why the
bulk of the region’s foreign exchange reserves
have been invested in securities issued by
Western governments, such as United States
treasury bills. Infrastructure development in
the Asia-Pacific region has been falling short
of needs and often constitutes a bottleneck
to growth. For the period 2010-2020, it has




Enhancing regional financial cooperationCHAPTER FOUR


105


been estimated that Asia and the Pacific
will need to spend about $8 trillion on
infrastructure.11 This projection is based upon
estimates on how infrastructure investment
has increased in each country of the region
in line with a number of variables, including
income per capita, agriculture value added,
manufacturing value added, the extent of
urbanization and population density using
data for the period 1960-2005.12 However,
this assumes that countries will maintain
their historical investment patterns. It does
not estimate the true scale of the need. Most
developing countries in the region have been
underspending on infrastructure, so if they
continue as before they will not be investing
enough to close their infrastructure gaps.
Hence, the real funding requirements of funds
for closing these gaps may be larger than $8
trillion. For instance, India alone is projecting
a $1 trillion requirement for infrastructure
investment in its twelfth five-year plan (2012-
2017), that is $200 billion a year.


Experience shows that investing in
infrastructure is highly profitable in economic
and financial terms, justifying cooperation.
Infrastructure assets offer stable and
predictable cash flows, long-term income
streams, low default rates and opportunities
for socially responsible investing.13 In
Asia and the Pacific, they will offer higher
returns than those from developed country
sovereign bonds. This observation is based
on the performance of existing infrastructure
securities, which although still on a modest
scale, offer yields far above those of
United States Treasury bonds (figure IV.4).
For instance, Standard and Poor’s Asia
Infrastructure Index, which incorporates the
30 largest listed infrastructure firms in the
region, has been outperforming the Global
Infrastructure Index by a large margin;
it registered (annualized) returns of 19.8
per cent versus 5.7 per cent for the Global
Infrastructure Index at the end of 2010 after
one year and 16.1 per cent versus 6.8 per cent
after five years.


Investing in infrastructure across the Asia-
Pacific region also offers risk diversification
opportunities. Due to the local nature of
demand for and supply of infrastructure


investment, infrastructure markets are
not very well correlated, thereby offering
an opportunity to diversify risks across
economies/subregions and types of infra-
structure. In addition, the infrastructure ca-
pital endowment of economies/subregions
differs widely, providing another opportunity
for diversification.


The two main methods of investing in
infrastructure assets – infrastructure funds
and listed assets (table IV.4) – exhibit different
liquidity and access conditions as well as offer
different degrees of diversification and risk
profiles. Consequently, they target different
types of investors. Infrastructure funds seek
larger investors, in particular institutional
investors. They carry low risk, but entry costs
are high and liquidity is low. They provide a
promising avenue for insurance companies
or pension funds that need to match their
long-term liabilities with long-term assets
and that may not require liquid assets, but
rather security of investments. Asia and the
Pacific, faced with ageing populations and
the consequent extension of systems of
social protection, is likely to boost insurance
companies and pension funds. These
institutions will need more long-dated assets
to match their portfolios with their liabilities
and be required to do so on a marked-to-
market basis as dictated by recent regulatory
changes.14 Listed infrastructure assets, in
contrast, may be better suited for individual
investors as expenses are low and liquidity is
high, though risk is also high.


To realize these financial and economic
returns, existing forms of cooperation could
be complemented with a new large-scale
lending facility, as proposed in this study, to
finance regional infrastructure with an initial
paid-up capital of no less than $100 billion.
The actual financing triggered by such a new
facility would be of a much larger scale as it
could also issue bond securities and would
attract private investment into the projects
it participates in. The facility would benefit
from low-funding costs as it would be backed
by highly rated countries, as is the case of the
largest multinational issuer, the EIB, which
has a triple-A rating.15 Unlike many of its
competitors, by issuing long-term securities,




106


the facility would not face maturity issues.
In addition, it can mitigate currency risks by
issuing in local currencies and could use swap
markets for hedging. Credit risk is expected
to be skewed towards the initial phase of
projects and to decrease disproportionately
thereafter.


Given the underdeveloped bond markets
in the poorest countries, the best option for
financing infrastructure development would
be direct lending. Nevertheless, the new large-
scale facility to finance infrastructure in Asia
and the Pacific could also buy infrastructure
securities and thus help spur the development
of a market for such securities – debt or equity
– in the region.


Any new forms of cooperation should seek
synergies with existing efforts. The proposed
new facility would focus on projects with


FIGURE TITLE


IV.4. Returns on selected infrastructure assets and major treasury bonds over 2002-2007


Source: ESCAP calculations based on data from CEIC Data Company Limited. Available from http://ceicdata.com/; and MSCI, available from www.
msci.com/products/indices/thematic/infrastructure/performance. html?undefined.


Notes: MSCI Emerging Markets Infrastructure Fund, annualized returns 2003-07 (i.e. 5-year returns as of 31 December 2007). MSCI Asia Infrastructure
Fund, annualized returns 2003-07 (i.e. 5-year returns as of 31 December 2007). Country-specific returns reflect the compound aggregate growth
rates of infrastructure-related stock market indices in each country during 2002-2007.


identifiable revenue streams. It would
complement lending activities by the ADB,
owing to its large scale. Available lending
facilities in the region tend to be small and
tailored to national needs and incapable
of meeting the financing requirements of
infrastructure megaprojects with regional
dimensions.


The new facility could also help coordinate
different potential financial institutions such
as multilateral and bilateral development
agencies as well as private-sector sources. If
needed, it could head a consortium of lenders.
Its backing for infrastructure projects could
also signal opportunities to private investors,
which could help tap some of the $7 trillion of
personal wealth market.


As a regional body, the facility would also be
in a position to take into account intraregional




Enhancing regional financial cooperationCHAPTER FOUR


107


spillovers. The facility would therefore target
cross-border projects, from which it would be
able to take fuller account of externalities. For a
similar reason it should also seek investments
in the region’s less developed parts, as
improving infrastructure in the periphery can
benefit the entire region. In order to diversify
risk, the facility would avoid concentrating on
particular countries, subregions or industries.
The proposed facility would also be well
placed to support green priorities. This should
attract a large pool of funds from both within
and outside the region for investments in
green infrastructure. The facility could also
enhance resource, energy and eco-efficiency,
help diversify energy sources and foster
infrastructure that is climate smart. It could
achieve this by applying criteria distinct from
those of other investors, taking into account
not just immediate financial returns but also
broader economic, social and environmental
consideration that could bring long-term
benefits. In this way, it could, for example,
reduce the damage from disasters that can
result from, or be exacerbated by, myopic
infrastructure planning.16


As with the EIB, the proposed facility could
also finance research and development, which
could enhance the region’s competitiveness
and help boost its long-term growth
potential. One of the benefits of national in-
frastructure spending is that it can be used
countercyclically to protect employment
during periods of economic downturn. In
addition, because of the large scale of its
pooled resources, the facility could be able to


provide liquidity support in coordination with
the CMIM.


In addition to financing infrastructure, the
facility would ideally also provide advisory
services and technical assistance. This could
cover a project development facility and
advisory services on financing from different
sources, the instruments best suited for
the particular project, risk assessment and
mechanisms for mitigation.


The facility’s governance should be indepen-
dent. This would ensure that it would make
decisions that were viable, both in terms of
the quality of the projects and the sources
of finance. Such decisions should be based
solely on net present value and cost-benefit
principles. Contributing governments,
investing their foreign exchange reserves,
would need to know that these funds were
being used for secure, viable investments. It
should therefore be operationally indepen-
dent and be able to rely on high-quality
experts. The facility would not operate with
government guarantees, so its lending would
not imply any contingent liability that could
be transferred into public debt.


A large-scale regional mechanism would thus
be able to help coordinate the development
of regional infrastructure and enhance
network effects, boost efficiency and achieve
economies of scale while signalling profitable
opportunities for private investors.


TABLE TITLE


IV.4. Investing in infrastructure through funds and listed assets


Infrastructure Funds Listed Infrastructure Assets
Nature of investments Active investment in a few projects Exposure to the broad infrastructure market


Expenses Moderate - typically 0.7-1% plus performance fees
Low - typically 0.5% to 0.6%


Liquidity Low – investments usually locked up for a certain period
High – investments trade on an exchange
and can be liquidated easily


Access Low – funds usually open only to qualified or institutional investors
High – securities can be bought on the open
market


Diversification Low to moderate – funds can diversify, but there are due diligence and time constraints
High – a basket may encompass different
infrastructure clusters and countries


Beta Risk Low High


Source: Standard & Poor’s, “Listed Infrastructure Assets - A Primer”, 18 March 2009.




108


Development of bond and capital markets:
The development of regional bond markets
and cooperation between the region’s stock
exchanges would also facilitate investment
flows within the region. A framework needs to
be developed to enable cross-border listings
in the region to allow corporate entities of
countries with relatively underdeveloped
capital markets to raise capital in other
regional markets.


Enhancing financial resilience and crisis
management: In the area of crisis prevention
and response, it is important to scale up
and build further on the pioneering CMIM
to expand its scope and coverage. More
importantly, the decision-making mechanism
needs to be simplified so that funds can be
mobilized within a short time. Furthermore,
to make the facility popular with countries it
needs to be delinked from IMF conditionalities
and have its own surveillance and monitoring
facility and its own conditionalities that are
countercyclical and development oriented,
unlike IMF conditionality that is procyclical.
While the size of CMIM funds is being
doubled and a surveillance and monitoring
office is being set up, its coverage needs
to be extended beyond ASEAN+3 to other
systemically important countries in the
region, such as Australia, India, the Russian
Federation and any other country interested
in participating. If this enhanced facility could
be able to provide a rapid disbursal of funds,
it would become a regional lender of last
resort to deal with financial emergencies and
gradually assume the functions of a regional
monetary fund. The importance of a well
endowed truly regional crisis response facility
cannot be over-emphasized as it could reduce
pressure on governments to build large
foreign exchange reserves for protecting
their economies against speculative attacks
and liquidity crises. Hence, it could assist
in reducing the need for running current
account surpluses for the countries in the
region. Enhanced regional cooperation for
crisis response and management should not,
however, be regarded as an alternative to full
participation in global economic relations.
Instead, it should be seen as a complement,
filling in the gaps and establishing the building
blocks for global multilateral cooperation.


Cooperation in trade finance: Trade financing
is another area with room for enhancing
cooperation to ensure an undisrupted
deepening of trade interdependence in the
region. Extending the coverage of bilateral
and multilateral agreements is crucial to
achieve this. In addition, the idea of a regional
agency with a high rating to provide export
credit and risk mitigation mechanisms could
be operationalized. Strengthening these
mechanisms would limit the risks related
to developments in global trade financing
markets. Settlement procedures should be
further simplified. Foreign exchange risks can
be mitigated by settling in the currencies of
the trading parties instead of international
currencies. Offshore markets, however, should
only be developed once there is a consistent
regulatory and supervisory structure. This
way offshore-related financial volatility and
arbitrage could be minimized. Also, the Asian
Exim Banks Forum, which has been active
since 1996 as a regional body, could move
forward to create an apex regional trade
finance institution, for which it has developed
an initial concept, to facilitate cooperation in
trade finance.


Closer cooperation between central banks
and financing institutions: As observed
earlier, a number of cooperative bodies of
central banks have been set up in the region,
such as SEANZA, EMEAP, SAARCFINANCE
and SEACEN, facilitating the coordination,
exchange of information and cooperation in
training and capacity building between them.
However, there is need for a broader regional
body that could facilitate region-wide
information sharing and to assist in closing
the capacity gaps.


Capacity-building in public-private part-
nerships: The enormity of resource require-
ments in Asia and the Pacific for infrastructure
development makes it clear that a strong
contribution from the private sector is
requisite for this endeavour. In addition to
bridging funding gaps, the private sector can
help overcome the public sector’s limited
delivery capacity and bring efficiency and
advanced technology to the operation. For
this purpose, governments are increasingly
turning to public-private partnerships (PPPs)




Enhancing regional financial cooperationCHAPTER FOUR


109


to develop and operate both economic and
social infrastructure. Some governments have
made considerable progress in the areas of
institutional development, capacity-building,
streamlining administrative processes and
financing and approving new projects.
Important steps have included: formulating
PPP policy frameworks (Bangladesh, India,
Indonesia, the Republic of Korea); enacting
new laws or amending existing ones to create
a PPP-supportive environment (Cambodia,
Fiji, Indonesia, the Philippines, Republic of
Korea, Turkey, Viet Nam, and many states in
India); establishing institutional mechanisms
to provide government grant/support to
PPP projects (Bangladesh, India, Republic
of Korea); establishing special infrastructure
financing institutions (Bangladesh, India,
Indonesia, the Russian Federation); creating
special PPP units in government (Australia,
Bangladesh, Fiji, India, Indonesia, Malaysia,
Pakistan, Republic of Korea, Sri Lanka, Turkey);
streamlining administrative processes (India,
Republic of Korea), among others. As a result
there has been a considerable increase in PPPs
for infrastructure. Between 2005 and 2009,
some 826 projects worth around $204 billion
reached financial closure. However, a few
countries, namely China, India, the Russian
Federation and Turkey accounted for a bulk
(82 per cent) of these projects.


In the aftermath of the global financial crisis,
some governments have been reinvigorating
PPPs as a part of stimulus packages sometimes
through policy and fiscal measures, such as
debt guarantees, direct financial stakes, tax
free bonds, lower equity capital requirements
and sharing interest rate risks. International
financing institutions have also considered
various measures. For example, the
International Financial Corporation (IFC), the
private-sector arm of the World Bank, created
a global $300 billion equity fund and a loan
financing trust to support PPPs.


There is need for building capacity for
fuller exploitation of PPPs for infrastructure
development in the region. This would
include a better understanding about PPPs
at the policymaking level with a clear policy
on risk sharing, capacity for developing
bankable projects and managing contracts,
standardized administrative processes and


project documents, clear legal and regulatory
regimes and availability of long-term finance.
In these areas, regional cooperation for
sharing of development experiences and
capacity-building drawing upon expertise of
countries that started earlier may be fruitful.
Regional organizations, such as ESCAP and
the ADB, may assist in building such capability
in the region.17


Regional cooperation to reform the
international financial architecture:
The de-velopment of a regional financial
architecture would also enable the region
to coordinate its policies and develop a
regional perspective on the reform of the
international financial architecture, including
on issues such as an SDRs-based global
reserve currency, a global tax on financial
transactions to moderate short-term capital
flows and international regulations for
curbing excessive risk taking by the financial
sectors. The Asia-Pacific region has eight
members in the G-20, namely Australia,
China, India, Indonesia, Japan, the Republic
of Korea, the Russian Federation and Turkey.
This is more than any other region and
highlights systemic importance of the region.
With effective coordination of their positions,
these countries will have greater influence
in shaping the reform of the international
financial architecture, so that it is best tuned
to their developmental needs. In these and a
host of other areas, the Asia and Pacific region
has the opportunity to further integrate and
coordinate its actions, thus not only ensuring
its recovery and future dynamism but also
supporting the global economy to the
greatest extent possible.


The ESCAP Commission at its 66th Session held
in Incheon, Republic of Korea in May 2010,
adopted a resolution seeking a task force to
elaborate the elements of a regional financial
architecture that could assist the Asia-Pacific
region with increased capital availability for
infrastructure development.18 As per the
request, the secretariat is engaged in further
work on the subject that will hopefully feed
into the policy agenda of the region in the
coming years.




110


ENDNOTES


1 Wealthy defined as individuals with net worth that
exceeds $1 million.


2 International Financial Services London, 2009.


3 For instance, Thailand’s Bangkok International
Banking Facilities (BIBF) has been significantly scaled
down and Malaysia’s Labuan International Offshore
Financial Centre is no longer available as an offshore
market for MYR-foreign currencies after the imposition
of capital controls in 1998.


4 A non-deliverable forward (NDF) is a contract in
which counterparties settle the difference between
the contracted NDF rate and the prevailing spot rate
by an agreed notional amount. In contrast to a forward
contract, where the full value of the amount contracted
is delivered at the time of settlement, in NDF contracts
only the difference between the NDF rate and the
spot rate is delivered, which reduces counterparty risk
considerably.


5 Erol and Ozuturk, 2011.


6 UNESCO, “ Archives of international organizations:
Asian Development Bank”. Available from www.unesco.
org/archives/sio/Eng/presentation.php?idOrg=1002
(accessed May 2012).


7 Asian Clearing Union, “History”. Avaiable from www.
asianclearingunion.org/History.aspx.


8 “Asean+3 to double Chiang Mai Initiative safety net to
$240 Bln”, Wall Street Journal, 3 May 2012. Available from
http://online.wsj.com/article/BT-CO-20120503-703698.
html.


9 Rajan, 2008.


10 See www.asianeximbanks.org/meeting10.asp.


11 ADB and ADBI, 2009.


12 Bhattacharyay, 2010. See also Fay, 2001; Chatterton
and Puerto, 2005; Yepes, 2004.


13 Inderst, 2009.


14 Bodie and Briere, 2011.


15 CAF has also been successful in tapping the United
States, European and Japanese markets owing to its
investment grade, though the costs are significantly
higher as it is rated at A+.


16 For instance, it is well known that investing in climate-
smart infrastructure would also reduce the frequency or
size of disasters, but the lack of sufficient investment in
such infrastructure results in more disasters, adding to
higher costs altogether.


17 ESCAP, 2011b.


18 See E/ESCAP/66/L.11, 19 May 2010.


Photo by Salapol Ansusinha




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


111 U
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112


Five
Economic cooperation
for addressing shared


vulnerabilities and risks


Greater regional integration can not only help countries capitalize on their
strengths but also assist them to address shared vulnerabilities such as
food and energy insecurity, disasters, pressures on natural resources, social
exclusion and rising inequalities.


Regional economic integration has enormous potential for boosting economic
growth and narrowing development gaps across countries, but countries can also
cooperate to protect themselves against a range of current and future threats. As
with the opportunities, these too cut across national boundaries. This chapter shows
how these issues are currently being addressed through bilateral, subregional or
regional cooperation. In addition, it argues that in the light of the interrelations
between food insecurity, disasters and pressures on natural resources, and
energy security (discussed in chapter three), an integrated approach to regional
cooperation encompassing all these areas would be the most efficient way to
reduce their risks and cooperate to articulate the most effective policy responses.


Food security


In the past half-century, Asia and the Pacific has made tremendous progress in
food security.1 Across the region, farmers have boosted agricultural productivity
and output, especially of rice and wheat, making food available at affordable prices
and lifting millions of people out of hunger. The Green Revolution improved seeds,
fertilizers and pesticides and dramatically increased crop production. Although
the world population increased by 60 per cent between 1970 and 1995, food
production rose faster, resulting in a nearly 30 per cent increase in cereal and
calorie availability per person. By increasing the supply of food and reducing prices
of food staples in Asia, the Green Revolution benefited poor people’s nutrition and
helped reduce poverty, with the absolute number of poor people declining by 28
per cent between 1975 and 1995.2


In spite of this progress, the region continues to face persistent poverty and
hunger and is still home to about 65 per cent of the people suffering from hunger.
Of particular concern is the situation in South Asia, where nearly 43 per cent of
children are malnourished.3


It may seem surprising that a region that has in many ways been so successful
should still experience serious problems with something as basic as food.4 The
main obstacle is not an overall lack of food. The region produces enough food
to enable everyone to be properly nourished and lead a healthy and productive
life.5 The problem is that many people are not consuming enough of that food.




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


113


They are prevented from doing so by a wide
range of factors – including poverty, natural
disasters, conflict and war, poor access to
resources, lack of employment opportunities,
a lack of education, and underinvestment in
agriculture, as well as instability in the world
food and financial systems.6


Food security is a situation in which “all people,
at all times, have physical and economic
access to sufficient, safe and nutritious food to
meet their dietary needs and food preferences
for an active and healthy life”.7 It has four
dimensions: availability, access, utilization
and stability. Availability is affected by the
levels of food production and stocks, and net
trade. Access depends on the ways in which
the available food is distributed, as well as on
incomes, expenditures, markets and prices.
Utilization refers to the way in which the body
uses food, which is affected by feeding and
child-care practices, food preparation, dietary
diversity, and on how food is shared within
the household. Stability involves taking into
account potential disruptions, as a result, for
example, of bad weather, political instability
or economic crisis.


Too often, food security is considered a
problem of availability through production,
and one that is best dealt with through
national policies, including those that aim to
achieve food self-sufficiency. However, food
security also has strong regional dimensions.
For instance, the High Level Task Force on the
Global Food Security Crisis pointed to “strong
intraregional complementarities between
ecological, production and consumption
areas and the need for shared management
of commonly held transboundary resources
– such as rivers and river basins, aquifers,
pastoral lands and marine resources”.8 In
addition, the availibility of food can be affected
by trade policies of exporting countries. What
follows is a review of selected cooperation
efforts pertaining to food security across Asia
and the Pacific.


Policy coordination


Some policies related to food security can be
coordinated at the regional or subregional
level. The ASEAN, for example, began


addressing food security in 1998 with a
Strategic Plan of Action on ASEAN Cooperation
in Food, Agriculture and Forestry. Since 2008,
it has implemented the ASEAN Integrated
Food Security (AIFS) Framework and the
Strategic Plan of Action of Food Security (SPA-
FS).9 The SPA-FS, while addressing increased
food production, also articulates common
objectives related to the reduction of post
harvest losses, market promotion, trade
for agricultural commodities and inputs,
and ensuring food stability. It specifies five
priority commodities: rice, maize, soybean,
sugar and cassava. The framework has four
components: food security and emergency
relief; sustainable food trade development; an
integrated food security information system;
and agricultural innovations. The ASEAN-
United Nations Meeting on Food Security
in 2008 developed a Convergence Matrix of
Programs and Activities to allow international
organizations and countries to coordinate
individual activities within the framework.10


South Asia has made similar efforts at
policy coordination. The SAARC Agricultural
Vision 2020 emphasizes the importance of
programmes on technology, seed quality,
and incentives to producers; sustainability in
the use of natural resources; food safety; the
availability of rural non-farm employment
opportunities; and capacity-building.11 To
translate this vision into reality, the SAARC
Regional Strategy and Programme for Food
Security, in partnership with the Food and
Agriculture Organization of the United Nations
(FAO), has identified a range of projects,
which address agricultural productivity, the
protection of natural resources, technology,
bio-security, food safety and agricultural
trade.12 Five of these projects are being
developed with technical assistance from the
ADB.13


In 2010 regional leaders met to endorse the
Framework for Action on Food Security in
the Pacific. The Framework has a number of
‘themes’ covering such issues as leadership
and cooperation, regulatory frameworks,
enforcement and compliance, and public-
private sector collaboration. It aims to enhance
the production, processing and trading of
safe, nutritious local food. At the same time,




114


the framework is designed to protect infants
and vulnerable groups while empowering
consumers.14 Implementing this plan requires
a broad-based partnership among national,
regional and international agencies.15


Regional food reserves


A good example of successful regional
cooperation aimed at promoting stable
access to food is the development of regional
food reserves. Throughout human history,
households and communities have tried to
maintain food stocks that could be drawn
upon at times of scarcity. However, doing
so on a larger scale, at a national level, can
be costly. As the High Level Task Force on
the Global Food Security Crisis pointed out,
excessive stockpiling to build national food
reserves can exacerbate food shortages and
inflate prices.


One option is to establish global stocks. The
first effort of this kind took place in 1975
when the United Nations aimed to establish
an International Emergency Food Reserve
under the World Food Programme, with initial
stocks of rice and wheat of 500,000 tons and a
final target of 30 million tons. However, it did
not develop in the way originally intended
and currently survives as a voluntary facility
to provide emergency relief either from food
stocks or budgeted funds.


Another option is to provide facilities at
the regional level. Such schemes should
be able to address the most common food
contingencies, frequent supply-demand
imbalances and various emergencies and
disasters. These schemes can take the form
of real or virtual stocks of food reserve
agreements, financial instruments or weather
risk insurance or bonds.


Within Asia and the Pacific, the first steps in
this direction were taken in 1979 when ASEAN
leaders signed the agreement on the ASEAN
Food Security Reserve, proposing a rice
reserve of 50,000 tons, to increase by 1997 to
67,000 tons and by 2004 to 87,000 tons. This
initiative failed, due mainly to a lack of funding
and poor administrative arrangements but
also as a result of cumbersome procedures on


prices, terms and conditions of distribution. In
2004, the ASEAN ministers agreed to relaunch
the scheme as the East Asia Emergency Rice
Reserve, initially on a pilot basis. Established
with clearer stock release guidelines, the
reserve facilitated the transfer of 10,000 metric
tons of rice from Viet Nam to the Philippines in
March 2010, and developed programmes to
help disaster victims in Cambodia, Indonesia,
and Myanmar.


In October 2011, based on this successful
pilot, the ASEAN countries, plus China, Japan
and the Republic of Korea (ASEAN+3) agreed
to establish a permanent mechanism in
which they would earmark a quantity of rice
on a voluntary basis. This forms the ASEAN+3
Emergency Rice Reserve (APTERR), which
includes both earmarked and physical stocks.
The current earmarked reserve is 787,000
tons, of which 89 per cent is to come from the
plus three countries. Although the agreement
stipulates a physical stock, the system mostly
operates through financial stocks, given that
rice is a commodity with high storage costs.
Contribution to the stock is voluntary. Japan
stated its willingness to provide 250,000 tons,
China 300,000 tons, the Republic of Korea
150,000 tons and ASEAN member states
87,000 tons. Thus, the addition of the plus
three countries has helped ASEAN countries
raise the scheme’s level of earmarked rice
reserves, removing a stumbling block
identified in the pilot that the reserve was too
small for the scheme to function optimally.


In emergencies, the reserves are made
available according to tiers. Tier 1 involves
releasing earmarked reserves under special
commercial transactions. In this case, the
APTERR management team effectively serves
as a mediator between provider and recipient
countries – as happened in 2010 under
the pilot East Asia Emergency Rice Reserve
when the Philippines obtained 10,000 metric
tons of rice from Viet Nam. Tier 2 offers
support through loans or grants agreed
bilaterally between countries. Tier 3, which
is triggered in acute emergencies, involves
using rice stockpiles donated free of charge
by member States. During the pilot phase, a
similar mechanism distributed nearly 3,000
tons of rice, mostly procured through cash




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


115


donations, from the Government of Japan,
for distribution in Cambodia, Indonesia, the
Lao People’s Democratic Republic and the
Philippines. In addition, in 2009, Thailand sent
520 tons of rice to the Philippines to assist the
victims of Typhoon Ketsana.


There have also been efforts to establish
regional food reserves in South Asia. In
1988, the SAARC established a food security
reserve, which aimed to collect 243,000 tons
of rice and wheat. This was never utilized,
even in 2007 in the aftermath of Cyclone Sidr
which devastated much of Bangladesh. An
important reason was that the system lacked
a mechanism for effective negotiation or for
the delivery of emergency supplies and also
entailed burdensome border formalities.
After much debate, the SAARC leaders agreed
in 2007 to relaunch the system as the SAARC
Food Bank. This specifies guidelines on
withdrawals and negotiations, defines what
is meant by food shortages and establishes
food-grain quality standards. Even so, the
system still has structural weaknesses, lacking
a clear mechanism for releasing stocks and
failing to identify storage facilities or border
points to which stocks can be delivered.


Food reserve systems need to operate with
clear guidelines and on a sufficient scale, and
they should establish ways of transferring
stocks speedily across borders without un-
duly relaxing safeguards for plants, animals
and humans. The ASEAN system, by clarifying
questions related to prices, terms and
conditions of commercial transactions, is a
good example of how to address these issues
effectively.


Information systems


Monitoring food security and taking the
necessary action requires a solid information
base. This should include statistics on
demand, supply, prices, and household
income and expenditure patterns, along with
vulnerability assessments, food insecurity
mapping, livestock diseases and information
on climate and weather patterns. Regional
bodies can provide value added in monitoring
food security by facilitating the establishment


of information systems related to agriculture
and rural statistics, thus enhancing standards
of transparency and comparability.


There is also scope for regional cooperation
to help build national systems and technical
capacity for identifying food insecurity
hotspots and groups that face food insecurity,
as well as for tracking, collecting, analysing
and disseminating statistics at national and
local levels. These systems should include
vulnerability mapping that combines infor-
mation on food security statistics with other
socioeconomic data. They should also form
the basis for early warning mechanisms for
food security, including better weather fore-
casting and timely notifications of impending
disasters. An important institution for this
purpose is the Asia and Pacific Commission on
Agricultural Statistics, a statutory body of FAO
that brings together officials from the Asia-
Pacific region to review agricultural statistical
systems and exchange ideas on food and
agricultural statistics.16


There are also subregional initiatives. ASEAN,
for example, has set up a food security
information system.17 Phase I, which ran from
2003 to 2007, concentrated on building human
resources and an information network, while
Phase II, 2008 to 2012, has been developing
early warning systems and publishing com-
modity outlooks. Another subregional initia-
tive is the Pacific Agriculture and Forest
Policy Network, which aims to facilitate com-
munication, disseminate information, build
capacity and enhance awareness on issues
related to agriculture and forest policy.


Cooperation in agricultural research


Agricultural research is a key driver for enhancing
agricultural productivity through technological
change.18 Regional cooperation on research is
critical when countries face common risks, such
as climatic variability, reduced water supplies,
loss of biodiversity and effects of mycotoxins
and microbial hazards on food quality. It is also
critical to address research needs related to
opportunities embedded in transboundary
resources.




116


One of the key organizations for sharing
scientific information and knowledge is
the Asia-Pacific Association of Agricultural
Research Institutions (APAARI). Established
in 1991, the Association works to support
national agricultural research systems in
about 20 economies, and also works with
centres affiliated with the Consultative Group
on International Agricultural Research and
regional organizations. It aims to promote
cooperation on priority programmes, ex-
change scientific and technological know-
ledge, improve research capacity and streng-
then linkages between national, regional, and
international partners.19


SAARC has also been making efforts to
coordinate regional research in agriculture.
In 2005, for example, it adopted the Global
Framework for Containment of the Priority
Trans-boundary Animal Diseases to establish
laboratories to contain three priority diseases:
highly pathogenic avian influenza, foot and
mouth disease and peste des petit ruminants,
a highly contagious viral disease of small
ruminants. In addition, the SAARC agriculture
ministers have called for meetings among
scientists and institutions for research and
extension, and for exchange visits among
extension specialists. This could pave the
way for regional projects and joint ventures.
The SAARC Agricultural Centre is another
effort which aims to strengthen regional
cooperation in agricultural research and
technology by fostering the exchange of
regionally generated technical information.


Agricultural biodiversity is indispensable for
plant stability, and therefore, sustaining crop
production, food security and livelihoods.20


The sustainability of such systems depends on
the health of all – plants, animals, land, water
and soil. An activity carried out in one place or
one sector can have far-reaching implications
on everything else in the system. Difficulties
may arise when systems are shared by many
countries, as in the Ganges or the Greater
Mekong river basin. Ensuring stability is more
difficult when resources are spread across
different countries. In such situations, regional
cooperation would be most beneficial.


One example is the Greater Mekong
Subregional Initiative, launched by Cambodia,
China, the Lao People’s Democratic Republic,
Myanmar, Thailand and Viet Nam, with
financial assistance from ADB.21 This initiative
has innovated programmes that address
common resources and facilitate cross-border
agricultural trade and investment.22 Another
example is the Pacific Agricultural Genetic
Resources Network, which works with
countries in the Pacific to conserve their crop
genetic diversity by stimulating collaboration
among researchers.


Promoting further regional cooperation for
food security


Asia and the Pacific is very diverse and thus
full of opportunities for collaboration in food
security: China and India are the two largest
countries in terms of food production and
consumption; Asia houses the largest rice
exporter – Thailand – as well as the largest
importer, namely the Philippines. The region
is also home to one of the largest rainforests
and biodiversity hotspots in the world and
blessed with some of the most spectacular
and resource rich river basin systems, such as
the Mekong and the Ganges-Brahmaputra,
and large marine ecosystems, such as the Bay
of Bengal. The challenge is to harness these
assets through programmes that go beyond
political boundaries and the mere availability
of food to arrive at a cohesive strategy based
on the core factors underlying food insecurity.


Regional mechanisms, including regional
economic integration organizations, such
as ASEAN and SAARC, can facilitate national
efforts towards achieving food security
through their active involvement in four
interrelated areas: (i) improved management
of shared financial and human resources and
natural and physical capital; (ii) harmonization
and coordination of national agricultural,
food and other supporting policy frameworks,
including macroeconomic policies, so as to
ensure national policies that do not circumvent
regional efforts; (iii) assuring the availability
of regional risk management mechanisms so
that regional food supplies and resources are
utilized effectively to manage food insecurity




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


117


in times of crises; and (iv) facilitation of regional
food and agricultural commodities so as to
ensure that overriding national compulsions
do not destabilize long-term regional food
security.


Notwithstanding the role that regional
efforts can play in achieving food security,
national efforts and programmes, including
those to increase agricultural investment,
empower women and marginalized groups
and improve access to quality and nutritious
foods. Therefore, regional programmes must
find innovative approaches to support these
national efforts through sharing know-
ledge, accurate and timely information and
technologies available for enhancing food pro-
duction, and capacity building. For this
purpose, the United Nations and its affiliated
agencies can play a useful role. As the exam-
ple discussed above, the innovative collabo-
ration between ASEAN and the United Nations
in preparing the AIFS and SPA-FS can be repli-
cated in other areas. Similarly, FAO has colla-
borated with SAARC in identifying a more
integrated food security strategy.23


Food systems comprise many groups -- pro-
ducers, consumers, processors and distributors
-- that are linked through trade across national
borders. At both national and international
levels, food production involves many eco-
logical and social costs which are not re-
flected in the price of food and agricultural
commodities. These include inappropriate
farming, fisheries and livestock-rearing, the
use of high doses of pesticides and chemical
fertilizer and concerns about food safety,
processing and storage.


In these circumstances, the jurisdiction
of national governments often becomes
irrelevant. The most appropriate forum
is therefore a regional or subregional
organization. Proposals have been mooted
to establish a common food security policy
for East Asia, with the ultimate objective of
developing it into a common agricultural
policy for Asia. In addition to enhancing
regional food security, such a policy could also
ensure that food and agricultural commodity
prices reflect their true cost by including
positive and negative regional externalities


in the production and distribution of food
and agricultural commodities. This will be
a prerequisite for ensuring the minimum
safety and quality standards of food available
in markets. The United Nations and other
regional entities need to recognize the
existing national efforts so as to develop a
truly regional and comprehensive approach
to food policy.


There are also opportunities at the regional
level to spread the benefits of advanced
technology. Some countries, for example, use
satellite technology for monitoring weather
and food production patterns while others
lack this capacity. Regional bodies, including
ESCAP, are ideally positioned to facilitate
negotiations on technical, institutional and
policy-level issues that facilitate food security
at the regional level.


Dealing with disasters


The world seems to be increasingly affected
by natural hazards, such as droughts, floods,
storms, volcanic eruptions, earthquakes and
tsunamis. In 2011, two mega-disasters in the
Asia-Pacific region alone, the great Eastern
Japan earthquake and tsunami and the
South-East Asia floods caused an estimated
$267 billion in combined economic losses
and resulted in over 18,000 deaths. Estimates
of the global economic losses of the disaster
in Japan amount to as much as $366 billion.24
In the light of these large losses, it seems
necessary to re-examine current strategies
and accelerate the implementation of mea-
sures to reduce the risk of future disasters.
Such strategies should also involve regional
cooperation for setting standards, pooling
resources and sharing knowledge.


Overall disaster risk depends on three factors:
(i) hazards – the occurrence of events such as
earthquakes, storms or droughts, (ii) exposure
– the number of people and the scale of assets
exposed to such events, and (iii) vulnerability
– the capacity to cope with and recover from
hazard events.


According to ESCAP estimations, all Asia-
Pacific subregions have experienced a re-
duction in their vulnerability to disasters




118


TABLE TITLE


V.1. Deaths and economic damages and losses due to recent mega-disasters in Asia and the Pacific


Disaster


Number of people
affected
(million)


Number of
people killed


Number of people
missing


Number of
people injured


Economic damages
and losses


(billion of US
dollars)


South-East Asia floods
(late 2011) 25.9 2 735 .. .. 46.6


Great Eastern Japan
earthquake and tsunami
(March 2011)


15 845 3 380 5 894 210


Wenchuan earthquake
China (May 2008) 45.6 69 227 17 923 .. 85


Indian Ocean tsunami
(December 2004) 5 184 167 45 752 .. 10


over the past two decades.25 This suggests
that policymakers can improve a country’s
resilience to disasters through early warning
systems, infrastructure investments and
strengthening disaster preparedness and
response efforts. However, in spite of the
region’s reduced vulnerability, exposure
to disasters has been on the rise because,
as populations grow, more people live in
disaster-prone areas. As a result, the number
of those affected by disasters tends to rise.
Furthermore, the region’s poor continue to
be the most exposed. This suggests the need
for disaster risk reduction policies to focus
especially on the most vulnerable groups,
such as the elderly, women, children and
persons with disabilities.


The highest average annual damages and
losses in Asia and the Pacific during the
period 1990-2010, $30 billion, were the result
of floods and earthquakes. However, this
average is expected to be surpassed in 2011,
as the estimated economic losses caused by
that year’s floods in South-East Asia alone
amounted to more than $47 billion. In recent
years, a relatively small number of mega-
disasters have caused disproportionate
economic and human losses (see table V.1).
The frequency and intensity of extreme


weather events, such as heat waves and heavy
precipitation, is likely to increase in future as a
consequence of climate change (see box V.1).


Disasters affect all countries, but can be
particularly destructive in smaller and lower
income countries. In Fiji, for example, they have
resulted in marked fluctuations in GDP (figure
V.1). Within countries, disasters generally hit
hardest at the poorest groups who live in high-
risk environments, vulnerable, for example,
to flooding and landslides – and who have
fewer ways to shield themselves. Women and
the elderly too are also disproportionately
affected. An estimated 70 to 80 per cent of
those who died during the 2004 Indian Ocean
tsunami, for example, were women. And the
elderly were disproportionately affected in
the earthquake and tsunami that hit Japan in
2011.26


Regional impact of disasters


Some disasters have a regional impact simply
because natural phenomena extend across
wide geographical areas. The 2004 Indian
Ocean tsunami, for example, killed more than
184,000 people in 14 countries across Asia and
the Pacific. Large explosive volcanic eruptions
can also cause widespread economic and


Sources: Asia Pacific Disaster Report 2010; Office of Civil Defense (OCD), Philippines; Department of Disaster Prevention and Mitigation, Royal
Irrigation Department, Thailand; National Police Agency, the Cabinet Office, Japan; Department of Hydrology and River Works, Cambodia; Hydro-
Meteorological Services of Viet Nam; Department of Meteorology and Hydrology, Lao Peoples’ Democratic Republic; Relief and Resettlement
Department, Myanmar.




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


119


BOX V.1. Climate change and disasters


Disasters are often caused by extreme weather events, such as heavy
downpours, heat waves and droughts, which have increased in frequency,
intensity and duration in recent decades. The year 2010, for instance, tied
with 2005 as the warmest year on record globally, with 19 countries setting
national high-temperature records and the Russian Federation losing
one third of its wheat crop. That year also recorded the highest global
precipitation since 1900, which led to devastating floods. For instance
six million people were displaced in Pakistan as a result of record floods
that year. On average, such extreme weather events, when aggregated
over decades, show an increasing trend. Over the past 50 years, global
rainfall has increased by 7 per cent, and the occurrence of record high
temperatures has become much more common than that of record low
temperatures.


Although individual weather events cannot be attributed to climate
change, it is possible to attribute changes in the risk of certain categories of
extreme weather to climate change. Risks are represented by probability
distributions, which describe what we should expect on average over
a long period of time. A good understanding of such risks is crucial to
properly assess the vulnerability of people and assets to extreme weather
events and to implement policies to reduce their impact.


The recent Special Report on Managing the Risks of Extreme Events
and Disasters to Advance Climate Change Adaptation published by the
Intergovernmental Panel on Climate Change (IPCC) argues that global
warming increases the risk of four categories of extreme weather events
– extreme heat, heavy downpours, drought and drought-associated
wildfires. For such events, the historical evidence is consistent with both
the science and simulations of the impacts of higher green house gas
concentrations. The relationship between global warming and other
extreme weather phenomena is weaker, as in the case of hurricanes, or
nonexistent, as in the case of tornadoes.


Despite the progress made in understanding the relationship between
climate change and extreme weather events, much more work is needed
to refine risks assessments in the Asia-Pacific region. For that purpose, it
will be necessary to improve substantially the collection of data, especially
at the local and regional levels. With improved data and quantitative
models with high resolution, it would be possible in future to prepare
more precise analyses of the impacts of climate change at the national and
subnational levels, which, in turn, would enable policymakers to improve
their planning for disaster mitigation and assist farmers, for example, to
plant crops that would be more suitable for weather conditions in the
future.


Sources: Huber and Gulledge (2011); IPCC Special Report on Managing the Risks of Extreme Events and Disasters to Advance
Climate Change Adaptation, Fact Sheet. Available from http://ipcc-wg2.gov/SREX/images/uploads/IPCC_SREX_fact_sheet.
pdf.




120


human losses. For example, the costs to
aviation of the 1991 Mount Pinatubo eruption
in the Philippines exceeded $10 billion. In
addition, this eruption led to a significant
drop in temperatures worldwide of close to
four degrees for about a year. The Asia-Pacific
region has many active volcanoes in countries
such as Japan, Indonesia, Papua New Guinea,
the Philippines, the Russian Federation
and Vanuatu. Although, during the past 20
years, volcanoes have caused smaller losses
than earthquakes or floods, they can have
enormous destructive power. Volcanoes can
also affect food security in the light of their
potential to halt agricultural activities, as was
the case with the Mount Tambora eruption of
1815 in Indonesia and the El Chichon, Mexico
eruption in 1982.


The socioeconomic impacts of disasters can
be further amplified as a result of growing
economic interdependence. For instance, the
2011 floods in Thailand affected 3.1 million
people and cut the country’s rate of growth
of the GDP to 0.1 per cent from an earlier
projection of 3.2 per cent,27 but the impact
spread far beyond Thailand. The floods
inundated factories, major highways, and
rural roads, disrupting global production for
a number of goods. Thailand has the world’s
twelfth largest automobile industry, which
is highly integrated into the global supply
chain. Factory closures were felt as far as


FIGURE TITLE


V.1. Fiji, annual fluctuations in GDP relative to the incidence of disasters, 1980-2008


Source: ESCAP based on data from www.databank.worldbank.org and International Disaster database, www.emdat.be.


North America, as missing parts forced major
manufacturers to curtail operations. Thailand
also produces about one-quarter of the
world’s hard-disk drives. Factories belonging
to one of the world’s largest manufacturers,
which produces more than 60 per cent of its
output in Thailand, were submerged, severely
affecting global computer supplies.


Similarly, the 2011 earthquake and tsunami in
Japan caused economic damages and losses
of $210 billion in this country, but it also
affected severely the Tohoku region, which
produces $322 billion worth of intermediate
goods and services that feed into global
supply chains.


Disaster risk reduction


Disasters are no longer perceived simply as
extreme events created entirely by natural
forces but rather as manifestations of
unresolved problems of development. Policies
have evolved from largely top-down relief and
response efforts to intersectoral approaches
of risk reduction with greater emphasis on
early warning and mitigation. Even so, local,
national and international resources are still
predominantly used for emergency response.


Most countries in the region have established
national policies, legislation, frameworks,
strategies, or plans to prepare for and cope


-8


-6


-4


-2


0


2


4


6


8


10


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010


An
nu


al
GD


P
gr


ow
th


ra
te


(p
er


ce
nt


)


Floods


Storm Storm
and


drought


Flood
Drought


Storm


Storms


Storm


Storm




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


121


with disasters. At the multilateral level,
the Hyogo Framework for Action, a global
blueprint for disaster risk reduction for the
period 2005-2015, was adopted by 168
United Nations member states at the World
Conference on Disaster Reduction. Within the
United Nations, the focal point for disaster
risk reduction is the International Strategy
for Disaster Reduction, which also manages
a biennial forum, the Global Platform for
Disaster Risk Reduction.


Thus far, however, much less attention has
been paid to the opportunities for regional
responses. One important forum is the
Asian Ministerial Conference on Disaster
Risk Reduction. This biennial conference
organized since 2005 has allowed ministers
in charge of disaster management to reaffirm
their commitment to the implementation of
the Hyogo Framework for Action.


An example of subregional cooperation is the
ASEAN Agreement on Disaster Management
and Emergency Response, which entered
into force on 24 December 2009. This aims
to promote subregional cooperation, and
has a range of components: provisions on
disaster risk identification, monitoring and
early warning; prevention and mitigation;
preparedness and response; rehabilitation,
technical cooperation and research;
mechanisms for coordination; and simplified
customs and immigration procedures.


There are other subregional cooperation
mechanisms. Under the auspices of SAARC,
the SAARC Disaster Management Centre,
set up in 1996 in New Delhi, administers the
South Asian Disaster Knowledge Network.
ESCAP and the World Meteorological
Organization (WMO) manage the Typhoon
Committee, which covers Cambodia, China,
Democratic People’s Republic of Korea, Japan,
Lao People’s Democratic Republic, Malaysia,
Philippines, Republic of Korea, Singapore,
Thailand, Viet Nam, United States of America,
Hong Kong, China, and Macao, China.
ESCAP and WMO also manage the Panel on
Tropical Cyclones, which covers Bangladesh,
India, Maldives, Myanmar, Oman, Pakistan,
Sri Lanka and Thailand. The Pacific Islands
Applied GeoScience Commission operates


Pacific Disaster Net, a comprehensive web-
based information resource for disaster risk
management.


Other initiatives include the Regional
Space Application Program for Sustainable
Development, the Central Asia Disaster
Risk Reduction Knowledge Network, the
International Strategy on Disaster Reduction
Asia Partnership, the Asian Disaster
Preparedness Center, the Mekong River
Commission, the International Centre for
Integrated Mountain Development, and the
Asian Disaster Reduction Center.


Asia and the Pacific would, however,
benefit from more comprehensive regional
agreements and cooperation. Better
management of transboundary river basins,
for example, can prevent floods in the
countries that share the basin. Tsunamis
also raise the need for regional cooperation
to develop effective early warning and
communication systems. Obstacles faced
during bilateral discussions and agreements
could be better addressed through multilateral
approaches where neutral parties can reduce
sensitivities and pave the way for cooperation.
Resolutions passed by the Intergovernmental
Oceanographic Commission of the United
Nations Educational, Scientific and Cultural
Organization (UNESCO) resulted in the
establishment of the Indian Ocean Tsunami
Warning and Mitigation System with an
intergovernmental coordination group set up
to govern it.


Regional early warning systems


The greatest challenge in implementing
regional early warning systems is that similar
patterns of natural hazards may result in widely
differing impacts in different countries. The
impacts vary based on levels of development,
the size of economy and other socioeconomic
influences. After the 2004 Indian Ocean
tsunami, for example, Thailand experienced
lower-than-expected economic growth while
the rate of growth in Indonesia exceeded
expectations. Another challenge is that
National Disaster Management Authorities/
Organizations are still in their early stages of
development.




122


An example of sound regional cooperation
is the Regional Integrated Multi-Hazard Early
Warning System for Africa and Asia (RIMES),
a regional tsunami early warning provider
for the Indian Ocean supported by ESCAP. It
includes the following elements: collecting
data and undertaking risk assessments;
monitoring hazards and early warning
services; communicating risks; and building
national and community-level response
capabilities (see box V.2).


An important intergovernmental forum
for improved regional cooperation is the
ESCAP biennial Committee on Disaster Risk
Reduction, which provides opportunities
for ESCAP member States to discuss and
share experiences on disaster risk reduction
policies. The joint ESCAP/UNISDR publication,
the Asia-Pacific Disaster Report, which is
published every two years, looks at regional
trends, linkages between disasters and
development, and possible approaches to


reduce risks. The Asia-Pacific Gateway for
Disaster Risk Reduction and Development is
an online platform aimed at assisting disaster
management authorities and relevant
ministries in efforts to mainstream disaster
risk reduction into development planning.


Fostering regional cooperation


Regional and transboundary cooperation in
developing risk reduction and adaptation
strategies can bring mutual benefit to
all countries, for example, by reducing
uncertainty through exchanges of data and
information. Cooperation can also widen the
knowledge and information base, increasing
the set of options available for prevention,
preparedness and recovery, and thereby
helping to find better and more cost-effective
solutions. Priorities should include:


• Strengthening the One UN approach
for disaster risk reduction through the
Regional Coordination Mechanism


BOX V.2. Regional cooperation on early warning systems for disaster risk
reduction


An important recent initiative in the area of early warning systems
has been the establishment of the Regional Integrated Multi-
Hazard Early Warning System for Africa and Asia (RIMES). RIMES
is an international and intergovernmental institution dedicated
to the generation and application of early warning information.
It evolved from the efforts of countries in Africa and Asia, in the
aftermath of the 2004 Indian Ocean tsunami, to establish a regional
early warning systems within a multi-hazard framework for the
generation and communication of early warning information, and
capacity-building for preparedness and response to transboundary
hazards. RIMES, which operates from its regional early warning
centre, located at the campus of the Asian Institute of Technology
in Pathumthani, Thailand, was established on 30 April 2009. Its
current members are Bangladesh, Cambodia, Comoros, India, Lao
People’s Democratic Republic, Maldives, Mongolia, Mozambique,
Papua New Guinea, Philippines, Seychelles, Sri Lanka and Timor-
Leste.


Source: RIMES. Available from http://www.rimes.int.




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


123


• Strengthening specialized regional
centres, including those for training,
research and capacity-building;


• Promoting social and economic analyses
on disaster risk reduction in the region


• Producing regional studies, baseline
assessments and periodic reviews;


• Sharing disaster data and statistics in the
region


• Using satellite technology for disaster
risk reduction;


• Promoting technical cooperation and
developing standards;


• Facilitating the cooperation of various
research and policy communities and
creating synergies between technical,
practical, and political counterparts.


Pressures on natural resources and
sustainability


Rapid economic growth in Asia and the
Pacific has placed increasing pressure on
natural resources. With limited endowments
of natural resources, the region is particularly
vulnerable to disruptions associated with


volatile energy and resource prices, land
use changes and climate change, which are
becoming increasingly interconnected.


Some of the most significant pressures
arise from the rising demands for energy,
which is projected to increase by about 34
per cent over the next decade.28 This will
pose particular problems for countries that
rely heavily on imported energy sources,
which are facing rising and volatile prices.29


Although investment in renewable energy is a
critical response to meeting energy demand,
there is a rising concern about the social
and environmental costs caused by two key
renewable energy sources, hydropower and
biofuels.30


There will also be pressure on water and
other ecosystem services. The region already
has the world’s lowest per capita availability
of water resources (see figure V.3). If current
trends and management practices persist, by
2025, a significant proportion of the region’s
population will live in water-stressed river
basins.31


In addition, there are threats to biodiversity.
Asia and the Pacific is a biologically rich region,


FIGURE TITLE


V.2. Primary energy use in Asia and the Pacific and the rest of the world, 1971-2008


Source: ESCAP.


0


50


100


150


200


250


300


1972 1976 1980 1984 1988 1992 1996 2000 2004 2008


Ex
a J


ou
les Asia and the Pacific


Rest of the world




124


FIGURE TITLE


V.3. Availability of water resources per capita, by region and subregion, 2008


Source: FAO, AQUASTAT, Information system on Water and Agriculture (accessed 8 February 2012).


with about 60 per cent of the world’s species.
However, as of 2010, nearly one-third of all
threatened plant and animal species are found
in the region.32 Forests too are being degraded,
with many primary forests being replaced
by plantations based on non-native species,
in some cases to produce biofuels. With the
laudable exception of Bangladesh, mangrove
forest cover has been reduced in most Asian
countries, increasing the risks of flooding in
coastal areas. Changes in forests are not only
leading to further environmental degradation
but also resulting in additional carbon
emissions and increasing vulnerabilities to
disasters and water insecurity.


Other environmental concerns that threaten
the sustainability of economic growth include
increasing sulphur dioxide emissions, the
rapid accumulation of solid waste, and the
increasing prices and scarcity of many natural
resources. Indeed, by 2005, Asia and the Pacific
had become the world’s largest resource user,
consuming 35 billion tons per annum of key
materials, such as biomass, fossil fuels, metal
ores and industrial and construction materials.
This represents 60 per cent of the global use
of resources (see figure V.4).33


At the same time, the composition of
materials used in the region’s economies
has also changed significantly. In 1970 the
biomass category accounted for 47 per cent


of materials used in the region, but by 2005,
construction materials, such as sand, gravel,
concrete and steel, had become the largest
category, representing 49 per cent of the total.
The price volatility of these commodities
increases uncertainty and creates new risks
and limits to the growth of certain sectors (see
figure V.5).


Regional responses


Recognizing that pressures on natural
resources and many other related environ-
mental problems pose threats to economic
growth and poverty reduction, the region’s
leaders have been developing regional
responses. One of the important approaches
involves the promotion of green growth, as
discussed at the Fifth Ministerial Conference
on Environment and Development in Asia and
the Pacific held in Seoul in 2005 and the Sixth
Asia and the Pacific Ministerial Conference
on Environment and Development held in
Astana in 2010.


Economic policy system changes are required
to enable technological innovations and
research and development to improve eco-
and resource efficiency. This will further create
important economic and financial savings
and gains, which can be invested in poverty
reduction and social welfare programmes.
The Asian and Pacific Regional Preparatory




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


125


FIGURE TITLE


V.4. Domestic material consumption in Asia and the Pacific and the rest of the world, 1970-2005


FIGURE TITLE


V.5. Shares of main material categories in Asia and the Pacific, 1970 and 2005


Source: CSIRO and UNEP Asia-Pacific Material Flow database. Available from www.csiro.au/AsiaPacificMaterialFlows.


Source: CSIRO and UNEP Asia-Pacific Material Flow database. Available from www.csiro.au/AsiaPacificMaterialFlows.


0


5


10


15


20


25


30


35


1970 1975 1980 1985 1990 1995 2000 2005


Bi
llio


ns
o


f t
on


s


Asia and the Pacific


Rest of the world




126


BOX V.3. Innovation and technology transfer


ESCAP has been supporting the widespread sharing of knowledge and
transfer, adaptation and replication of environmentally sound technologies,
with the support of its Asian and Pacific Centre for Transfer of Technology
(APCTT) and its subregional offices, particularly in the Pacific. ESCAP has
also been building regional cooperation for transferring low-cost, low-tech,
locally affordable and applicable technologies throughout the region. One
of its activities was to conduct a regional study on the promotion of publicly
funded environmentally sustainable technologies (EST) in the Asia-Pacific
region, initiated in 2007.a The study recommended that national systems
of innovation be enhanced and called for boosting regional cooperation
through the creation of a regional network of national innovation centres or
agencies closely involved in the full cycle of EST development and transfer.


Since its inception in 1977, APCTT has been helping to upgrade capacity in
technology transfer and innovation management. Its experience suggests
that while certain countries have developed sophisticated insights into the
structuring and operation of national innovation systems others lack this
capacity. The Centre has also worked extensively on identifying barriers to
the transfer of green technologies, in particular low-carbon technologies.


In general, national efforts in building capacity to plan and implement
technology transfer activities in SMEs are weak in many developing countries.
As a result, ESCAP has implemented a number of projects to support them.
For example, a training centre in Samoa has developed low-cost, locally
appropriate technologies for capturing biogas for cooking and heating from
human sanitation units and animal husbandry.


Similarly, local adaptations and improvements of technology applied in Viet
Nam with the assistance of Thai experts where successfully replicated in Fiji
and Vanuatu. Another example has been the use of solar renewable energy
in Cambodia, where Sunlabob, a Lao People’s Democratic Republic-based


Meeting for the United Nations Conference
on Sustainable Development (UNCSD) –
Rio+20, held in October 2011, underlined,
among other key sustainable development
priorities for the region, the need for regional
cooperation to “facilitate technological inno-
vation and transfer and promote access to
green technologies at affordable costs.”34 A
recent review of country submissions to the
UNCSD secretariat confirms that technology
transfer and capacity building are among the
top priority issues.35


Among the most effective means of
technology transfer are regional and inter-
regional partnerships (see box V.3). In Asia and
the Pacific they have included the Kitakyushu
Initiative for Clean Environment,36 and the
Seoul Initiative Network on Green Growth.37
The Astana Green Bridge Initiative38 is evolving
as another driver fostering regional and
intraregional cooperation for technological
innovation and transfer of green technologies.


How can countries in the South launch the
necessary initiatives to leapfrog into these




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


127


new areas? For this purpose, it would be
invaluable to have an ICT-based South-South
network to share information on, for instance,
national policies, the technologies available
for sale, the nature of intellectual property
protection and the institutions working
in each area. Another useful step, to avoid
wasteful duplication of efforts and resources,
would be to form a South-South network of
research and development institutions. The
intellectual property thus generated could be
owned jointly, and disseminated over a wider
range of SMEs as proposed later in this study.
Countries of the South should not of course
work only among themselves. They also need
to work with the developed countries in the
North to strengthen other business-oriented
technology transfer efforts.


Another option for SMEs, in particular, is
through public-private partnerships (PPPs).39
Such initiatives are not new; they were used,
for example, to promote the Green Revolution
in agriculture. One proposal currently under
discussion is to develop “climate innovation


centres” to build local capacity and finance
the acquisition of relevant low-carbon
technologies through buyer-friendly
business processes.40 Another, in the health
sector, involves the search for new drugs. In
2008, the Council of Scientific and Industrial
Research of India launched the Open Source
Drug Discovery programme,41 which aims to
attract the brightest minds worldwide to be
part of the drug discovery movement.42


Setting priorities


In conclusion, regional cooperation could
help promote environmentally sustainable
technologies in SMEs in the following areas:


Skills – Creating a critical mass of skills to help
firms, especially SMEs, plan and implement
technology transfer with a business focus,
particularly those for which there are no
intellectual property constraints. This could
provide opportunities for PPPs.


Supply chains – Enabling the growth of
effective supply chains and marketing


BOX V.3. Continued


private company, set up local cooperatives to provide solar lantern rental
systems in floating villages of the Thonle Sap lake area.


In 2011, APCTT organized a business-to-business forum on “Fostering
Business Partnerships to Promote the Adoption and Utilization of Renewable
Energy Technologies” in Colombo, Sri Lanka. It was organized in association
with the National Engineering Research and Development Centre of Sri
Lanka, the National Cleaner Production Centre of Sri Lanka (NCPCSL), and the
Ceylon Chamber of Commerce. As part of the forum, one-to-one meetings
were set up between renewable-energy business firms and technology
transfer intermediaries in Sri Lanka and firms from six other participating
countries, namely Fiji, India, Mongolia, Nepal, the Philippines and Thailand.
One outcome of this meeting is negotiations between a company in the
Philippines and NCPCSL on transferring solar-assisted air conditioning
technology to Sri Lankan companies.


Source: ESCAP-APCTT.


a Van Berkel, 2008.




128


networks, which can manufacture, market,
and service low-carbon technologies.


Research and development – Encouraging
international collaboration in research,
design, development and deployment. This
should aim to reduce the risks associated
with capital costs through government
demonstration activities,43 and would help
prevent innovations lying dormant without
being commercialized.


Available technologies – It is important to
identify, for SMEs in particular, the potential
of mature low carbon technologies for which
there are no intellectual property issues. Such
information can be publicized widely through
government and international agencies and
through private-sector participation.


Intellectual property – Introducing guarantees
for strong intellectual property enforcement
while also developing locally appropriate
versions.44


Innovation hubs – Establishing regional hubs,
based on the “open innovation” principle for
instance, in the ASEAN or SAARC regions, to
develop critical low carbon technologies.


Financial incentives – Designing market
transformation incentives to overcome costs
that prevent firms from switching to low
carbon technologies.


Clean development mechanism – Providing
comprehensive information on the Clean
Development Mechanism with respect to
eligibility criteria and potential emission
reduction opportunities.45


Microfinance – This currently appears to be
operating only in niche markets. Scaling up its
use will require management of transaction
costs and credit risk, and offering low-cost,
long-term financial resources.46


Bank finance – Building capacity in the
finance and banking sector, in areas such as
low-carbon energy finance, including models
for the effective use of available finance and
economic and feasibility analysis.47


Addressing sustainability risks through
technological cooperation


The case for regional cooperation to meet the
challenges considered in this chapter – food
and energy insecurity, disasters and pressures
on natural resources – is based on two facts:
that their impact often cuts across national
boundaries and that national capabilities
to reduce risks and mitigate impacts are
unevenly distributed across countries in the
region. As a result, cooperative efforts could
both be in the best interest of all countries
and make the overall regional response to
these challenges more effective.


A critical element for regional cooperation
in the three areas is the production and
dissemination of accurate information
to facilitate the preparation of diagnoses
and risk assessments and to help national
governments plan and implement the most
effective policy responses. In addition, it is
very important to help all countries in the
region build sufficient capacities in the areas
of data collection and analyses, diagnoses
and risk assessments, and policy planning and
implementation.


As mentioned earlier in the chapter, a large
number of subregional, regional and global
institutions and initiatives aim at fostering
cooperation to address the challenges of food
insecurity, disasters and pressures on natural
resources. The majority of these cooperative
arrangements are highly specialized and
cover a limited number of countries in the
region. Subregional organizations, such as
ASEAN and SAARC, play very important roles
as umbrella organizations that encompass
various institutional mechanisms with the
same membership.


However, as highlighted in previous chapters
of this study, subregional approaches to
cooperation are not the most effective. For
instance, in the case of trade, a key reason for
a broader approach to regional integration
was given by the widespread distribution of
export opportunities, which are not limited
to the confines of each subregion. In the case
of transport, energy and ICT infrastructure
investment, the existence of network




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


129


externalities provide a strong economic case
for aiming to build the broadest possible
networks, encompassing the whole Asia-
Pacific region.


A similar argument can be made for a region-
wide response to the challenges of food
insecurity, disasters and pressures on natural
resources. Because the three challenges pose
potentially large economic costs to countries
in the region, it is important to seek ways to
minimize these costs. For this purpose, region-
wide cooperative mechanisms could be the
most effective, because of their effectiveness
in disseminating knowledge, sharing good
practices and supporting the build-up of
capabilities across all countries in the region.


The three challenges of food insecurity,
disasters and pressures on natural resources
are fundamental aspects of sustainability, and
are interrelated. The concept of sustainability
implies that, at a minimum, the same degree of
access to food, protection from disasters, and
natural resources must be ensured for future
generations. To meet this enormous challenge,
it is critical to build capacities and promote
technological innovations and research and
development to improve eco- and resource
efficiency. Technological innovations are
also needed to ensure food security through
the development of sustainable agriculture
practices and to enhance the effectiveness
of monitoring and early warning systems to
reduce disaster risks.


To maximize the effectiveness of the region’s
response to these interlinked challenges, the
creation of a region-wide body named “Asia-
Pacific Technology Development Council”
(APTECH), could be considered. APTECH
would serve as a regional apex body of
national innovation institutions. Its main
functions would entail fostering innovation
that addresses shared problems and
promoting cooperation in pre-competitive
research and development. For that purpose,
it could establish a regional innovation
fund to finance joint innovation proposals,
the intellectual property of which would
be owned by APTECH and shared among
members. Such intellectual property could be
subsequently made available to national and
regional enterprises for competitive research.


The funding of a potential regional innovation
fund would come from one of the regional
development funds proposed below.


Addressing social risks
Despite the region’s economic dynamism, the
number of people living in extreme poverty,
suffering from hunger and lacking insufficient
access to sanitation, education, health
and financial services is still enormous.48
While economic growth is creating vast
opportunities, growth alone is insufficient
to correct the region’s huge socioeconomic
and developmental disparities within and
between countries, and such disparities could
pose serious threats to national economic,
social and political stability.


The fast economic growth of the last two
decades has been accompanied by rising
inequalities, with the population-weighted
mean Gini coefficient for the entire region
increasing from 32.5 per cent in the 1990s
to 37.5 per cent in the mid-2000s.49 These
rising income inequalities are a manifestation
of deeper inequalities in the access to
fundamental resources, such as sanitation,
education, health services, food security and
electricity. Such access has tended to be more
widespread in urban areas, where most of
the region’s development has been taking
place, leaving rural areas behind. At the same
time, persistent disparities have continued
between women and men, and between
different social and ethnic groups.50


While it might appear that economic growth,
like a tide that lifts all boats, would eventually
provide employment opportunities for
all, even the poorest and most deprived
segments of society, this is not necessarily
the case. Trickle down cannot be taken
for granted. First, economic growth in the
twenty-first century places a premium on
educated individuals who are not only literate
but also able to take advantage of modern
ICT effectively. When professionals and
skilled workers are scarce in rapidly growing
economies, their real wages tend to increase
significantly faster than average, contributing
to increased income inequalities. Second,
there is much evidence that poverty and social
deprivations, such as the lack or insufficient
access to basic sanitation, education or health




130


services, play a large role in determining
health outcomes – and, thus, the potential to
engage fully in employment activities – across
the population.51


Persistent poverty and inequality in the
world’s most dynamic region represents, as
argued in chapter one, a missed opportunity.
If the ”bottom one billion” inhabitants of
Asia and the Pacific had similar access to
sanitation, health, education and social
protection as the ”top three billion”, they
would be able to enhance the size of what
is already the largest and most rapidly
expanding market, contributing to sustaining
growth in decades to come. Moreover, social
justice considerations make the exclusion
of a quarter of the region’s population from
the fruits of its growing prosperity morally
unacceptable. Furthermore, social exclusion
creates downside risks to stability and growth
itself.


Studies on the relationship between poverty
and violent conflict usually find that causality
runs from conflict to poverty, but the reverse
relationship is not as clear. However, when
poverty coincides with ethnic, religious,
language or regional boundaries, underlying
grievances can explode into open conflict,
often triggered by external shocks, such as
a sudden increase in the price of food or
other necessities. The potential for conflict
is more likely when basic human needs,
such as the need for physical security
and well-being, communal and cultural
recognition, participation and distributive
justice are repeatedly denied, threatened,
or frustrated, especially over long periods
of time.52 According to the Commonwealth
Commission on Respect and Understanding,
remembered injustices, including those that
occurred decades, even centuries before, play
an important role in justifying and sustaining
many conflicts.53


As shown in figure V.6, social exclusion appears
to have an adverse consequence on foreign
direct investment. The horizontal axis shows
a Millennium Development Goals capabilities
index developed by ESCAP for the year 1990. 54
It measures the levels of country’s capabilities
to provide services in the areas of health and
education. The vertical axis shows cumulative


inflows of foreign direct investment per capita
during the period 2003-2010. The relationship
between these two variables is positive and
statistically significant. The countries in the
bottom half of the distribution of the index
have an average cumulative foreign direct
investment (FDI) per capita of $415 over the
period 2003-2010, compared to $1,065 for
those in the upper half of the distribution
of the Millennium Development Goals
capabilities index. The relationship between
social exclusion and FDI could be explained
by two possible factors: (i) the reduced size of
the domestic market resulting from the lower
purchasing power of the excluded; and (ii)
potential risks to social and political stability
which could affect the return of FDI.


An important objective of regional economic
integration schemes is to narrow development
gaps and bring about convergence in the
levels of economic development of different
participants through the optimal deployment
of the region’s resources. The objective of
achieving a balanced and equitable regional
development also creates conditions
for a more enthusiastic participation of
all partners, including those with scarce
productive capacities. Some studies suggest
that increased trade by itself, even if balanced,
does not ensure economic development.
Thus, growth in trade must be accompanied
by complementary development policies
to promote investment in infrastructure,
education and research and development in
lower-income countries and less-developed
regions.


Many existing regional trading arrangements
include balanced regional development and
social cohesion policies.55 For instance, the
European Union has extensive programmes,
to support lagging regions through
structural funds under the social cohesion
policy. The Southern Common Market
(MERCOSUR) is considering proposals for a
regional social fund. SAARC has created the
SAARC Development Fund which includes
a social window to fund poverty alleviation
programmes and projects, an infrastructure
window to finance infrastructure projects,
and an economic window to fund other non-
infrastructure commercial projects.




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


131


Therefore, apart from special and differential
treatment provisions in favour of developing
and least developed coun-tries, which are
normally incorporated in any trade liberalization
scheme, a broad and comprehensive regional
economic integration scheme for Asia and
the Pacific should include other measures
to assist lower-income countries, as well as
lagging regions in all countries. Regional
development funds similar to the examples
mentioned above could be set up with
contributions from member countries based
on an agreed pro-portion of their GDP. With
a combined GDP of about $20 trillion, even a
0.1 per cent share would yield a sum of $20
billion per annum. Such an amount could be
used to create three funds: the Asia-Pacific
Regional Development Fund, the Asia-Pacific
Regional Integration Fund and the Asia-
Pacific Technology Development Fund. The
proportion of the total to allocate to which
of the three funds could be 65, 20 and 15 per
cent.


The Asia-Pacific Regional Development Fund
could be earmarked for uplifting lower-


FIGURE TITLE


V.6. Social exclusion in 1990 and foreign direct investment over 2003-2010


Source: ESCAP based on data from the United Nations Statistics Division, Millennium Development Goals Indicators database.


Notes: The Millennium Development Goals capabilities index is a measure of the level of country’s capabilities to provide MDG-related services
in the areas of health and education. For details on the construction of the index see Clovis Freire, “Measuring progress towards the MDGs: a
capability-based approach”, Working Paper (Bangkok, ESCAP forthcoming).


income countries as well as less-developed
regions of all member countries by investing
in physical and social (education, training and
health care) infrastructure. The fund could
also offer subsidies, incentives and technical
support to producers based in these regions
and promote technology transfer to enhance
their competitiveness. The fund could also
facilitate the provision of social safety nets
to groups adversely affected by regional
trade liberalization. Among many socially
desirable areas, invest-ments promoted by
this fund could aim at enhancing connectivity,
developing rural communities and agro-
based industries, increasing agricultural
productivity, and supporting SMEs. The
less developed regions, the main intended
beneficiaries of the fund, should be identified
on the basis of a measurable criterion, such
as having a GDP per capita below certain
threshold of the average GDP per capita
for all the economies participating in the
regional integration scheme. In addition, it is
important that specific projects supported by
the fund be co-financed by local or national
governments in order to give them a financial


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132


stake in the outcome of the projects, creating
incentives for their effective implementation.


The Asia-Pacific Regional Integration Fund
could provide financing to enhance con-
nectivity between lower-income countries
and the main markets in the region by linking
highways, railways, and ports. This fund
could also provide financing in areas related
to ICT, broadband, the use of satellites, trade
facilitation, electronic data interchange and
radio frequency identification (EDI/RFID),
harmonization of customs and conformity
procedures. Financing from the fund should
normally stimulate private investments in the
beneficiary countries. Thus funding from the
fund should be limited to a maximum of 30
per cent of the total project cost.


The Asia-Pacific Technology Development
Fund could provide assistance to joint research
and development programmes of Asia-Pacific
enterprises based in a least two countries, one
of which should be a developing country. The
fund would be administered by APTECH, as
proposed above. An important objective of
this fund could be to assist enterprises based
in relatively lower-income countries of the
region in accessing modern technologies
and developing productive capacities. The
assistance from the fund could be limited to
50 per cent of the total project cost.


With these steps accompanying the pro-
grammes of regional economic integration,
regionalism in Asia and the Pacific would
hopefully become a model of an inclusive,
balanced, equitable and participatory deve-
lopment process for other regions to emulate.



ENDNOTES


1 Asia Society and International Rice Research
Institute, 2010.


2 Hazell, 2009.


3 United Nations, 2011.


4 ESCAP, 2009b.


5 United Nations, “Hunger: Who are the hungry?”.
Available from www.un.org/en/globalissues/briefing
papers/food/whoarethehungry.shtml.


6 Ibid.


7 FAO, 1996.


8 United Nations, 2009, p. 27.


9 ASEAN, 2009a.


10 United Nations, 2009.


11 SAARC, 2009.


12 FAO and SAARC, 2008.


13 SAARC, 2011.


14 Food Secure Pacific, 2010.


15 Cokanasiga, Keil and Sisifa, 2011.


16 As of February 2010, the 25 members of the
commission were Afghanistan, Australia, Bangladesh,
Bhutan Cambodia, China, Fiji, France, India, Indonesia,
the Islamic Republic of Iran, Japan, the Lao People’s
Democratic Republic, Malaysia, Myanmar, Nepal,
New Zealand, Pakistan, the Philippines, the Republic
of Korea, Sri Lanka, Thailand, the United Kingdom of
Great Britain and Northern Ireland, the United States of
America and Viet Nam.


17 ASEAN, 2011b.


18 Alene and Coulibaly, 2009; Timmer, 2005; World
Bank, 2008; ESCAP, 2012.


19 APAARI, 2010.


20 World Business Council for Sustainable Development
and the International Union for Conservation of Nature,
2008.


21 ADB, 2007b.


22 Ibid.


23 FAO and SAARC 2008.


24 UNISDR, 2012.


25 ESCAP and UNISDR, 2010, p. 36; ESCAP, 2012.


26 ESCAP, 2011f.


27 See Thailand, Office of the National Economic and
Social Development Board, 2012; Thailand, Ministry of
Finance, 2011.




Economic cooperation for addressing shared vulnerabilities and risks CHAPTER FIVE


133


28 ESCAP, based on International Energy Agency, 2011.


29 ESCAP, 2012.


30 ESCAP, ADB and UNEP, 2010.


31 UNEP, 2011.


32 ESCAP, 2011d.


33 UNEP, 2011.


34 UNCSD, 2011.


35 ESCAP review of official submissions of member
states to the UNCSD secretariat.


36 ESCAP, 2001, part three.


37 ESCAP, 2005, annex III.


38 ESCAP, 2011d, chapter I, section C.


39 Brenner, 2009.


40 Ibid.


41 Available from www.osdd.net (accessed 1 February
2012).


42 Chesbrough, 2003.


43 Ockwell, Watson and Macherron, 2008.


44 Global Climate Network, 2009.


45 Schneider and others, 2008.


46 Parthan and others, 2010.


47 Ibid.


48 ESCAP-ADB-UNDP, 2012.


49 ESCAP, 2012.


50 ESCAP-ADB-UNDP, 2012.


51 Commission on Social Determinants of Health, 2008.


52 Ocampo, 2004.


53 Commonwealth Commission on Respect and
Understanding, 2007.


54 The ESCAP MDG capabilitites index is calculated
by considering different levels of MDG attainment as
different deliverables requiring specific capabilities to
be produced and by applying the method proposed by
Hidalgo and Hausmann, 2009, to measure the level of
capabilities available to countries to produce them. For
details see Freire, 2012.


55 See Yeats and Deacon, 2006, for a review of different
RTAs.




134


Photo by John Isaac




Towards an inclusive and sustainable Asia-Pacific CenturyCHAPTER SIX


135


UN Photo




136


Six
Towards an


inclusive and sustainable
A s i a - Pa c i f i c c e n t u r y


A compelling case exists for deepening and
broadening economic cooperation in the Asia-
Pacific region and to move forward towards the
formation of an economic community of Asia
and the Pacific as a long-term goal. The four-
pronged action agenda outlined in this study
covers trade and investment, connectivity,
financial cooperation and cooperation for
addressing shared risks. The region will need
an elaborate institutional architecture to move
ahead with this ambitious agenda.


In the preceding chapters, it was argued that
fostering regional economic integration would be
critical to sustain growth in Asia and the Pacific
because, burdened by huge debts and global
imbalances, the advanced economies of the West
are no longer able to play the role of engines of
growth for the region that they played over the
past 60 years. However, the region does not need
to look very far to find new sources of aggregate
demand. Regional developmental challenges,
such as poverty and wide disparities in social
and physical infrastructure, can be turned into
opportunities for sustaining growth in the future.
The region’s “bottom billion”, if lifted out of pov-
erty and allowed to join the mainstream of the
region’s consumers, could help sustain growth in
Asia and the Pacific – and the world at large – in
decades to come. In addition, if all countries of
the region were connected seamlessly by closing
development gaps in physical infrastructure and
adopting best practices in trade and transport
facilitation, lagging economies would be able to
access the largest and most dynamic markets in the
world, boosting their business and employment
opportunities.


UN Photo




Towards an inclusive and sustainable Asia-Pacific CenturyCHAPTER SIX


137


The four-pronged action agenda for
enhancing regional economic integration in
Asia and the Pacific proposed in this study
could contribute not only to sustaining
the region’s dynamism, but also to making
its development process more inclusive
and sustainable. The agenda entails: (i) the
formation of a broader integrated regional
market; (ii) seamless physical connectivity
across the region; (iii) financial cooperation
for closing the development gaps; and (iv)
economic cooperation for addressing shared
vulnerabilities and risks. This agenda could be
instrumental in the realization of an inclusive
and sustainable Asia-Pacific century, in which
the region would not only be free from
poverty and hunger but also continue to
prosper in a sustainable manner, meeting its
needs without compromising the interests of
future generations. A dynamic, inclusive and
sustainable Asia-Pacific region could become
an effective locomotive to support economic
growth in the rest of the world, contribute
to fostering peace, and exercise influence
in global economic governance to a degree
that is commensurate with its rising economic
weight.


To be sure, the proposed agenda is ambitious,
and it would require an extensive institutional
architecture for decision-making, consensus
building, operationalizing it across sectors,
and implementing it throughout the region.
The following is an outline of a possible
institutional architecture, which draws upon
the experiences of various regional economic
integration schemes from across the world.


Institutional architecture


The institutional architecture could include
the following elements:


The Asia-Pacific Economic Summit (APES): As
the highest level body, APES would be tasked
with setting up the region’s agenda and
providing direction for its implementation
among member countries. It would adopt a
long-term vision for an economic community
of Asia and the Pacific and its contours, reflect
on global challenges and global affairs and
the region’s response, cooperate with other
agencies and international organizations, and
meet annually.


Ministerial councils on trade and investment,
finance, transport, energy, food security
and agriculture, environment, disaster risk
reduction and technology: These ministerial
councils would develop specific agendas of
work for each sector. In a number of cases, the
ministerial councils would actually replace
the ad hoc ministerial conferences that
ESCAP organizes on some sectors such as
the environment (every five years), transport
(every two years) and disaster risk reduction
(every two years). In addition, these ministerial
councils would give direction and operative
instructions to respective senior officials
meetings.


Committees of Senior Officials: In each sector,
there would be Committees of Senior Officials
to implement the mandates given by the
respective ministerial councils.


A Consultative Committee of Subregional
Associations: It will bring together all
subregional bodies, such as the Association of
Southeast Asian Nations (ASEAN), the South
Asian Association for Regional Cooperation
(SAARC), the Bay of Bengal Initiative for Multi-
Sectoral Technical and Economic Cooperation
(BIMSTEC), the Economic Cooperation
Organization (ECO) and the Pacific Islands
Forum (PIF), of the region to facilitate mutual
learning. It would meet annually at the
sidelines of APES.


People-to-people contacts: The programme
of regional economic integration would not
be able to exploit its full potential without the
people of the region coming together with
their peers. Regional professional associations
are needed to organize such interactions
for all different professions. Two proposed
associations that would be very critical are:


i. An Asia-Pacific business advisory council,
which would help mobilize the business
community to exploit the full potential
of regional economic integration, and


ii. An Asia-Pacific network of think tanks,
which would bring together research
institutes across the region that conduct
studies and recommend evidence-
based policy alternatives to maximize
the benefits from regional economic




138


integration in Asia and the Pacific. These
groups would meet annually at the
sidelines of APES.


Secretariat


The elaborate institutional architecture pro-
posed above would need a secretariat to
service it. The ESCAP secretariat, in view of its
multidisciplinary nature, could play that role
and should be strengthened for that purpose
to provide secretariat services to APES,
ministerial councils and their senior officials
level operational bodies.


In addition, the ESCAP secretariat should work
closely with other regional and subregional
organizations, such as the ASEAN Secretariat,
the SAARC Secretariat, the ECO Secretariat, the
PIF Secretariat and the to be opened BIMSTEC
Secretariat, among others, to coordinate the
programmes of regional economic cooperation
and integration. It should also strengthen its
partnership with the Asian Development
Bank, which is another regional development
organization with overlapping membership
and which is committed to regional
economic integration, especially in areas
such as financial cooperation, infrastructure
development and connectivity, trade
facilitation, environment and technology
development.


The way forward


In December 1963, the First Ministerial
Conference on Asian Economic Cooperation,
held in Manila under the auspices of the
Economic Commission for Asia and the Far
East (ECAFE) as ESCAP was known then,
endorsed a proposal to establish a regional
development bank for Asia to supplement
World Bank activities aimed at assisting the
countries in the region in their efforts to
rebuild their economies as they came out of
the yoke of colonialism and the Second World
War. Three years later, the Asian Development
Bank was born.


Nearly half a century later, the Asia-Pacific
region is once again at such a juncture in
its evolution. In the aftermath of the global
economic and financial crisis it has become
clear that business as usual is no longer an
option and that it is necessary to look for
alternative ways and means to sustain the
region’s dynamism. The ESCAP Commission
should seize this moment to convene the Asia-
Pacific Ministerial Conference on Regional
Economic Cooperation and Integration
in 2013 not only to celebrate the fiftieth
anniversary of the earlier conference but
also to review and consider possible ways to
implement the recommendations contained
in the present study and chart out a road map
to grow together for shared prosperity and
for an inclusive and sustainable Asia-Pacific
Century!


UN Photo




Technical notesAnnex


139


Photo by Farzana Hossen Mipu




140


Annex: Technical notes


i. Estimates of regional trade flows


The forecast trade flows for the period 2011-2016 shown in figure II.1 are based on estimates
of regional trade flows using the gravity equation. The upper forecast is based on a model that
includes a time trend, namely


where xi j t are the logarithms of exports from region i to region j in year t, yi t and yj t are the
logarithms of the GDPs of regions i and j in year t, and εi j t is a non-observable error term. The
coefficients βi j capture unobserved and time-invariant factors unique to exports from region i
to j, such as geographical distance or trade costs. This model was estimated for the period 1993-
2010 using data from the International Monetary Fund, Direction of Trade Statistics and the United
Nations Statistical Division, National Accounts Main Aggregates database. The upper forecasts
were calculated using the estimated equation


for the years 2011-2016 based on GDP forecasts from the International Monetary Fund, World
Economic Outlook database.


It is important to keep in mind that the estimate coefficient for the time trend 0.1821, or 1.8 per
cent, per year, is based on trade data for a period of fast-increasing commodity prices. If these
trends continue during the forecast period, the forecasts will be accurate, but this is uncertain. For
that reason a more conservative, lower forecast was also considered in order to provide a range
of possible future trade values. The more conservative forecast is based on the following model


which includes time effects instead of a time trend, and was estimated as


For the forecast period, the estimated time effects βt were set to zero, which is their average value
during the estimation period. In other words, these lower forecasts assume no time effects (neither
positive nor negative) for the period 2011-2016.


^


,


,


,




Technical notesAnnex


141


ii. Export opportunities indicator


The export opportunities indicator is a type of overlap indicator designed to measure the degree
to which competitive exports of one country match the expanding import markets of another.
A higher degree of export opportunity indicates more favourable prospects for trade expansion
given the past rate of growth of the import markets and the revealed comparative advantage of
the export country. The indicator is scaled so that it can be interpreted as the potential annual
increase in the size of the export market – measured in billions of United States dollars – of each
country vis-à-vis each of its trading partners.


The indicator is defined as


for all i such that >1 and zero otherwise, where s is the source country, d is the destination
country, i represents industries, m represents imports in billions of United States dollars, t0 is the
base period and t1 (t1 > t0 ) is a more recent period, M represents global imports by all countries in
all products in billions of United States dollars, and is the indicator of revealed comparative
advantage of country s in industry i in the period t1. The latter is defined as the share of industry
i in the exports of country s divided by the share of industry i in global exports. The export
opportunities indicator was calculated for 40,940 pairs of export/import countries involving 231
economies and using trade data from the United Nations Commodity Trade database (COMTRADE)
for the periods 1996-2000 and 2006-2010. The trade data used were classified according to the
Standard International Trade Classification (SITC) rev2 at the 4-digit level.


The export opportunities indicator captures the recent dynamics of specific export markets from
the perspective of each exporter. If imports of industry i expand significantly in country A and
if country B has a revealed comparative advantage in industry i, this means that country B has
potentially profitable export opportunities in country A. The indicator adds up the estimated
annual increase in imports of country A for all the industries in which (i) the share of imports
in total world imports has increased between the two periods and (ii) country B has a revealed
comparative advantage. Of course, this increase in export opportunities is not going to exclusively
benefit country B because there are other countries with a revealed comparative advantage in
some of the same industries as country B. Nevertheless, it is easier for exporters to enter and
expand sales in a growing market than in a stagnant or declining market. Thus, the indicator
provides useful information about future potential increases in bilateral trade.


To provide a more concrete example of the construction of the indicator, consider the electronic
microcircuits industry (SITC 7764). Between 1996-2000 and 2006-2010, China increased its share in
the world’s imports of electronic microcircuits by 0.7013 per cent. Thus, on average China increased
its share in the world imports of electronic microcircuits by 0.7013 / 10 = 0.07013 per cent per year.
Multiplying this number by the value of global imports for 2010, $13 trillion, a value of $9.2 billion
is obtained. In other words, imports of electronic microcircuits to China has been increasing by
almost $10 billion per year. On the other hand, the value of the indicator of revealed comparative
advantage for electronic circuits during the period 2006-2010 is 14.8 > 1 for the Philippines. As
shown in table II.3, the total value of the indicator for exports of the Philippines to China is $27.6
billion. The value of $9.2 billion calculated above is part of this indicator value. It is obtained by
adding the value of other industries for which (i) imports to China have grown faster than global
imports and (ii) the Philippines has a revealed comparative advantage indicator greater than one.


One caveat to keep in mind is that the indicator does not take into account transportation and
trade costs. In other words, an exporting country, such as country B, could have great export
opportunities in country A, but it could be too expensive for exporters in country B to take


RCAt1is


RCAt1is




142


advantage of them. Nevertheless, the indicator provides guidance on which trade partnerships
could be most desirable, a useful first step which should be followed by an analysis of the obstacles
and necessary policy measures to facilitate such partnerships.


iii. Computable general equilibrium simulations


The analysis of the potential gains to trade from broader agreements is based on computable
general equilibrium (CGE) simulations using the Global Trade Analysis Project (GTAP) model. The
structure of the model is a standard, multi-region CGE, discussed in detail in T. Hertel, ed., Global
Trade Analysis: Modelling and Applications, Cambridge: Cambridge University Press,1997. The
database used in the simulations is GTAP7.1 with base year 2004, the latest available at the time
of writing. The database was updated to 2010 using a static projection based on labour growth
rates, changes in the skilled/low-skilled labour composition, and capital accumulation. Total factor
productivity was determined residually based on GDP. Applied tariff rates were also updated.


The simulations conducted were based on comparative static techniques. These have the
disadvantage relative to dynamic techniques of not describing the time-path. In other words, the
analysis focuses on the end outcomes rather than the transition to that outcome. However, this
disadvantage is countered by the reduced degree of computational complexity, which allows the
consideration of a larger number of potential scenarios and a greater level of sectoral and regional
disaggregation, while still addressing the primary questions. The results should be interpreted
as indicating how these economies would differ, relative to the updated 2010 equilibrium, after
all adjustments in response to the liberalization have taken place, under the assumption that the
trade arrangements being simulated have been implemented.


In each scenario, trade liberalization is modelled as a removal of all tariffs on merchandise trade.
Thus the simulations represent upper bounds of the liberalization that could potentially take place,
since, in practice, agreements provide for the exclusion of some products, notably agricultural
products, as well as extensive phase-in periods for the elimination of tariffs on other products.
The trade facilitation scenarios are implemented as a positive shock to the productivity of the
transportation sector at the bilateral level for the countries engaged in liberalization. The shock
applies to all goods and is assumed to affect all trading partners in both directions. In order to
capture the potential gains from moving toward best practices, the size of the shock is proportional
to ESCAP measures of comprehensive trade costs net of known tariffs. Both a medium-run closure,
which captures the effects of resource reallocation, and a long-run closure, designed to capture
potential dynamic gains from capital accumulation, are implemented.


As with all CGE studies, the modelling cannot capture all possible economic effects that can matter.
A limitation of the modelling approached employed in this study is that it assumes perfectly
competitive markets throughout, as in most CGE studies. Studies that do incorporate imperfect
competition tend to generate welfare estimates that are roughly double those of competitive
models.1 Hence, the estimates presented here are probably conservative.


Another reason that the model results are probably conservative is that only merchandise trade
liberalization is considered. However, while many new regional trade agreements do contain
provisions for liberalizing trade in services, it is not always clear to what extent they are effective.
In addition, the mechanisms for incorporating services trade liberalization into CGE models are
still unsettled. One possibility is to use tariff equivalents, but it is not clear that services trade
barriers really affect trade in the same way as tariffs affect merchandise trade.2 Some authors
argue that it is better to model the impact of services trade liberalization in terms of productivity
enhancement. One example is work conducted by Dr. Phiippa Dee, whose research on the APEC
economies indicates productivity gains in the region of 2 to 14 per cent.3 In summation, to the
extent that can be realistically assumed that effective service trade liberalization will in fact be part




Technical notesAnnex


143


of the agreements under consideration, the results presented in this study probably understate
the potential benefits. This will be an useful area for future research.4


iv. The IDE Geographical Simulation Model


The Geographical Simulation Model of the Institute of Developing Economies (IDE) is based on data
for 1,699 regions in 15 Asian economies: Bangladesh; Brunei Darussalam; China; India; Indonesia;
Japan; Lao People’s Democratic Republic; Malaysia; Myanmar; Philippines; Singapore; Thailand;
Viet Nam; Hong Kong, China; and Macao, China. The data for the model include (i) estimates of
arable land area, population and regional gross domestic products (RGDP) for each region based
on official statistics for the year 2005, (ii) currently available highways, railways, sea shipment,
and air shipment routes, and (iii) estimates of border cost measures, such as tariff rates, non-tariff
barriers, other border clearance costs and transhipment costs. The model is useful for studying the
dynamics of the location of population and industries over the long term, and for simulating the
economic impacts of specific infrastructure projects at the subnational level for all the countries
in the region.


In the model, the state of physical transport infrastructure of various land routes is operationalized
by making assumptions about the average speeds at which vehicles can circulate. For instance, in
the baseline scenario, the average land transport speed is set at 38.5 km/h in all routes with the
exceptions of (i) Thailand, Malaysia and Singapore, where road networks are well developed and
the average speed is set at 60 km/h, and (ii) Eastern India (the provinces of Arunachal Pradesh,
Assam, Nagaland, Manipur, Mizoram, Tripura, Meghalaya and Sikkim) where, considering the
mountainous terrain, the average speed is set at 19.25 km/h. In addition, the baseline scenario
assumes that the average time and monetary cost of crossing national borders are13.2 hours
and $500 per container, respectively, and that through traffic in Myanmar and Bangladesh is not
allowed.


FIGURE TITLE


A.1. Interpreting simulation results


Source: S. Kumagai, 2012.




144


Three alternative scenarios are considered, namely (i) construction and improvements in physical
infrastructure, (ii) the implementation of custom facilitation measures, and (iii) permitting through
traffic in Myanmar and Bangladesh. The first one is operationalized by setting the average speed
of land transport at 60 km/h in the routes considered. Under the second scenario, the time and
monetary cost of crossing national borders are lowered to two hours and $100 per container,
respectively. Under the third scenario, through traffic is allowed in both Myanmar and Bangladesh.5


The simulations are run for a period of 25 years, between 2005 and 2030. Data on already completed
projects until 2010 are incorporated into the model and additional development projects to be
simulated are added in 2015. The net gains reported in figure A.1 are the differences between the
baseline and the simulated scenario in the last year of the simulation period, 2030.


Endnotes


1 See, e.g. Scollay and Gilbert, 2000; Gilbert and Wahl, 2002; Francois and Martin, 2010.


2 See, e.g. Fontagne, Guillin and Mitaritonna, 2010.


3 See, e.g. Dee, 2010.


4 For more details see Gilbert, 2012.


5 For more details see Kumagai, 2012.


Ph
ot


o
by


W
ar


re
n


Fi
el


d




References


145
Photo by Warren Field




146


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