Economic Impacts of Improved Connectivity for ASEAN: An Application of the Geographical Simulation Model

• Author: Ikumo Isono,Satoru Kumagai
• Date: 01 July 2016
• Published date: 01 July 2016
• DOI: http://doi.org/10.1111/aepr.12147

Economic Impacts of Improved Connectivity

for ASEAN: An Application of the Geographical

Simulation Model

Ikumo ISONO†and Satoru KUMAGAI

Instituteof Developing Economies

We compare the prioritized projects of the Master Plan on ASEAN Connectivity (MPAC) and the

Comprehensive Asia Development Plan (CADP) by utilizing the Institute of Developing

Economies/Economic Research Institute for ASEAN andEast Asia Geographical SimulationModel.

The prioritized projects of the MPAC mainly focus on specific hard or soft infrastructure projects

connecting one remote area of an ASEAN member state to another and thus fail to capture the full

potential of the infrastructure because of neglected important links within a state. On the other

hand, the CADP emphasizes the importance of economic corridors or linkages between a large

cluster and another cluster. Our simulation analysis shows that CADP projects will result in an

addition to gross domestic product (GDP) of $US 1544bn over the period from 2021 to 2030

(in 2010 dollars) or an impact on ASEAN countries that is 12 times larger than MPAC projects.

The results strongly suggest that the CADP projects should be adopted and implemented to fully

realize the potential economic growth of the ASEAN countries. Moreover, the CADP will

contribute more to narrowing the development gaps among the ASEAN countries than MPAC

prioritized projects.

Key words: ASEAN, infrastructure, new economic geography, simulation

JEL codes: F15, O53, R12

1. Introduction

Since the 1980s, ASEAN and East Asian countries have witnessed the establishment of

global production networks througha progressing division oflabor in production processes

and an optimizing of the location of production blocks by multinational enterprises. The

productionnetworks were one of the drivingforces of rapid economicgrowth in this region.

In fact, ASEAN and East Asia are said to have the most complicated and sophisticated

production networks in the world. Complicated global purchasing systems are only

achievable if they have good physical logistics infrastructure, sophisticated information

and communications technology, stable logistics services, and supporting policies. This

can be supported by a higher share of intermediate goods in exports and imports of

forerunnerASEAN, Vietnam, and East Asiancountries. This is alsosupported by the higher

logistics performance indices of those countries compared with their per capita incomes.

†Correspondence: Ikumo Isono, Economic Geography Studies Group, Interdisciplinary Studies

Center, Institute of Developing Economies, JETRO (IDE-JETRO), 3-2-2 Wakaba, Mihama-ku,

Chiba-shi, Chiba, 261-8545, Japan. Emai l: ikumo_isono@ide-gsm.org

doi: 10.1111/aepr.12147 Asian EconomicPolicy Review (2016) 11, 290–306

290 ©2016Japan Center for EconomicResearch

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The higher logistics performanceindices imply that these countries are stronglycompetitive

in global production networks. The ASEAN Economic Community Blueprint (hereafter

AEC Blueprint) (ASEAN, 2008) clearly stated that the single market and production base

is the first pillar of the economic community to make ASEAN more dynamic and

competitive. Theestablishment of the community at the end of 2015 is expected to further

the evolution of the production networks in this region by providing better transport

infrastructure and an improved business environment.

At the same time, many issuesstill remain. Good infrastructure is still limited between

industrialzones surrounding the largesteconomic cities and gatewayports in Indonesia, the

Philippines,and Vietnam. In fact, the WorldBank’s logistics performanceindex is a survey-

based index that mainly focuses on the firms located in areas near the largest economic

cities. Malaysia has succeeded in dispersing the electronics industry to the states along the

Strait of Malacca,but for Thailand, Indonesia,the Philippines and Vietnam,agglomerations

in production can be seen in limited areas. The delay in infrastructure development is

reported everywhere in ASEAN countries. Furthermore, Cambodia, Lao PDR, and

Myanmar have relatively poor infrastructure and find it difficult to fulfill infrastructure

demands in the faceof a rapidgrowth in the number of passenger and commercialvehicles,

even though manyglobal manufacturers are keen to establish factories in thosecountries to

utilize their abundant and relatively cheap labor.

Each country has a difficult decision-making problem givenstrict financial constraints,

increasing demand for infrastructure, and political commitments to mitigate the

development gapsbetween the central area and remote areas in the country.In this regard,

there is a strong policy demand to have a good tool to judge the appropriate way to attach

priorities to infrastructure projects to stimulate innovation, mitigate congestion, and

narrow development gaps.

Recognizing this difficulty, the Economic Research Institute for ASEAN and East Asia

(ERIA) submittedthe Comprehensive AsiaDevelopment Plan (CADP) (ERIA,2010) to the

Fifth East Asia Summit in October 2010 as a grand spatial design in developing

infrastructure in East Asia. ASEAN drafted the Master Plan of ASEAN Connectivity

(MPAC) (ASEAN, 2010a) in cooperation with ERIA, the Asian Development Bank, and

the World Bank and adoptedit at the 17th ASEAN summit in 2010. Both plans emphasize

the importance of hard and soft infrastructure development as the basis of economic

integration and community building in ASEAN.

In light of these developments, this paper examines the importance of transportation

infrastructure developments by comparing the economic impacts of MPAC and CADP

for ASEAN using the Geographical Simulation Model (Institute of Developing

Economies/ERIA-GSM), which has been developed by the IDE-JETRO and ERIA since

2007. IDE/ERIA-GSM is a tool to help policymakers comprehend the importance of

infrastructure provision and its potential consequences (Kumagai et al., 2013). The model

can predict the type of physical or institutional integration that favorably or adversely

affects a particular region(s) at thesubnational level. It is also possible to predict howpolicy

measures facilitating international transactions affect the traffic along particular routes, by

identifying potential bottlenecks that prevent an extraction of the full merits of economic

Ikumo Isono andSatoru Kumagai Economic Impactsof Improved Connectivity

©2016 JapanCenter for EconomicResearch 291