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The role of ASEAN connectivity in reducing the development gap

Citation of the final chapter: Feeny, Simon and McGillivray, Mark 2013, The role of ASEAN connectivity in reducing the development gap. In McGillivray, Mark and Carpenter, David (ed), Narrowing the development gap in ASEAN: drivers and policy options, Routledge, Abingdon, Eng., pp.84-133.

This is the accepted manuscript of a chapter published by Routledge in Narrowing the development gap in ASEAN in 2013, available at: https://doi.org/10.4324/9780203583715

© 2013, The Association of Southeast Asian Nations

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ChapterFour:TheRoleofASEANConnectivityinReducingtheDevelopmentGap

SimonFeeny

AlfredDeakinResearchInstituteDeakinUniversity,Melbourne

SchoolofEconomics,FinanceandMarketingRMITUniversity,Melbourne

MarkMcGillivray

AlfredDeakinResearchInstitute,DeakinUniversity,Melbourne

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4.1.Introduction

Connectivity refers to the extent and quality of links across a number of different dimensions.Connectivity is a crucial component of ASEAN integration. In order to promote and establish theASEANCommunityby2015,aHighLevelTaskForcedevelopedaMasterPlanonASEANconnectivitywiththeassistanceofanumberofotherinternationalorganisationsworkingintheregion(ASEAN,2011).1

The Master Plan recommends improved connectivity through enhanced regional and nationallinkages.ItoutlinesanumberofbenefitsarisingfromgreaterconnectivityamongASEANmembers:“Enhancing intra-regionalconnectivitypromoteseconomicgrowth,narrowsthedevelopmentgapsby sharing the benefits of growth with poorer groups and communities, enhances thecompetitivenessofASEAN,andconnects itsMemberStateswithintheregionandwiththerestoftheworld”(ASEAN,2011,pp.5).TherecentGlobalEconomicCrisis(GEC)ledtoafallindemandforASEANexportsfromadvancedeconomiesandthisheightenstheimportanceofenhancingregionaldemand through increased intra-regional trade (Bhattacharyay, 2009). Improving ASEANconnectivityisrequiredtoassistwiththisobjective.

TheMasterPlanistobeenactedovertheperiod2011to2015andseekstoforgegreaterlinkagesamong ASEAN Member States (AMS) through enhancing three types of linkages: (i) physicalconnectivity; (ii) institutional connectivity; and (iii) people-to-people connectivity. Physicalconnectivity refers to the development of national and regional infrastructure development,specificallyinthetransport,InformationandCommunicationsTechnology(ICT)andenergysectors.Physicalconnectivityiscommonlyreferredtoas‘hardinfrastructure’andplaysaveryimportantrolein connecting ASEAN’s massive lad area, diverse geography and numerous islands. Institutionalconnectivity relates to the policy environment of member countries and includes effectivegovernanceandinstitutions.Itisoftenreferredtoas‘softinfrastructure’.2Finally,people-to-peopleconnectivityreferstoempoweringpeopleandincludesgreaterlinkagesamongASEANmembersintheareasofeducation,culture,tourism(ASEAN,2011).

There are great differences in the level of development across ASEAN countries, as discussed atlength inChapter two, aswell as significantdifferences in culture and language.According to theWorldBankclassification,ASEANmembersincludehighincomecountries(Brunei,Singapore)aswellassomeoftheworld’sleastdevelopedcountries(Cambodia,LaosandMyanmar).Thereisalsogreatdiversity in the geography of ASEAN members. The needs and infrastructure solutions are verydifferentforthesmallcitystateofSingaporecomparedtolandlockedLaos,mountainousMyanmaror the thousands of islands of Indonesia and the Philippines. ASEAN’s traditional focus on exportorientation has led to coastal bias in infrastructure development but connecting inland, remoteareas as well as ASEAN numerous islands to major ports and economic centres can yield greatbenefits(Bhattacharyay,2009).

Therearealso large infrastructuregapsbetweenASEANcountrieswithCambodia,Laos,Myanmarand Indonesia having less access to different types of physical infrastructure than other ASEANmembers. Reducing these physical infrastructure gapswill be vital to narrowing the developmentgap. The quality of infrastructure also varies greatly, being much higher in Singapore, Brunei,

1TheseorganisationsincludedtheAsianDevelopmentBank(ADB),theEconomicResearchInstituteforASEANandEastAsia(ERIA),UnitedNationsEconomicandSocialCommissionforAsianandthePacific(UNESCAP)andtheWorldBank.2 The ASEAN Master Plan includes the following as institutional connectivity: (i) trade liberalisation andfacilitation; (ii) investment and services; (iii) liberalisation and facilitation; (iv) mutual recognitionagreements/arrangements;(v)regionaltransportagreements;(vi)cross-borderprocedures;and(vii)capacitybuildingprogrammes(ASEAN,2011,pp.2).

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MalaysiaandThailandrelativetotheotherASEANmembers.Greaterpeople-to-peopleconnectivityalso holds great potential in narrowing the development gap among ASEAN countries, greatlybenefitingbothsendingcountries(largelythroughremittances)andhostcountries(byfillinglabourshortagesandskillsgaps).

Whilethereareclear,tangiblebenefitsofgreaterconnectivity,ASEANcountriesalsofaceanumberof challenges in realising the objectives of theMaster Plan. Huge investmentswill be required tobuild both the hard and soft infrastructure necessary to narrow the development gap. ASEANcountriesneedtofundinfrastructureinvestmentsaveragingUS$60billionperyearto2015aswellas successfully integrating infrastructureprograms thatarebeingundertakenat thenational, sub-regional and regional levels. Moreover, the environmental and social impacts of large scaleinfrastructure projects and the greater mobility of ASEAN’s people will need to be addressed.Political commitment to addressing brain drain and social impacts of migration will also requireattention.

ThischapterexaminesindetailhoweachofthethreedimensionsofconnectivitycanassistASEANinnarrowing the development gap among its members. Section 4.2 defines physical infrastructurebeforehighlightingtheverystrongpositiveassociationbetweenindicatorsofphysicalinfrastructureanddevelopment. Italsoexaminesthecurrentstateofphysical infrastructureinAMSandoutlinesthe ways in which it can contribute to narrowing the development gap. The empirical evidenceregarding physical infrastructure and development is also assessed. Section 4.3 examinesinstitutionalconnectivity, includinghow it isdefinedand its relationshipwithdevelopment. Italsoexamines how AMS perform across different indicators of institutional connectivity. Section 4.4examines people-to-people connectivity and focuses on the role that greater labourmobility andmigrationcanplay innarrowingthedevelopmentgap.Section4.5summarisesthechallengesthatASEANcountriesfaceinimprovingconnectivityinalloftheseareasandSection4.6concludes.

4.2.PhysicalConnectivityandNarrowingtheDevelopmentGap

4.2.1Whatisphysicalinfrastructure?

Physicalorhard infrastructure is rarelypreciselydefinedbutusuallyrefers tothefacilitiesusedtodeliver energy, transport, water and sanitation and telecommunications (Estache, 2006; Straub,2008). Physical infrastructure includes: (i) transport infrastructure such as roads, bridges, tunnels,railways, waterways, sea ports and airports, (ii) power utilities or energy infrastructure includingelectricitygridsandgasandoilpipelines(aswellasrenewableenergyprojects);(iii)InformationandCommunicationTechnology(ICT) infrastructure includingfixed linetelephones,mobiletelephones,undersea cables, satellite connections and access to the internet; and (iv) water and sanitationinfrastructureincludingwatersupplyandseweragesystems,dams,irrigationandfloodmanagementsystems. Broader definitions of infrastructuremight include hospitals, schools and other physicalbuildings.

In addition to national physical infrastructure, there is Regional and Cross Border Infrastructure(R&CBI). Stafford (2005) identifies regional infrastructure as infrastructure projects implementedthrough a Regional Economic Community (REC) and cross border infrastructure as infrastructureprojectsimplementedthroughbilateralagreements,thattypicallyconnecttwocountriesonly.SinceR&CBI involvesmore thanonecountry, suchprojects requirepolitical commitmentandaswell ascoordinatedpolicyandprocedureactions(softinfrastructure)(Bhattacharyay,2010).Agreementonthe costs of R&CBI between countries can be very challenging given that there is often anasymmetricdistributionofbenefits(ADB/ADBI,2009).

4.2.2Therelationshipbetweenphysicalinfrastructureanddevelopment

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Physicalinfrastructureprovidesavitalinputintoproductionandisoftenassertedtobeessentialforsustained economic growth and poverty reduction. Figures 4.1 to 4.6 below lend support to thisnotion. They provide very strong associations between differentmeasures of infrastructure (roaddensity, mobile phone subscriptions and electricity power consumption) and the HumanDevelopmentIndex(HDI).ThedevelopmentgapamongASEANmembersaccordingtotheHDIwasafocusofChapter2.ThefiguresprovidetherelationshipsforallcountriesaswellasjustforAMS.Therelationship between physical infrastructure and human development among ASEAN countriesappears to be particularly strong. There are similar associations between the measures ofinfrastructureandGNIpercapita(PPP),asprovidedbyFiguresA4.1toA4.6inAppendixX.Thisdoesnot necessarily imply that higher levels of physical infrastructure lead to better developmentoutcomes since it could be a two way relationship or causality may run the other way. It does,however,indicatethatphysicalinfrastructureanddevelopmentindicatorsarehighlycorrelatedandthatphysicalconnectivitycanplayanimportantroleinnarrowingthedevelopmentgap.

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Figure4.1:RoaddensityandtheHumanDevelopmentIndex

Note:DatasourcedfromWorldBank(2012)andtheUNDP(2011).DatafortheHDIarefor2010.Dataforroaddensityarethelatestavailablebetween2003and2010.

Figure4.2:RoaddensityandtheHumanDevelopmentIndex(ASEANcountries)

Note:DatasourcedfromWorldBank(2012)andtheUNDP(2011).DatafortheHDIarefor2010.Dataforroaddensityarethelatestavailablebetween2003and2010.

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8

Roa

d de

nsity

(km

of r

oad

per 1

00 s

q.km

per

of l

and

area

)(log

ged)

.2 .3 .4 .5 .6 .7HDI score (logged)

Brunei Darussalam

IndonesiaCambodia

Lao PDR

Myanmar

Malaysia

Philippines

Singapore

Thailand

Vietnam

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34

56

Roa

d de

nsity

(km

of r

oad

per 1

00 s

q.km

per

of l

and

area

)(log

ged)

.4 .45 .5 .55 .6 .65HDI score (logged)

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Figure4.3:MobilephonesubscriptionsandtheHumanDevelopmentIndex(2010)

Note:DatasourcedfromWorldBank(2012).

Figure4.4:MobilephonesubscriptionsandtheHumanDevelopmentIndex(2010)(ASEANcountries)

Note:DatasourcedfromWorldBank(2012).

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5

Mob

ile c

ellu

lar s

ubsc

riptio

ns (p

er 1

00 p

eopl

e)

(logg

ed)

.2 .3 .4 .5 .6 .7HDI score (logged)

Brunei DarussalamIndonesia

CambodiaLao PDR

Myanmar

Malaysia

Philippines

Singapore

Thailand

Vietnam

12

34

5

Mob

ile c

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lar s

ubsc

riptio

ns (p

er 1

00 p

eopl

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(logg

ed)

.4 .45 .5 .55 .6 .65HDI score (logged)

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Figure4.5:ElectricitypowerconsumptionandtheHumanDevelopmentIndex(2009)

Note:DatasourcedfromWorldBank(2012).

Figure4.6:ElectricitypowerconsumptionandtheHumanDevelopmentIndex(2009)(ASEANcountries)

Note:DatasourcedfromWorldBank(2012).

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810

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Elec

tric

pow

er c

onsu

mpt

ion

(kW

h pe

r cap

ita) (

logg

ed)

.2 .4 .6 .8HDI score (logged)

Brunei Darussalam

Indonesia

Cambodia

Myanmar

Malaysia

Philippines

Singapore

Thailand

Vietnam

56

78

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Ele

ctr

ic p

ow

er

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nsum

ption (

kW

h p

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cap

ita)

(log

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)

.4 .45 .5 .55 .6 .65

HDI score (logged)

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4.2.3PhysicalInfrastructureinASEANcountries

AccesstophysicalinfrastructurevariesconsiderablyacrossAMS.Table4.1belowprovidesindicatorsof access to infrastructure for ASEAN members. There is a particularly large gap in access toelectricity,with100percentofthepopulationhavingaccessinSingaporecomparedtojust13percentinMyanmarand24percentinCambodia.WhiletheASEAN6generallyhashighratesofaccessto electricity, theexception is Indonesiawith less than two-thirdsof its populationhaving access,while access is almost universal in Vietnam. In fact, Vietnamhas better access to allmeasures ofinfrastructurethanIndonesiawiththeexceptionofraillinesandthepercentageofpavedroads.

Vietnam also has the highest rate of mobile subscriptions among all ASEAN countries. However,there is clearly a digital divide between the ASEAN6 and Cambodia, Laos andMyanmarwith thelatter three countries having far lower internet users and mobile phone subscriptions (per 100people). There is virtually no uptake of these types of technology inMyanmar. However, growthrates inaccess to technology (since2000)havebeenhigher in theASEAN4 than for theASEAN6suggesting some degree of catch up. Road density varies greatly across ASEAN members, withSingapore not surprisingly having by far the greatest density. Road density is particularly low inMyanmar, LaoandCambodiabut relativelyhigh inVietnam.While thePhilippineshasa relativelyhigh road density, less than 10 per cent of the country’s roads are paved, comparable withCambodia,LaosandMyanmar.

Access to an improvedwater source is relatively low in Cambodia and Laos. Access to improvedsanitation is just 31 per cent in Cambodia and is also low in Laoswith Indonesia. Access to bothimprovedwaterandsanitationisuniversalorclosetouniversalinMalaysia,SingaporeandThailandandreassuringly,growthinaccesstoimprovedwaterandsanitationsince2000hasbeenhigherinthe ASEAN 4 than in the ASEAN 6. The table clearly indicates that infrastructure investmentswillneedtobebiased in favourofCambodia,LaosandMyanmar foranarrowingof thedevelopmentgaptoberealised.

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Table4.1:AccesstoinfrastructureinASEANmembers

Accesstoelectricity(%of

population)(2009)

Internetusers(per

100people)(2010)

Mobilesubscriptions(per100

people)(2010)

Raillines(totalroute-km)(latest

available)

Roaddensity(kmofroadper100sq.km)(latestavailable)

Roads,paved(%oftotal

roads)(latestavailable)

Improvedwatersource(%of

populationwithaccess)(2010)

Improvedsanitation

facilities(%ofpopulationwithaccess)(2010)

ASEAN6 BruneiDarussalam 99.7 50.0 109 51 81 Indonesia 64.5 9.9 92 3,370 25 57 82 54Malaysia 99.4 56.3 119 1,665 30 81 100 96Philippines 89.7 25.0 86 479 67 10 92 74Singapore 100 71.1 145 473 100 100 100Thailand 99.3 21.2 104 4,429 35 99 96 96ASEAN4 Cambodia 24 1.3 58 650 21 6 64 31LaoPDR 55 7.0 65 17 14 67 63Myanmar 13 0.2 1 3,336 4 12 83 76Vietnam 97.6 27.9 175 2,347 48 48 95 76Source:WorldBank(2012)

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An examination of current infrastructure in ASEAN countries must include a discussion of thenumerous examples of R&CBI. These include sub-regional initiatives such as the GreaterMekongSubregion(GMS)(aprogramtohelpimplementprioritytransport,energyandtelecommunicationsprojectsacrossCambodia,Laos,Myanmar,Thailand,VietnamandaprovinceinChina).TheGMSisavery successful example of CBI, coordinatingmore than $12 billion in investments, particularly inestablishingallweatherroadsbetweenSouthernAsiaandChina(ADB,2012).OtherexamplesofCBIincludetheMekongRiverCommission(MRC)(aforumforCambodia,Laos,ThailandandVietnamtomanagetheirwaterresourcesandthesustainabledevelopmentof theMekongRiver), theBrunei-Indonesia-Malaysia-Philippine East AsiaGrowthArea (BIMP-EAGA) (an initiative to increase trade,tourism and investment through infrastructure development), the Indonesia-Malaysia-ThailandGrowth Triangle (IMT-GT) (which aims to encourage trade, investment and private sector growththrough infrastructure development), the Asian Highway (AH) and the Trans-Asian Railway (TAR)networkwhichplantolinkEuropewithAsia.ExamplesofenergysectorprojectsincludetheASEANPowerGridandtheTrans-ASEANGasPipelinewhichaimtosecureacross-borderenergynetworkandbenefitmembersthroughenergytrading(Bhattacharyay,2009).

CBI relating specifically to the transport sector includes the flagship projects of the ASEANConnectivity Master Plan. The first is the ASEAN Highway Network (AHN) which includes TransitTransport Routes (TTRs) which are considered critical for facilitating goods in transit. The otherflagshipprojectistheSingaporeKunmingRailLink(SKRL)whichisduetobecompletedin2015.Inconsists of several routes fromSingapore throughMalaysia, Thailand, Cambodia andVietNam toKunming in China. Currently there are 4,069 km ofmissing links or links that need rehabilitation(ASEAN,2011).

4.2.4Howcanphysicalinfrastructurecontributetonarrowingdevelopmentgaps?

Physicalinfrastructurehasgreatpotentialtoincreaseproductionandincomeandimproveaccesstobasicservicessuchashealtheducation,safewaterandimprovedsanitation.However,theimpactofinfrastructureonnarrowingthedevelopmentgapinASEANcountrieswill,toalargeextent,dependon its type, quality and location. For infrastructure to narrow the development gap, spurringeconomicgrowthisnotenough.Economicgrowthmustoccurinlaggingregionsandinfrastructuremust link the poor to basic services and income earning opportunities. In fact, the impacts andproductivityof infrastructurewill oftenbehighest in lagging regions. Laos, inparticular, stands togainmuchfromimprovedinfrastructureandconnectionstoportssincetransportcostsareoftenfarhigherinlandlockedcountries.AcrossASEANmembers,thewell-developedinfrastructureincoastalareasmustbecomplementedwithinvestmentsinremoteandinlandlocations.

Thischapteridentifiesthreemainchannelsthroughwhichphysicalinfrastructurecancontributetonarrowing thedevelopmentgap.Firstly, it can increase theeconomicgrowth ratesof thepoorestcountriesandregions.Secondly, infrastructurecanchangethesectoraldistributionofgrowththusmakinggrowthmorepro-poor.Thirdlyinfrastructurecanimpactonpovertyandmeasuresofhumanwell-beingdirectly.Eachchannelisdiscussedinturn.

(i)Infrastructureincreasingeconomicgrowthinlaggingregions

Infrastructure can spur the rate of economic growth in a number of different ways includingimprovingaccesstothekey factorsofproduction, linkingmarkets,allowingfor theexploitationofeconomiesofscale,expandingproductivecapacity,reducingthecostsofproductionandthecostsofdoing business, and increasing productivity and competitiveness. It can increase efficiency bypromotingtheagglomerationofbusinesses,leadingtoknowledgespillovers,ensuringproducerscanrespondquicklytochangesindemandandfacilitatingthemovementofpeopletothemostsuitable

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jobs. Infrastructurecanalso facilitate intraandextra regional tradebyprovidinggreateraccess todifferent markets and good infrastructure will also attract both domestic and Foreign DirectInvestment (FDI),which are important drivers of growth. Access to safewater and sanitation areneededforahealthyworkforceandincreasesinlabourproductivity.Reliablesuppliesofelectricityallowbusinessestooperatewithoutdisruptionwhilegoodtelecommunicationsenablesbusinessestomake informed decisions based on the latest available relevant information (see for example,DfID,2002,Bhattacharyay,2009,Brooksetal.,2010andWEF,2011).

Further, Serven and Calderon (2004) highlight the importance of improved infrastructure as aprecursor for trade liberalisation and integration to achieve the desired impacts on growth anddevelopment. Inordertonarrowdevelopmentgaps,however, it isnecessaryfor infrastructuretopromotegrowthinlaggingregionsoratleastprovidethoselivinginsuchregionsgreateraccesstoincome earning opportunities thus allowing them to participatemore fully in the growth process(OECD,2007).

(ii)Infrastructurechangingthesectoralpatternofgrowth

Physicalinfrastructurecanalsopromotepro-poorgrowthandreducedevelopmentgapsbychangingthesectoraldistributionofeconomicgrowth.Forexample,manyofthepoorinAMSarelocatedinrural areas and are reliant on agriculture for a living. Infrastructure projects which are biasedtowardsproductioninthissectorwillthereforehavethegreatestimpactonpovertyandgapswithinand acrossASEANmemberswill be reduced. Rural roads, improved storage facilities, irrigation aswell as telecommunications assisting farmers in accessing informationon the latestmarket pricescanassist in increasingproductivityandoutput in theagricultural sector (DfID,2006). In changingthe sectoral pattern of growth, infrastructure can increase the poverty elasticity of growth, witheachpercentage increase inGDPper capita leading to greater reduction in thepercentageof thepopulationlivinginincomepoverty.

(iii)Thedirectimpactofphysicalinfrastructureonpovertyandhumanwell-being

There are several direct channels through which physical infrastructure can impact on povertyreduction and improvements in humanwell-being. Firstly, physical infrastructure investments candirectly create employmentopportunities for thepoor through its construction andmaintenance.Secondly, infrastructure can provide better access to employment opportunities, by reducing thetraveltimetootherareasandbylinkingdifferentmarkets.Thirdly,thepoorcanbenefitfurtherbythe improved access to markets and basic services that infrastructure provides. For example,infrastructure will enable poor communities to sell their produce at local markets as well aspurchasing goodsatpotentially cheaperprices. Theywill alsobebetter able to accesshealth andeducation services, either through reduced travel time or by being able to travel to schools andhealth clinics that were previously out of reach (DfID, 2002, Bhattacharyay, 2009). By having agreater impact on the poor, infrastructure can reduce inequality within and across countries(Estache, 2003; World Bank, 2003). Infrastructure can also have a direct impact on poverty byreducingthepricesthatthepoorpayfortheirutilitiesandthereforeraisingtheirrealincome(ADB,2012).

In fact, improvements inphysical infrastructure arewidely viewedas crucial for progress towardsthe United NationsMillennium Development Goals (MDGs). TheMDGs are a set of internationaldevelopment goals towhich all UnitedNationsmember countries are committed to achieving by2015.TheMDGtargetof reducing theproportionof thepopulationwithout sustainableaccess tosafedrinkingwaterandbasic sanitation relatesdirectly to theprovisionofphysical infrastructure.Improving access towaterwill also have a number of other benefitswhich can assist in reducingdevelopment gaps. For example, access to water is particularly important for health but is alsoimportant to agriculture with irrigation leading to higher agricultural productivity which can help

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improvefoodsecurityandreducethevulnerabilityof ruralhouseholds (DfID,2006). InfrastructurecanthereforecontributetoprogresstowardsallMDGs.Asnotedabove,transportinfrastructureinparticular,willassistinreducingincomepovertybyprovidingpeoplewithgreateraccesstoincomeearningopportunities,aswellasreducingthecostsand improvingaccesstoschools,healthclinicsandhospitals,allofwhichdirectly impactonschoolattendance, childandmaternalmortalityandotherMDGs (seeWilloughby, 2004a). Energy infrastructure is also crucial. TheWorldBank (2011)argues thataccess tomodernsourcesofenergy isvital inprovidinghouseholdsaccess tomoderncookingsolutions,whichcan improvehealthandreduceratesofprematuremortalityparticularlyforwomenandchildren.

Gender gaps and inequities can also be reduced through improved infrastructure. A lack ofinfrastructureinruralareas implieswomenspenda lotoftimeaccessingwaterandbasicservices,travellingtomarketsandcollectingfirewoodforcookingandheating.Rural infrastructureprojects(includingimprovedaccesstoelectricity)canbenefitwomenthroughemployment, improvingtheiraccesstoservices,improvingtheirhealth,reducingtheirburdenofworkinthehomeandfreeingupmoretimeforotherproductiveworkandeducation(ILO,2010;OECD,2011).

Infrastructurecanalsocontributetoenvironmentalsustainability.Itcandosobyprovidingaccesstocleanwaterandsanitation,cleanersourcesofenergy,thesafemanagementanddisposalofwaste,andthemanagementoftrafficinurbanareas(WorldBank,1994).Bycontributingtoenvironmentalsustainability, infrastructure can assist in ensuring that a narrowing of the development gap willprevailinthefuture.Goodsystemsofinfrastructurecanalsoassistcountriesinadjustingtoclimatechangeandcopingwithnaturaldisasters(ADB,2012).

Despitethenumerouspotentialbenefitsarisingfromphysicalinfrastructure,positiveimpactsshouldnot be taken for granted. There are often environmental (and social) costs of large scaleinfrastructure projects. Importantly, by facilitating economic activity in some regions relative toothers,infrastructurecanpotentiallyincreaseinequalityandwidenthedevelopmentgapwithinandacrosscountries.Eveninruralor laggingregions,theincreasedcompetitioninducedmyimprovingaccesstomarketsmightactuallyharmsomeproducersandaffectlocalproductionintheshortterm(Stafford,2005).

Environmental impacts from infrastructure projects include carbon emissions, water and airpollution, flooding and deforestation; these impacts are often disproportionately felt by the poor(World Bank, 2007). This is in addition to the social impacts arising from the displacement ofcommunities.Itisalsotruethatinfrastructurealonewilloftenbeinsufficienttoreducepovertyanddevelopment gaps. Complementary interventions are required such as raising the level of humancapital of the poor to allow them to make use of the increased employment opportunities thatinfrastructurebrings.TheADB(2012a)documentsempiricalevidencethatshowsthatinfrastructureis more successful at reducing poverty when accompanied by strong programs in health andeducation.Moreover, improving the investment environmentwill also be important for improvedinfrastructuretoattractdomesticandforeignfirmsandimproveemploymentopportunitiesforthepoor. Governmentsmust also play the important role of providing basic services for the poor toaccess(Stafford,2005).

Since,physical infrastructuredevelopmentspotentiallyhavebothpositiveandnegativeimpactsondevelopmentandpoverty, its influenceondevelopmentandnarrowingthedevelopmentgapisanempiricalissue.Wethereforenowturntotheempiricalevidenceoftheimpactsofinfrastructure.

4.2.5.Empiricalevidenceoftheimpactofinfrastructureondevelopment

Duringthepasttwodecadesavastnumberofstudieshavebeenundertakentoevaluatetheimpactof infrastructureon indicatorsofdevelopment includingoutput,growth,productivity,povertyand

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inequality. Studiesdiffer through theirmeasureof infrastructure, their empirical techniques, theirtime periods, their sample of countries and their model specifications.3 Extensive reviews of theliteratureareprovidedbyGramlich(1994),CalderonandServen(2004),Estache(2006),Rompandde Haan (2007) and Straub (2008). This chapter identifies four stylised facts from this extensiveliterature.

(i).Macroeconomic studies confirmapositiveassociationbetween infrastructureanddevelopmentbuttheprecisemagnitudeoftheeffectisdisputed

Results from studies examining the impact of infrastructure on output, economic growth andproductivitygenerallyconcludethatinfrastructureisimportant(forthoroughreviewsseeCalderonand Serven, 2004; Romp and de Haan, 2005; UN-HABITAT, 2011). However, the finding is by nomeans universal and obtaining precise estimates of the magnitude of the impact has not beenpossible.Somestudiesfindinfrastructurehasanimplausiblyhighrateofreturnwhileothersfindithasanegligibleimpact.Forexample,Straub(2008)reviewsthefindingsfrom140specificationsfrom64 papers published between 1989 and 2007 and finds that 63 per cent of specifications find apositiveandsignificantassociationbetweeninfrastructureandadevelopmentoutcome,31percentfindnosignificantassociationandsixpercentfindanegativeandsignificantrelationship.

EmpiricalstudiesstemfromtheworkofAschauer(1989).Inthisseminalstudy,hefoundthataonepercentincreaseinthelevelofUSpublicinfrastructureisassociatedwitha0.39percentchangeinoutput. A finding of similar magnitude for the US is reported by Munnell (1990) although thearguably unrealistic magnitude of the impact led to a number of re-examinations of theinfrastructureoutputrelationshipwithotherstudiesdisputingthesizeoftheeffect (seeGramlich,1994;Holtz-Eakin,1994).

Whileearlierstudiesexaminedtheimpactof infrastructureusingtime-seriesdatafortheUS, laterstudiesusecross-countrydata.Canning(1999)confirmsapositiveassociationbetweeninvestmentandoutputusingalargesampleofcountries.Further,usingdataforover100countriesspanningtheperiod1960to2000,CalderonandServen(2004)findthatboththestockof infrastructureand itsquality have large impacts on per capita economic growth aswell as reducing income inequality.Other studies confirming a positive relationship between measures of infrastructure and growthincludeEsfahaniandRamires(2003)andSanchez-Robles(1998).

Other studieshaveexamined the impactof specific typesofphysical infrastructure, again,usuallywith encouraging findings. These studies are often focused on the US or OECD countries. Forexample,Croninetal.(1991)confirmthatspendingontelecommunicationshasledtohigheroutputin the US and Röller and Waverman (2001) find large output effects of telecommunicationsinfrastructure in OECD countries.More recently, Czernich et al. (2011) find that a 10 percentagepoint increase in broadband penetration raised annual per capita growth by 0.9 - 1.5 percentagepointsinOECDcountriesduringtheperiod1996to2007.EasterlyandRebelo(1993)findthatpublicspending on transport and communications is positively associated with economic growth whileFernald (1999) finds large productivity effects of changes in road infrastructure in theUS.UNIDO(2009a) find evidence that energy infrastructure is important for economic growth.Moreover, inreviewingstudiesoftheimpactsofspecifictypesofphysicalcapital,Estache(2006)findseconomicreturnsoninvestmentprojectsaveraging30to40percentfortelecommunications,inexcessof40

3Theapproachofthemacroeconomicempiricalstudiesisoftentoestimatesomekindofproductionfunction,oftenforacountryorregionswithinacountrybutsometimesusingcross-countrydata.Unfortunately,therearevery fewstudies specific toASEANcountriesand the focusof this review is therefore thecross-countryliterature.Modelsareestimatedusingaregressionframeworkoragrowthaccountingapproach.Thestockofinfrastructure per capita is usually used as the measure of infrastructure often just capturing publicinfrastructure,althoughspecifictypesorcategoriesofphysicalinfrastructurearesometimesexamined.

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percentforelectricitygenerationandasmuchas200percentforroads(Estache,2006,pp.8).Thisindicatesthattheprovisionofroadsislikelytotakepriorityforsomecountries,particularlyinruralareas.

However, not all studies establish a positive association between infrastructure and growth. Oneexception is Devarajan et al. (1996) who find a negative association between the share ofinfrastructure spending in total spending and economic growth in developing countries. Theirexplanation for this finding is that high levels of infrastructure spending can actually becomeunproductive, with overprovision of infrastructure in some countries driving this result. Further,Straubetal.(2008)failtofindanylinkbetweeninfrastructure,productivityandgrowthinEastAsiaandsuggestthatthemainroleof infrastructurewastorelieveexistingconstraintsandbottlenecksratherthandirectlyencouraginggrowth.Thesestudiespointtothepossibleexistenceofanoptimallevelofinfrastructure.

Hulten(1996)providesevidencethattheefficiencyof infrastructure, inadditionto its level isveryimportantinexplainingdifferencesingrowthratesacrosscountries.4Thestudyfindsthatoverone-quarterofthedifference inthegrowthratebetweenAfricaandEastAsiacanbeattributedtothedifference in theeffectiveuseof infrastructure resources. This studyhighlights the importanceofsoftinfrastructureexaminedinSection4.3.

(ii). Positive impacts aremore likely to be found inmacroeconomic studies examining developingcountries

Itisunlikelythattheimpactofinfrastructureisthesameacrossallcountries,anassumptionmadeby much of the cross-country literature. In their review of macroeconomic studies, Briceno-Garmendia et al. (2004) Calderon and Servon (2004) and Estache (2006) find that infrastructuremattersmoreinlow-incomecountriesandregionsthaninricherones.Further,Straub(2008)findsthat results are slightly more positive when studies are restricted to those using data for justdeveloping countries, confirming the notion that returns to infrastructure can be higher in suchcountries. Hulten and Isaksson (2007) explicitly test whether the impacts of infrastructure varyaccordingtothelevelofdevelopment,measuredbyacountries’WorldBankincomeclassification.Their results confirm that the impact of infrastructure on productivity is higher for lower incomecountries.UNIDO(2009b)alsofindthatthereturnstopublicinvestmentare,largely,diminishingasincomeincreases.

DelaFuenteandEstache(2004)review12studieswhichhaveexaminedtheimpactofinfrastructureandgrowthinindividualdevelopingcountriesandfindthatallofthemreportpositiveassociations.Theevidenceindicatesthatinfrastructurecanplayanimportantroleinnarrowingthedevelopmentgap between rich and poor countries, with returns to infrastructure investment probably beinghighestintheearlystagesofdevelopmentwherebasicinfrastructureisabsent.

(iii).Whilethereisevidencethatinfrastructurebenefitsthepoor,suchimpactsshouldnotbetakenforgranted

Thereisnoshortageofevidenceofinfrastructureleadingtoreductionsintheincidenceofpoverty,the level of inequality and improvements in human well-being. Numerous examples and casestudies are provided by OECD (2007) and UN-HABITAT (2011). However, the benefits ofinfrastructure to thepoor shouldbynomeansbe taken for granted.While infrastructurehas thepotentialtoassistthepoorbyconnectingthemtoeconomicopportunitiesandreducingproductionand transportation costs, its impact depends upon the poor gaining access to appropriate

4Infrastructureefficiencyisestimatedusinganindexincorporatinginformationonthefaultytelephonelines,electricitygenerationlosses,pavedroadsanddiesellocomotiveavailability.

15

infrastructure as well as it being affordable to the poor. Poverty reduction depends upon manydifferentinterventionsandfactorsofwhichinfrastructureisjustone.

Forexample, intheirstudyofchildhealthoutcomes,Leipzigeretal.(2003)findthatinadditiontotraditionalvariablessuchasincome,assets,educationanddirecthealthintervention,accesstobasicinfrastructure services is also very important. According to the study, a large proportion of thedifference in healthoutcomesbetween the rich andpoor canbe explainedby access to services.They conclude that the best progress towards the MDGs will be made through combiningcomplementary interventionsgiven thatmanyof thegoalsare inter-related.Clearly infrastructurecancomplementotherdirect interventions inthehealthandeducationsectorsto improvehumandevelopment. Brenneman and Kerf (2002) also review the literature to uncover important linksbetweeninfrastructureandimprovedhealthandeducationoutcomes.Specificallytheydiscussthelinksbetweenaccesstotransport,electricityandwaterandimprovementsinhealthandeducationandhowtheyare inter-related.5Further,usingcross-countrydata,Lopez (2003)andCalderonandServen(2008)findthatinfrastructure(measuredusingtelephonedensity)isassociatedwithreducedincomeinequality.

TheWorldBank(1994;2008)findshowever,thatpublicinfrastructurebenefitsthenon-poormorethanthepoorandwarnsagainstthenegative impactsthat infrastructureprojectscanhaveonthepoorthroughdisplacementandenvironmentaldegradationdiscussedabove.

(iv).Theempiricalliteratureislimitedinitspolicyrelevance

Whileusefulindemonstratingthepositiveimpactsofphysicalinfrastructure,theempiricalliteraturecanonlyprovidevery limited insights intoanumberofusefulquestionsfromapolicyperspective.Straub (2008) notes that important questions remain over the relevance of infrastructure tocountries at different stages of development and its role in creating or closing the gap betweenregionswithinandacrosscountriesandamongruralandurbanareas.Differentlevelsandpatternsofinfrastructurespendingshouldbeundertakenatdifferentstagesofdevelopment.

While it is true thatmost empirical studies find a positive associationbetween infrastructure anddevelopment, this literature has limited information for policy makers of what forms ofinfrastructure have the greatest returns and should take priority and where projects should beundertaken.ExceptionsincludeEstache(2006)andtheempiricalstudiesofFanetal.,(1999;2002)whichshowedthatspendingonroadshasthebiggest impactonpovertyrelativetoothertypesofinfrastructurespendinginthecontextofIndiaandChina.

Further, the literature is not always clear on how infrastructure has led to growthwhen positiveassociationsareobtained.Differentcountrieswithdifferentcharacteristicsrequiredifferenttypesof

5 There is very little literature which examines the link between infrastructure and poverty specifically inASEAN countries. However,Willoughby (2004b) documents the important role that infrastructure played inreducingpoverty inVietnamduring the1990s.Thegovernment investedgreatly in transport,power,water,irrigationandtelecommunications,successfully,attractingFDIleadingtoprivatesectorjobcreation.StudiesbyGlewweetal. (2002)andBalisicanetal. (2003)emphasise the importanceof roadsand improvedaccess toservicesgreatlyassisted in reducingpoverty inVietnam.BalisacanandPernia (2003) findthat investment inroadsinthePhilippinesreducespovertyinareaswithhigherlevelsofschooling.GibsonandOlivia(201)findthat access to and the quality of infrastructure (roads and electricity) is important for rural households inIndonesia.

16

infrastructureandatdifferenttimes.Therearealsoquestionsoversequencingthatcountriesmustconsiderintheirinfrastructurepolicies.

4.3.InstitutionalConnectivityandNarrowingtheDevelopmentGap

4.3.1WhatisInstitutionalInfrastructure?

Institutionalconnectivityrelatesto‘softinfrastructure’ortherulesandinstitutionsthatfacilitateorsupport the development and operation of hard infrastructure (ADB, 2009, 2012; Bhattacharyay,2009). Soft infrastructure therefore includes aspects of governance (including the policy,institutional, legal and judicial environments), the protection of property rights, financial andaccounting systems, the labour force and can also include ‘social infrastructure’ (such as health,education, law and order, community development) (Casey, 2005; Bhattacharyay, 2009). Softinfrastructure therefore plays an important role in increasing economic growth and productivity,reducingpovertyandnarrowingthedevelopmentgapamongASEANmembers.Withoutadequatesoftinfrastructure,theimpactofhard/physicalinfrastructurewillbeverylimited.

ASEAN(2011)includesthefollowinginstitutionalbarrierstoASEANintegration:tariffandnon-tariffbarriers; differing standards; and burdensome processes and procedures for the movement ofgoods,servicesandpeople.Further,Brooks(2008)arguesthat“highfreightcosts,delaysincustomsclearance, unofficial payment solicitations, slow port loading or landing and handling, and poorgovernance create barriers to trade. Institutional bottleneck (administrative, legal, financial,regulatory, and other logistics infrastructure), information asymmetries, and discretionary powersthatgiverisetorentseekingactivitiesbygovernmentofficialsatvariousstepsoftradetransactionsalso impose costs” (Brooks, 2008, pp.4). Improvements in these forms of soft infrastructure areneededtoreducethetransactioncostsofdoingbusinessandtocomplementimprovementsinthehardorphysicalinfrastructureinfosteringeconomicgrowth.

The ADB (2012a) summarises the empirical evidence that shows that customs, immigration,quarantineandsecuritypoliciescanallimpedetradeandgrowthandthatimprovingthesepolicieswillbeimportantfornarrowingthedevelopmentgap.Thestudyemphasisestheimportanceofsoftinfrastructureincomplementinghardinfrastructure.Forexample,roadswon’tbeusedeffectivelyifborder crossing are too onerous, tourists won’t travel with uncertain immigration rules andprocesses,andcargowon’tbemovediftariffsaretoohigh.

4.3.2Therelationshipbetweeninstitutionalinfrastructureanddevelopment

SimilartotherelationshipbetweenphysicalinfrastructureanddevelopmentprovidedinSection4.2,therearestrongassociationsbetweendevelopmentindicatorsandmeasuresofsoftinfrastructure.Figures 4.7 to 4.12 provide the relationship between the HDI and three measures of softinfrastructure:governance;theeaseofdoingbusinessandalogisticsperformanceindex.

Governance is defined as a composite index comprised of the following six equally weightedindicatorsfromtheWorldBank:(i)controlofcorruption;(ii)governmenteffectiveness;(iii)politicalstability and absence of violence; (iv) regulatory quality; (v) rule of law; and (vi) voice andaccountability. TheWorld Bank’s Ease of Doing Business rankings are based on a country’s scoreacross10equallyweightedcomponents.6Thelogisticsperformanceindexscorescountriesaccordingtotheeasewithwhichgoodscanbetransportedandtraded.Scoresareaveragedoverthefollowingsixdimensions:(i)theefficiencyoftheclearanceprocessbybordercontrolagencies;(ii)thequalityof trade and transport related infrastructure; (iii) the ease of arranging competitively priced6 These components include: (i) starting a business; (ii) dealing with construction permits; (iii) gettingelectricity;(iv)registeringproperty;(v)gettingcredit;(vi)protectinginvestors;(vii)payingtaxes;(viii)tradingacrossborders;(ix)enforcingcontracts;and(x)resolvinginsolvency.

17

shipments; (iv) the competence and quality of logistics services; (v) the ability to track and traceconsignments;and(vi)thetimelinessofshipments inreachingdestinationwithinthescheduledorexpected delivery time. High scores for governance and logistics indicate a better performancewhilelowercountryranksarepreferredfortheeaseofdoingbusiness.

Thefiguresprovideclearpositiveassociationsbetweenimprovedsoftinfrastructureandthelevelofhumandevelopment.Astrongerrelationshipbetweentheeaseofdoingbusinessappearsstrongerincountrieswithmediumlevelsofhumandevelopmentandonceagainalloftherelationshipsareparticularly pronounced forASEAN countries. Similar relationships between themeasures of softinfrastructure andGNI per capita (PPP) are provided in Figures A4.7 to A4.12 in the appendix. Insummary,thereisstrongevidencethatindicatorsofsoftinfrastructureanddevelopmentarehighlycorrelated.

18

Figure4.7:GovernanceandtheHumanDevelopmentIndex(2010)

Note:DatasourcedfromWorldBank(2012).

Figure4.8:GovernanceandtheHumanDevelopmentIndex(2010)(ASEANcountries)

Note:DatasourcedfromWorldBank(2012).

12

34

Gov

erna

nce

Inde

x (lo

gged

)

.2 .3 .4 .5 .6 .7HDI score (logged)

Brunei Darussalam

Indonesia

CambodiaLao PDR

Myanmar

Malaysia

Philippines

Singapore

ThailandVietnam

1.5

22.

53

3.5

Gov

erna

nce

Inde

x (lo

gged

)

.4 .45 .5 .55 .6 .65HDI score (logged)

19

Figure4.9:EaseofDoingBusinessandtheHumanDevelopmentIndex(2010)

Note:DatasourcedfromWorldBank(2012).

Figure4.10:EaseofDoingBusinessandtheHumanDevelopmentIndex(2010)(ASEANcountries)

Note:DatasourcedfromWorldBank(2012).

12

34

5

Ease

of D

oing

Bus

ines

s (lo

gged

)

.2 .3 .4 .5 .6 .7HDI score (logged)

Brunei Darussalam

IndonesiaCambodiaLao PDR

Malaysia

Philippines

Singapore

Thailand

Vietnam

12

34

5

Ease

of D

oing

Bus

ines

s (lo

gged

)

.4 .45 .5 .55 .6 .65HDI score (logged)

20

Figure4.11:LogisticsPerformanceIndexandtheHumanDevelopmentIndex(2010)

Note:DatasourcedfromWorldBank(2012).

Figure4.12:LogisticsPerformanceIndexandtheHumanDevelopmentIndex(2010)(ASEANcountries)

Note:DatasourcedfromWorldBank(2012).

.81

1.2

1.4

1.6

Logi

stic

s In

dex

(logg

ed)

.2 .3 .4 .5 .6 .7HDI score (logged)

Indonesia

Cambodia

Lao PDR

Myanmar

Malaysia

Philippines

Singapore

Thailand

Vietnam

1.2

1.3

1.4

1.5

1.6

Logi

stic

s In

dex

(logg

ed)

.4 .45 .5 .55 .6 .65HDI score (logged)

21

4.3.3InstitutionalInfrastructureinASEANcountries

This section examines further indicators of soft infrastructure and the competitiveness of ASEANcountries. It compares scores and ranks for ASEANmembers across the following four groups ofindicators: the quality of infrastructure; the ease of doing business; governance; and the logisticsperformance index. In demonstrates that the quality of infrastructure varies considerable acrossASEAN countries presenting a challenge for integration in general and for regional infrastructuredevelopmentmorespecifically.

Wong et al. (2011) provide the first ASEAN Competitiveness Report and find that while ASEANcompetitivenessisabovetheworldaverageandimprovedduringthefirsthalfofthe2000s,ithasstagnatedoverthepastfiveyears.Inparticular,ASEANisfoundtobeleastcompetitiveinsocalledadministrative infrastructure relating to the time and procedures to start up a business and theefficiencyofcustomsprocedures.ImprovinghumandevelopmentandtheruleoflawarealsofoundtorequiremoreeffortamongsomeAMS.

Table 4.2 provides indicators of the quality of infrastructure for ASEANmembers from theWorldEconomicForum’sGlobalCompetitiveness Index (GCI).7Thescoreandrank for thequalityofeachASEANmember’soverallinfrastructurefor2011-12and2008-09areprovidedinthefirstcolumnsofthe table. The final rowof the table provides the average score and rank for ASEANmembers. Itshowsthat in2011-12ASEANwouldrank64outof142countries. Thisrankinghasfallenfrom58over the last three years although only 134 countrieswere included in 2009-09. This provides anindicationthatASEANhasexperiencedverylimitedimprovementsinthequalityofitsinfrastructure,constraininggreatintegrationamongitsmembers. In2011-12,thetablealsoshowsthatindividualcountryrankingsvarygreatlywithSingaporeranked2ndoutof142countriesandBrunei,MalaysiaandThailandalsorankingrelativelywell.However,in2011-12Vietnamranked123rd.

TherearelargegapsinthescoresandranksforthespecificinfrastructurequalitymeasuresamongASEANmemberswithSingaporeandMalaysiascoringandrankingveryhighlybutfar lowerscoresandranksarerecordedforthePhilippinesandVietnam.BruneiandThailandrankrelativelywellanddataarenotavailableforLaosandMyanmar.Interestingly,thereisnotaclearqualitygapbetweentheASEAN6andASEAN4 forwhichdataareavailablewithCambodiaoftenhavingbetter scoresthanIndonesiaandthePhilippinesacrossthedifferentmeasuresofinfrastructurequality.

With theexceptionofSingaporeandThailand,allASEANmembershave improved theirqualityoftheir overall infrastructure scores although rankings have fallen for some countries due to theinclusion ofmore countries in the later period and other countries improving the quality of theirinfrastructure at a faster rate. Indonesia and Cambodia have been particularly successful atimproving the quality of their infrastructure in recent years although Cambodia’s poor quality ofelectricitysupplylowersitsoverallrank.Intermsoftheoverallqualityofinfrastructure,Bruneiranksrelativelywelldespiterankingrelativelypoorlyforitsqualityofrailroadinfrastructure.Indonesiahasimproveditsscoreandrankconsiderably,butstillrankspoorlyonthequalityofitsportfacilitiesandthecountry’selectricitysupplyisdeemedunreliableaswellasscarce(WEF,2011).

7TheGCI isanannual indexdevisedbytheWorldEconomicForum.Itaggregatesdataon110variables intoscores for twelve pillars capturing themost important determinants of global competitiveness. The twelvepillarsinclude:(i)institutions;(ii)infrastructure;(iii)themacroeconomicenvironment;(iv)healthandprimaryeducation; (v)highereducationandtraining; (vi)goodsmarketefficiency; (vii) labourmarketefficiency; (viii)financialmarket development; (ix) technological readiness; (x)market size; (xi) business sophistication; and(xii) innovation.Theindexrecognisesthatdeterminantsofproductivitydiffercountriesatdifferentstagesofdevelopmentandthereforegroupscountriesaccordingtowhethertheyareat(i)afactordrivenstage(Stage1); (ii) a transition stage (fromStage 1 to 2); (iii) an efficiency driven stage (Stage 2); (iv) a transition stage(fromStage2to3);and(v)aninnovationdrivenstage(Stage3).

22

WhileVietnamhas improved its overall quality of infrastructure score, it ranks particularly poorlywithrespecttothequalityofitsroadsandportinfrastructure.ThePhilippineshasalsoimproveditsscorebutfromalowbaseandstilldoesn’tfeatureinthetop100foranyofthequalityrankings.

23

Table4.2:SoftinfrastructureinASEANmembers

QualityofOverallInfrastructureScore

2011-12

QualityofOverallInfrastructureScore

2008-2009 QualityofRoadsQualityofRailroadInfrastructure

QualityofPortInfrastructure

QualityofAirTransportInfrastructure

Qualityofelectricitysupply

ScoreRank

(outof142) ScoreRank

(outof134) Score Rank Score Rank Score Rank Score Rank Score Rank

ASEAN6

Brunei 5 44 4.7 39 5.2 33 2.2 85 4.4 60 4.9 62 5.4 53

Indonesia 3.9 82 2.8 96 3.5 83 3.1 52 3.6 103 4.4 80 3.7 98

Malaysia 5.7 23 5.6 19 5.7 18 5 18 5.7 15 6 20 5.9 38

Philippines 3.4 113 2.9 94 3.1 100 1.7 101 3 123 3.6 115 3.4 104

Singapore 6.6 2 6.7 2 6.5 2 5.7 7 6.8 1 6.9 1 6.8 4

Thailand 4.7 47 4.8 35 5 37 2.6 63 4.7 47 5.7 32 5.5 50

ASEAN4

Cambodia 4.1 76 3.1 82 4 66 1.8 96 4 76 4.3 84 3.5 103

LaoPDR na na Na na Na na na na na na na na na Na

Myanmar na na na na Na na na na na na na na na Na

VietNam 3.1 123 2.7 97 2.6 123 2.5 71 3.4 111 4.1 95 3.3 109

ASEANunweightedaverage

4.6 64 4.2 58 4.5 58 3.1 62 4.5 67 5.0 61 4.7 70

Source:WEF(2008;2011)

24

Table4.3providestheeaseofdoingbusinessindicatorsforASEANcountries.Dataareavailablefor2010and2011fromtheWorldBank(2012).ThelastrowofthetableindicatesthatifASEANwasacountryitwouldberanked87outof183countries.Thisisslightlydownonthe2010rankingof86,highlighting theneed forASEANmembers tomakeprogress in this respect. In comparison to theaverageforOECDcountries,ASEANmembersfacealowercosttoexport(US$742versusUS$908percontainer)butexportingtakesconsiderablylonger(19versus10days)(seeADB,2012).

ThetablealsoindicatesthattheeaseofdoingbusinessishighestinSingaporethananyoftheother183 countries included in the rankings. Thailand and Malaysia also ranks well at 17th and 18threspectively. Lao PDR ranks the lowest among ASEAN members, at 165 out of 183 countriesalthoughMyanmar is not included in the data. It is not the case that all ASEAN 6 countries rankhigherthantheASEAN4.VietnamrankshigherthanIndonesiaandthePhilippineswhichhaveverysimilarrankstoCambodia.

ExaminingtheindividualcomponentsoftheindexrevealsthatthecostofexportingandimportinginLaosissignificantlyhigher(aboutfourtimes)thanitisinSingaporeandMalaysia.Thetimeittakesto importandexportforLaoisalsosubstantiallyhigher. Interestingly,Bruneiscores lowestamongASEANmemberswhenitcomestothenumberofprocedurestoenforceacontractandjointlowestwith the Philippines when considering the number of procedures to start a business. Thesecomponentspulldownthecountry’soveralleaseofdoingbusinessrank.

With the exception of Singapore,Malaysia and Thailand there is clearly greater scope for ASEANmembers to improve the ease of doing business to encourage a flourishing private sector and tofacilitategreaterintegration.

Table 4.4 examines the ASEAN country ranks for theWorld Bank’s governance indicators. It alsoexaminesthechangeintheserankingsfrom1996(justbeforetheAsianfinancialcrisis)to2010.ThefinaltworowsofthetableindicatethatifASEANwasacountryitwouldrankabouthalfwayformostgovernanceindicators.However,ASEANhasfalleninrankingsacrossallgovernanceindicatorssince1996(althoughmorecountriesarerankedinthelatterperiod).Inparticulartherearelargefalls inthe rankings for “control of corruption’ and ‘political stability and the absence of violence’. Ingeneral, Singapore and Brunei rank highly across the governance indicators although all ASEANcountriesrankpoorlyfor‘VoiceandAccountability’. In2010,onlyBrunei,Malaysia,SingaporeandThailandhave ranks in the top100acrossall governance indicators. LaosandMyanmarareoftenrankedthelowestamongASEANmembersacrossthegovernanceindicators.ThegapbetweentheASEANmember rankings can be huge. The difference in ranks between Singapore andMyanmarexceeds200for‘ControlofCorruption’,‘GovernmentEffectiveness’and‘RegulatoryQuality’.WhilethereisgenerallyagapbetweentheASEAN6andtheASEAN4,VietnamranksaboveIndonesiaandthePhilippinesforsomegovernanceindicators.

Evenmorestartling is thechange intherankingacrosstime.BruneiandSingapore improvedtheirrankonjusttwogovernanceindicatorsfrom1996to2010whilerankingsacrossallindicatorsfellforLaoPDR,Myanmar,Philippines,ThailandandVietnam.Whilealargernumberofcountriesincludedinthesamplein2010canpartiallyexplainthisfinding,thereisstrongevidencetosuggestthattheperceivedlevelofgovernanceisfallinginASEANcountries.

ThelogisticalperformanceindexscoresforASEANcountriesareshowninTable4.5.OnceagainthetableshowsthatisASEANistreatedasacountry,itsrankingfortheoverallindexhasfallenfromin62 in 2007 (out of 150 countries) to 68 in 2010 (out of 155 countries). Singapore and Malaysiaperformverywell according to this index. The tablealso indicates thatwhileCambodia, LaosandMyanmaralwaysscorelessthantheASEAN6,VietnamhasahigheroverallscorethanIndonesiaduetoitshigherscoreacrossfiveofthesixcomponentsoftheindex.

25

Narrowing the gap between the logistics performance index across ASEAN members will bechallenging. It will take time for the poor ASEAN countries to develop the capacity to reach theinternational best practice of a country like Singapore. However, the ASEAN Single Window forcustomsclearance schemewill greatlyassistwith trade facilitationamongmember countries. TheASEAN Single Window will integrate National Single Windows enabling a single submission ofinformationanddataandgreatly speedup thecustomsclearanceprocess.Currently theASEAN6hasaSingleWindowsysteminplacewiththeASEAN4toestablishthesystemduring2012.

26

Table4.3:EaseofDoingBusinessIndicatorsforASEANcountries(2011)

Easeofdoingbusinessindex2011(1=easiestto183=mostdifficult)

Easeofdoingbusinessindex2010(1=easiestto183=mostdifficult)

Trade:Costtoexport(US$per

container)

Trade:Costtoimport(US$per

container)

Trade:Timetoexport(day)

Trade:Timetoimport(days)

Trade:Documentsto

export(number)

Trade:Documentsto

import(number)

Proceduresrequiredto

startabusiness(number)

Proceduresrequiredtoenforceacontract(number)

ASEAN6

BruneiDarussalam 83 86 680 745 19 15 6 6 15 47

Indonesia 129 126 644 660 17 27 4 7 8 40

Malaysia 18 23 450 435 17 14 6 7 4 29

Singapore 1 1 456 439 5 4 4 4 3 21

Philippines 136 134 630 730 15 14 7 8 15 37

Thailand 17 16 625 750 14 13 5 5 5 36

ASEAN4

Cambodia 138 138 732 872 22 26 9 10 9 44

LaoPDR 165 163 1880 2035 44 46 9 10 7 42

Myanmar

Vietnam 98 90 580 670 22 21 6 8 9 34ASEANAverage(unweighted) 87 86 742 815 19 20 6 7 8 37Source:WorldBank(2012)

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Table4.4:WorldBankGovernanceIndicatorsforASEANcountries1996and2010

ControlofCorruption

GovernmentEffectiveness

PoliticalStabilityandAbsenceofViolence RegulatoryQuality RuleofLaw

VoiceandAccountability

Rank(1996)

Rank(2010)

Rank(1996)

Rank(2010) Rank(1996) Rank(2010)

Rank(1996)

Rank(2010)

Rank(1996)

Rank(2010)

Rank(1996)

Rank(2010)

ASEAN6

BruneiDarussalam 53 46 34 48 20 16 13 38 55 57 136 150

Indonesia 125 153 109 110 161 173 77 127 102 146 152 110

Malaysia 54 82 45 38 66 103 57 61 54 74 92 146

Philippines 90 163 93 102 125 199 71 118 86 139 83 113

Singapore 8 4 1 1 23 23 1 4 24 15 79 133

Thailand 92 112 69 88 73 186 75 92 56 107 75 148

ASEAN4

Cambodia 150 194 146 163 160 158 93 136 155 185 151 160

LaoPDR 120 181 129 175 76 136 164 173 142 167 156 200

Myanmar 178 209 172 205 171 189 177 208 169 205 196 210

Vietnam 109 141 117 118 72 104 133 145 108 130 167 194ASEANunweightedaverage

98 129 92 105 95 129 86 110 95 123 129 156

Rankedoutof 184 210 184 210 189 213 185 210 185 212 199 212Source:WorldBank(2012)

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Table4.5:LogisticsPerformanceIndexvaluesforASEANmembers2010

Logisticsperformanceindex:Overall(1=lowto5=high)

Rank2010(outof155)

Rank2007(outof150)

Logisticsperformanceindex:Abilitytotrackandtraceconsignments(1=lowto5=high)

Logisticsperformanceindex:Competence

andqualityoflogisticsservices(1=lowto

5=high)

Logisticsperformanceindex:Easeofarrangingcompetitivelypricedshipments(1=lowto

5=high)

Logisticsperformanceindex:Efficiencyofcustomsclearanceprocess(1=lowto

5=high)

Logisticsperformance

index:Frequencywithwhich

shipmentsreachconsigneewithinscheduledorexpectedtime

(1=lowto5=high)

Logisticsperformanceindex:Qualityoftradeandtransport-relatedinfrastructure

(1=lowto5=high)

ASEAN6

BruneiDarussalam Na na na na na na na na na

Indonesia 2.76 74 42 2.77 2.47 2.82 2.43 3.46 2.54

Malaysia 3.44 29 26 3.32 3.34 3.5 3.11 3.86 3.5

Philippines 3.14 43 64 3.29 2.95 3.4 2.67 3.83 2.57

Singapore 4.09 2 1 4.15 4.12 3.86 4.02 4.23 4.22

Thailand 3.29 34 30 3.41 3.16 3.27 3.02 3.73 3.16

ASEAN4

Cambodia 2.37 128 81 2.5 2.29 2.19 2.28 2.84 2.12

LaoPDR 2.46 118 118 2.45 2.14 2.7 2.17 3.23 1.95

Myanmar 2.33 131 146 2.36 2.01 2.37 1.94 3.29 1.92

Vietnam 2.96 52 52 3.1 2.89 3.04 2.68 3.44 2.56ASEANunweightedaverage

2.98 68 62 3.04 2.82 3.02 2.70 3.55 2.73

Source:WorldBank(2012)

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4.4People-to-PeopleConnectivityandNarrowingtheDevelopmentGap

4.4.1Culturalandeducationalexchangesandtourism

The objective of people-to-people connectivity in the Master Plan on ASEAN Connectivity is “Todevelop initiatives that promote and invest in education and life-long learning , support humanresource development, encourage innovation and entrepreneurship, promote ASEAN culturalexchanges,andpromotetourismandthedevelopmentofrelatedindustries”(ASEAN,2011,pp.7).

The Master Plan includes a number of activities to achieve these objective including outreachprograms,studentexchanges,reducingvisaandtravelrequirementsandeducationprogramsaimedatfosteringagreaterrecognitionandunderstandingofotherASEANcultures.ASEANhasanumberof established entities to assist in fulfilling these objectives including the ASEAN Socio-CulturalCommunity (ASCC), the ASEAN University Network (AUN), established in 1995 to promotecollaboration among ASEAN Scholars and scientists, the ASEAN Committee for Culture andInformationandtheASEANTourismStrategicPlan2011-15topromotetourismandincreasetouristarrivalstoASEAN.

Whiletheseareasofpeople-to-peopleconnectivitywillbeimportanttonarrowingthedevelopmentgap,particularly inthelongterm,thissectionfocusesonthemorecontentiousissueofpeople-to-peopleconnectivity;thatoflabourmobilityandmigration.

4.4.2IntraASEANLabourmobilityandmigration

The free flow of labour is often viewed as a contentious issue of ASEAN integration and only anincrementalapproach isbeingunderbyASEANmembers.LabourmovementsaregovernedbytheGeneralAgreementonTradeandServicesandtheASEANFrameworkAgreementonServices(AFAS).TheFrameworkrequirescountriestolistthesectorstheywouldliketoliberaliseandtherehasbeenvery limited commitment to liberalise further due to pressure from lobby groups (Manning andBhatnagar, 2005). Efforts are currently focused on improving skilled labour mobility. There isincreasing movement of skilled workers within ASEAN, and this is associated with greater intra-regional FDI and trade. However, unlike unskilled workers, an estimated 80 per cent of skilledworkers come fromoutsideofASEAN (Manning andBhatnagar, 2005).Menon (2012) argues thatfailuretodealwiththe issueof labourmobility isthebiggestdisappointmentoftheAECBlueprintandtherearecurrentlyinadequatepolicyframeworksfordealingwithlabourmobility.

Tofacilitategreatermobilityofskilledlabouramongitsmembers,ASEANhassofarestablishedeightMutualRecognitionArrangements(MRAs).TheseMRAsarewhereASEANcountriesrecogniseeachother’s conformity assessments therefore reducing time and costs in employment. They currentlyextendtothefollowingeightprofessionalgroups: (i)engineering; (ii)nursing; (iii)architecture; (iv)surveying; (v) tourism; (vi) medical practitioners; (vii) dental practitioners; and (viii) accountants(ASEAN,2011).

SomeASEANcountrieshaveexperiencedarapidexpansionofforeignworkerstoveryhighlevels.InMalaysiaforeignworkersincreasedfrom250,000in1990tomorethantwomillionin2007andtheyaccounted for 16 per cent of the countries labour force in 2010.More than two-third of foreignlabourisfromASEANcountries,inparticular,workersfromIndonesiaandthevastmajorityiseitherskilledorsemi-skilled(Pasadilla,2011).

Thailandhasahugenumberofforeignworkers,manyofwhichareundocumentedandexperienceexploitation.Thereareanestimated threemillion foreignworkers inThailandmostof them fromMyanmar and smaller numbers from Laos and Cambodia yet they do not show up in the official

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statistics.TheThaigovernmenthasembarkedonaschemetoregisterforeignworkersinorderforthem towork legally and to access services.However,Myanmarnationals are reluctant to returnhome, even temporarily, in order to get registered and therefore face possible arrest anddeportation (Economist, 2010). While the Philippines has a large proportion of its populationworking overseas, the most common worker destinations are outside of ASEAN such as the US,Canada,Australia,JapanandtheMiddlesEast.

Table 4.6 provides official data on intra-ASEANmigration stocks from theWorld Bank’s bilateralmigration database. It provides data for 1990 and 2010 although data are not available forIndonesia,MyanmarandVietnamforthelatterperiod.Thetabledemonstratesafairlyhighlevelofmobility among ASEAN members. It also indicates that the highest stocks of migrants areIndonesiansinMalaysiaandMalaysiansinSingapore.

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Table4.6:IntraASEANmigrantstocks

1990 ToBrunei

Darussalam Cambodia Indonesia LaoPDR Malaysia Myanmar Philippines Singapore Thailand VietnamFrom BruneiDarussalam 0 3 55 0 5,211 19 137 322 515 20Cambodia 0 0 994 1,423 106 343 254 40 10,882 6Indonesia 3,340 58 0 57 407,154 4,121 6,546 37,770 1007 1,549LaoPDR 0 141 1,501 0 243 518 336 19 16,940 8Malaysia 40,846 93 3,471 17 0 1,197 1,042 343,171 1,153 821Myanmar 0 28 4,166 412 3,353 0 982 293 52,701 29Philippines 7,852 83 5,811 28 168,737 2,003 0 747 950 647Singapore 1,522 66 551 3 50,381 190 272 0 715 186Thailand 6,616 16,276 1,098 2,318 50,151 378 445 3,846 0 213Vietnam 6 19,802 6,995 14,099 6,313 2,412 1,709 2,936 4,857 0

2010 ToBrunei

Darussalam Cambodia Indonesia LaoPDR Malaysia Myanmar Philippines Singapore Thailand VietnamFrom BruneiDarussalam 0 0 Na 0 7,905 na 1,003 0 0 naCambodia 0 0 Na 909 0 na 232 0 49,750 naIndonesia 6,727 505 na 0 1,397,684 na 5,865 102,332 1,459 naLaoPDR 0 1,235 na 0 0 na 0 0 77,443 naMalaysia 81,576 816 na 0 0 na 394 1,060,628 3,429 naMyanmar 0 247 na 143 17,034 na 415 0 288,487 naPhilippines 15,861 728 na 0 277,444 na 0 0 3,360 naSingapore 3,033 581 na 0 103,318 na 288 0 2,134 naThailand 13,381 142,767 na 916 79,604 na 150 0 0 naVietnam 0 173,694 na 8,167 0 na 748 0 22,156 naSource:WorldBank(2012)adaptedfromMenon(2012)

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Ingeneral,unskilledlabourisdominatedbyfemalesindomesticservices,maleconstructionworkersand male agricultural workers. Skilled workers are concentrated in manufacturing and services(ManningandBhatnagar,2005).TheasymmetricallabourmobilitybetweenAMSisnotsurprising,asworkers from poorer regions seek employment, higher wages and better working conditionselsewhere. A freermovement of labour and people among ASEAN countries therefore has greatpotentialinnarrowingthedevelopmentgap.Greaterlabourmobilityalsoenablesmigrantstosendback(remit)moneytotheirhomecountries.Inareaswhichsufferfromlowemploymentratesandlimited income earning opportunities the benefitswill be particularly pronounced. Host countriesalso benefit from filling shortages and skills gaps in their labour force and businesses can benefitfromlowerwagerates.

Arapidlygrowing literature isemergingonthe impactofremittances inreceivingcountries.Whilesome findings are disputed, empirical studies find positive impacts with respect to growth(Catrinescu et al.,2009; Jongwanich, 2007; Pradhan et al., 2008)), poverty reduction (Adams andPage, 2005; Brown and Jiminez, 2005), and raising levels of human capital (Hildebrandt andMcKenzie,2005;Acostaetal.,2007). Table4.7belowdemonstratesthat levelsofremittancesareparticularly high in the Philippines and Vietnam accounting for about 11 and 8 per cent of thecountries’ GDP respectively. This reflects the large number of national of these countries livingabroad. The table also indicates that Brunei, Malaysia and Singapore have higher internationalmigrantstocks(asapercentageoftheirpopulation)reflectinglargeinflowsofmigrants,fromASEANandnon-ASEANmembers,inordertomeettheirdemandforlabour.

Despite its potential benefits the governments of both labour importing and exporting countriessometimesopposemovetowardsgreaterlabourmobility.Thegovernmentsofoftenpoorerlabourexporting countries have concerns over an exodus of talent and their skilled professionals. Theseimpacts are commonly referred to as a brain drain. The loss of doctors and nurses to richercountries with higher wages presents a particular concern. The governments of host (net labourimporting)countriesoftenhaveconcernsoveraccepting largenumbersofunskilledmigrantssincethiscanleadtohigherunemploymentandmoreresourcesrequiredforsocialprotection.Itcanalsoleadtosocialtensions,particularlyifnewmigrantsdisplacedomesticworkers.Fewerrestrictionsonthe movement of people also makes people trafficking easier. However, by restricting labourmobility to just skilled labour seriously restrict the ability to narrow the development gap.RestrictionsonitsmobilitywillaccentuateinequalityandmakesitharderforallASEANcountriestoadjusttochangingeconomicanddemographiccircumstances(Menon,2012). It isthemigrationofunskilled labour (even ifonlyonatemporarybasis) thanwillbeofmostbenefit topoorcountriesandregionsandwhichwilleffectivelynarrowthedevelopmentgap.

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Table4.7:RemittancesandthestockofinternationalmigrantsinASEANcountries(2010)

Workers'remittancesandcompensationof

employees,received(%ofGDP)Internationalmigrantstock(%

ofpopulation)BruneiDarussalam - 37.1Cambodia 3.3 2.4Indonesia 1.0 0.1LaoPDR 0.6 0.3Malaysia 0.5 8.3Myanmar - 0.2Philippines 10.7 0.5Singapore - 38.7Thailand 0.6 1.7Vietnam 7.8 0.1Source:WorldBank(2012)

4.5.ChallengesforConnectivitytoNarrowtheDevelopmentGap

TheMasterPlanonASEANConnectivityeffectivelyguidesmembercountriesonhowtoextendandstrengthen their links across a number of dimensions. However, countries face a number ofchallengesinadoptingtheplanandreachingitsobjectives.

Global issues present one set of challenges for ASEANmembers. The recent GEC highlighted thedangersofanexportorientedgrowthstrategyandcontinuingweakgrowthinbothEuropeandtheUShas constrained thedemand forASEANexportsand reducedpublic sectorbudgets.Moreover,thePhilippines,MyanmarandVietnamarefoundtobeamongthetencountrieswiththegreatestexposuretonaturalhazards.Combinedwitha limitedcapacity torespond, theseASEANmembersare particularly vulnerable to great disruption to output and production, as well as damage toessentialinfrastructureintheeventofamajornaturaldisaster(Maplecroft,2012).

Anothermajorchallengerelatingtoconnectivityistoensurethattheoftenasymmetricbenefitsofgreaterconnectivityareskewedtowardsthepoorestcountriesandregionsandthatgrowthispro-poor.Unlessthisisthecase,greaterconnectivitycouldleadtoawideningratherthananarrowingof the development gap. Specific challenges to improving physical, institutional and people-to-peopleconnectivityarediscussedinturn.

4.5.1Challengesinimprovingphysicalconnectivity

AnimportantchallengeforASEANistoaddressthetrade-offs inprioritisingandthesequencingoftheir physical infrastructure investments. The cost of delivering infrastructure in remote areas isoften far higher than in urban areas. Often there will be a trade-off between directinginfrastructure towards lagging or poorer regions, possibly at the expense of growth, but for thebenefitofthoselivingintheseareas(DfID,2006).Thiswillbenecessarytonarrowthedevelopmentgap.Thespatialclusteringofinfrastructureneedsconsiderationinordertomaximiseitsbenefits.

Inordertopreservethequalityofinfrastructure,ASEANmustalsostriketherightbalanceinfundingthemaintenanceofexisting infrastructureversusthefundingofnewprojects.Straub(2008)notesthat there is often a bias towards new infrastructure due to its greater visibility to electorates.However, lower than optimal maintenance expenditures are likely to lead to higher operationalcosts.

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The financing of ASEAN infrastructure requirements presents another challenge. ASEAN countrieswill require infrastructure investments amounting to an average investment of US$60 billion peryearto2015.About66percentofthisamountisneededfornewprojectsand34percentforthemaintenanceof existing infrastructure (Bhattacharyay, 2009). To assistwith themassive financingrequirementsforregionalinfrastructure,ASEANmemberswiththeADBhaveestablishedtheASEANInfrastructureFund(AIF).TheinitialequityoftheAIFwillbeUS$485million,whichwillbefundedbytheASEANcountries (US$335million) and theADB (US$150million). TheAIFwill initially fund sixprojectsayearandhasatotallendingcommitmentofaboutUS$4billionto2020.Withco-financingfromtheADBandotherpartners, it isanticipated that the fundwill leverage$13billion. It isalsohopedthatthefundwillattractsomeofthecurrencyreservesheldbyAMSthatareinvestedoutsideof ASEAN, currently estimated at US$700 billion (ADB, 2012b). To meet ASEANs infrastructurerequirementssourcesoffundingotherthantheAIFarerequired.Bhattacharyay(2009)arguesthatfundingshouldcomefromAMSsavingsandforeignexchangereservesaswellmobilisingresourcesfromotherAsiancountriessuchasthroughtheUS$10billionChina-ASEANInvestmentCooperationFund(CAICF)andthatthereisalsoaneedtodevelopanASEANInfrastructureBondFund

Largeinfrastructuredevelopments,particularlyregionalprojectscarrylargerisksandarethereforeoften funded by the public sector (ABD/ADBI, 2009). Clearly meeting ASEAN’s infrastructurerequirementswill be easierwith the assistance of the private sector. Thiswas recognised by the2009ASEANComprehensiveInvestmentAgreementaimedtofacilitateprivatesectorinvestmentbyimprovingtheinvestmentenvironmentacrossASEANmembers.Further,infrastructureprojectsareoftenverycostlyandcomplexandPublicPrivatePartnerships(PPPs)provideameanstosupplementpublic sector resources and increase the efficiency of infrastructure projects. The ADB (2012a)outlinesthefollowingbenefitsofPPPs:(i)theeasingofpublicsectordebtandexpenditureburdens;(ii) assisting in the development of domestic financial markets; (iii) improved administrativeefficiency;(iv)betterserviceprovision;and(v)stimulatingbroadereconomicactivity.However,thereportalsoidentifiesfactorscontributingtotheirfailureincludingunforeseeneconomicconditions,alackofcapacity,uncertain/unreliablelegalsystemsandalackofcontinuousdialoguebetweenthegovernmentandprivatesector.

Minimising theenvironmental and social impactsof large scale infrastructureprojectswill alsobevital for greater physical connectivity to effectively narrow the development gap. The negativeimpacts of displacement, pollution and deforestation must be planned for and minimised inundertakingnewinfrastructureinvestment,particularlysincethepooroftendisproportionatelybearthebruntoftheseimpacts.

Successfully integrating infrastructure programs that are being undertaken at the national, sub-regionalandregional levelspresentsagreatchallengeforASEANmembers (Bhattacharyay,2009).There are numerous projects being simultaneously implemented and one over-arching andcomprehensivestrategyneedstobeadoptedinordertoeffectivelycoordinateprojectsandensurethat the projects which have the greatest potential in narrowing the development gap areprioritised.

4.5.2Challengesinimprovinginstitutionalconnectivity

Globally, ASEAN countries on average do not rank very highly according to their enablinginfrastructure or institutional connectivity. Further,measures of such connectivity have stagnatedoverthepastfiveorsoyearsandgreatereffortsareneedtoimprovethequalityofinfrastructureinordertonarrowthedevelopmentgap.

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Policiesandproceduresgoverning tradenotonlyneed tobestrengthenedbutharmonisedacrosscountries. This is particularly important for RCB infrastructure projects. Bhattacharyay (2010)identifies, 40 major international, regional and subregional institutions and programs that havesupported infrastructure development across Asia, again, strongly pointing to a need forharmonisation, coordination and integration. Some countries will need greater assistance inimprovingthequalityoftheinfrastructureandtheirinstitutionalconnectivity.

4.5.3Challengesinimprovingpeople-to-peopleconnectivity

Thereisn’talwaysthepoliticalwillforgreaterlabourmobilitydespiteitspotentialbenefitstobothsendingandreceivingcountries.Ingeneralloweringtherestrictionsonthemovementoflabourwilllead tomovements of people from poor regions to richer ones in search of employment, betterwages rates and working conditions. Given the huge diversity in living standards across ASEANcountries,verylargenumbersofpeoplefromCLMVcountrieswouldmovetoneighbouringThailand,aswellasMalaysia,SingaporeandBrunei.Firdausy(2005)notesthetensionsbetweengovernmentsarising from the movement of workers from Indonesia to Malaysia and Singapore and from thePhilippinestoMalaysia.Moreover,giventhemillionsofBurmesealreadyinThailand,thereislikelytobepoliticalwillforonlyaverygradualeasingofrestrictionsonthemovementoflabour.ASEANneedstodeveloppoliciestomanagebothlargeoutflowsof labourfromsomemembersaswellaslargeinflowsoflabourtoothers(Menon,2012).

Withthe increasingratesofmobilityamongASEANmembers, it isnecessary toensureacceptableworking conditions prevail across them. In 2007 ASEAN leaders signed the Declaration on theProtection and Promotion of the Rights of Migrant Workers which seeks to promote fair andappropriateemploymentprotection,paymentofwages,andadequateaccesstodecentworkingandliving conditions for migrant workers. The implementation of this declaration should be closelymonitored. Moreover, ASEAN faces the challenge of providing universal social protection,particularlyforthoseintheinformalsector.8

ThebraindrainisaninevitableissueforthepoorerASEANcountries.Thechallengeistomanageitas best as possible and minimise its impacts. Improving wage levels and the living and workingconditionsinpoorerASEANmemberswillassistinreducingtheincentiveforskilledprofessionalstomigrate.Apolicywherebyskilledprofessionalsfromdevelopingcountriesthatareworkinginrichercountries are taxed and the money returned to their home country was originally proposed byBhagwati(1977)buthasrecentlyrenewedinterestandcouldbeconsideredbyASEAN.

4.6ConclusionandPolicyImplications

This chapter has provided strong evidence that physical, institutional and people-to-peopleconnectivity canall playa crucial role innarrowing thedevelopmentgap. There isno shortageofempiricalevidencethatconfirmsthe importanceofphysical infrastructure forgrowthandpovertyreduction.Yettomaximisephysicalinfrastructure’sdevelopmentimpactasupportiveandenablingenvironmentmustalsoexist.Goodgovernance,stronginstitutions,andsupportivemacroeconomicpolicies are vital if the potential gains from physical infrastructure are to be realised. GreaterconnectivityandfewerrestrictionsonthemovementofpeopleaswellasgoodswillhavetangibleimpactsonnarrowingthedevelopmentgapamongASEAN’smembers.

Empirical evidence suggests that physical infrastructure has its greatest impact in developingcountries. ASEAN must therefore prioritise infrastructure investments in CLMV given the lower8 Pasadilla (2011) examines the portability of social security for cross-border workers in ASEAN. Portabilityreferstoabilitytotransfersocialsecuritybenefitsacrosscountries.Shefindsdifferences insocialprotectionschemes in terms of their coverage, their exportability and the minimum qualifying periods for eligibility,concludingthatgreaterportabilityisneededforthegrowingnumberofmigrantworkersinASEAN.

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development indicators that prevail in these countries. Projects in more rural and remote areasshould be prioritised in other ASEAN members. Potential projects must be assessed not justaccordingtowhethertheywillspureconomicgrowthinASEANcountriesbutwhethergrowthwillbepro-poor. Thiswill dependnotonlyon the locationof infrastructurebut alsowhether it is biasedtowards the sectors inwhich thepoor operate. Thepoor canbenefit from infrastructure throughincomeearningopportunitiesandaccesstoservicesandtheacademic literaturesuggests that thepovertyreducingimpactofroadsappearstobeparticularlyhigh.

The Master Plan on ASEAN Connectivity provides a comprehensive outline for achieving greaterconnectivitywith19keystrategiesaswellas84keyactions.Inrelationtophysicalconnectivity,theevidence provided by this chapter indicates that priority should be given to the strategies of (i)completingtheASEANhighwaynetworkwhichwillintegratebyroadlaggingpartsoftheregion;(ii)establishanefficientandintegratedinlandwaterwaysnetworkwhichismorerelevanttotheASEAN4; and (iii) establish integrated and seamless multimodal transport systems to make ASEAN thetransporthubofEastAsia (and inparticular construct themissing linkof theEastWesteconomiccorridorinMyanmar).

Atthesametime,thenegative impactsofphysical infrastructureandgreaterconnectivityneedtoconsideredandaddressed.Largescaleinfrastructureinvestmentscanleadtoenvironmentalimpactssuchaswaterandairpollutionaswellassocialimpactsincludingthedisplacementofcommunitiesaswellconnectivitypossiblyleadingtomorecrime,illegalimmigrationandpeopletrafficking.

TheADB/ADBI(2009)andBhattacharyay(2010)arguesthataneffectiveinstitutionalframeworkforAsian connectivity is needed to strengthen existing institutions and provide a mechanism forensuringeffective cooperationand coordination.APan-Asian Infrastructure Forum is proposed tocoordinateandintegrateexistinginitiativeswiththeAsianInfrastructureFundtakingresponsibilityfor financing infrastructure development projects. The forum could be responsible for prioritisingand coordinating regional infrastructure plans, harmonising standards and processes and dealingwiththenegativeeconomicandsocialimpactsofinfrastructuredevelopments.

Concurrently,improvingthesoftinfrastructureorinstitutionalconnectivityofsomeASEANcountriesmustalsobeapriority.ASEANmembers,onaverage,don’tperformverywellaccordingtoindicatorsof governance, theeaseofdoingbusinessand logistics.However, there is greatdiversity in thesemeasuresacrossASEANmembers.WhileSingapore,MalaysiaandThailandrankhighlyconsiderableimprovements need to be achieved by all otherASEAN countries. There is also evidence that thecompetitivenessofASEANcountrieshasactually stagnatedover thepast fiveyears,highlightingafurtherneed to improvepolicy and institutional environments. In this regard, theprioritiesof theMasterPlan forASEANconnectivity forgreater institutional connectivity shouldbe (i)acceleratingthedevelopment of an efficient and competitive logistics sector; (ii) substantially improving tradefacilitation intheregion;and(iii) strengthening institutionalcapacity in laggingareas intheregionandimproveregional-sub-regionalcoordinationofpolicies,programmesandprojects.

IfASEANmembersareseriousaboutnarrowingthedevelopmentgap,theymustalsoprioritiseandmovebeyondthestrategyofencouraginggreater intra-ASEANpeoplemobility intheMasterPlan.Progress in this area has been weak and limited to skilled labour mobility. However, restrictingmobility to just skilled professions risks expanding rather than narrowing the development gapamongASEANmembers.Thepolicyallowstherichermemberstofillgapsintheirlabourforceandwhilepoornationsmightbenefit from the receiptof remittances, theywill also sufferbraindrainimpacts.Whileitisrecognisedthatgreaterimmigrationispoliticallydifficultmoreprogressneedstobemadeinthisarea.

Byitsverynature,narrowingthedevelopmentgapinvolvesasymmetriesinbothcostsandbenefits.The ASEAN 4 stand to benefit more from greater physical, institutional and people-to-people

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connectivity relative to other member countries. Richer ASEAN members must provide genuinefinancial and political commitments to narrowing the development gap, recognising that a moreequitableASEANisinallofitsmembers’longterminterests.

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