Comment on “Connectivity in East Asia”

Abstract

Brooks (2016) provides an overview of the relationships between connectivity improvements and trade and investment flows, focusing mainly on East Asia. Connectivity improvements, whether in terms of infrastructure, logistics, information and communication technology (ICT), and finance, have widen production choices leading to the development of fragmented production, supply chains, and trade and foreign direct investment (FDI) flows. East Asian economies, in particular, through their export-led development strategies, have developed to become the main manufacturing hubs for the whole world. Firms take advantage of improved connectivity to design their production strategies in terms of product fragmentation, geographical locations, sourcing, and investment distributions. This has contributed to the dynamism of the East Asian region, with diverse patterns of trade and investment flows and fast growth, although the effectiveness of export in driving growth has declined somewhat since the global financial crisis. Generally, Brooks (2016) is informative. However, there could have been more discussion of the policy aspects of connectivity development and how this serves the development strategies of countries and/or groups of countries. Improving connectivity can require costly investment, so when the projects are carried out they must fit into the perceived need of the countries carrying them out. Sometimes the projects relate directly to facilitating trade and investment, but other projects may serve other connectivity objectives, depending on the circumstances and need of the country at the time. Take the case of Thailand. Back in the late 1950s and early 1960s, there was a high risk that Thailand could become the next domino, succumbing to communism. The main priority at that time was to raise rural incomes, particularly in areas adjacent to Thailand's communist neighbors (Cambodia and Lao PDR). The first 5-year development plan (1961–1966) stressed road building into the rural hinterlands in order to open up new land for agriculture and increase rural incomes. So the need at that time was on improving internal connectivity to integrate rural areas into the national economy, and this was quite successful. Moving forward 20 years to the mid-1980s, Thailand had become more integrated into the global economy, with the degree of openness (ratio of export plus import of goods and services to gross domestic product (GDP)) reaching about 60% compared to about 40% in mid-1960s. However, the exchange rate realignments following the Plaza Accord in 1985 made Thailand and some other Southeast Asian economies attractive as destinations for production relocations from Japan and Asian Newly Industrialized Countries (NICs). This led to a boom in FDI, manufactured exports, and economic growth. By 1995, the degree of openness had jumped to around 90%. However, the infrastructures for external connectivity that would facilitate foreign trade and investment lagged behind. By late 1980s and early 1990s there were congestions at ports, airports, notorious traffic jams in Bangkok, shortages of hotel rooms, and telecommunications bottlenecks, among others. Many major infrastructure projects were carried out during that boom decade, including development of deep seaports and industrial estates along the Eastern Seaboard, airport expansions, mass transit rail, expressways, and telecommunication concessions to the private sector. These eventually helped to ease the external connectivity congestions. Moving to the early 2000s, it was no longer sufficient for Thailand to think about external connectivity as an individual country. This was also the case for other ASEAN countries. ASEAN economies were weakened by the Asian financial crisis. This also coincided with the rapid emergence of China as the production powerhouse for the world economy. The emergence of China showed that size does matter and was an important impetus for deeper ASEAN integration (see Chia & Sussangkarn, 2006). While ASEAN had already embarked on establishing the ASEAN Free Trade Area (AFTA) since the early 1990s, this is still a long way from an integrated ASEAN that could compete with a large single country. So the goal of striving for the ASEAN Economic Community (AEC) by 2015 was set. While the AEC is still far from the European style integration, it aims for free movement of goods, services, investment, skilled labor, and freer flow of capital. These should move ASEAN toward: (i) a single market and production base; (ii) a highly competitive economic region; (iii) a region of equitable economic development; and (iv) a region fully integrated into the global economy. To achieve these goals, it is clear that improving connectivity in the broad sense is key. Connectivity is clearly critical for ASEAN to become a single market and production base. This will also allow greater exploitation of scale economies and intra-ASEAN supply chains contributing to greater ASEAN competitiveness. Improving connectivity of the less developed ASEAN members will also facilitate their catching up with the more developed members leading to more equitable development within ASEAN. Reflecting the importance of connectivity, ASEAN has also developed a Master Plan on ASEAN Connectivity, MPAC (see Isono & Kumagai, 2016). Connectivity is clearly a very important focus for ASEAN economies and others. However, it does not happen automatically and will require sizeable investment. So the policy aspect of connectivity development is very important.