Asia-Pacific Regional Connectivity and Integration

ESCAP Executive Secretary Dr. Shamshad Akhtar delivers a statement on Asia-Pacific Regional Connectivity and Integration during her official visit to China, with Mr. Qu Xing, President of China Institute of International Studies

Delivered at the China Institute on International Studies Forum, Beijing, China

Mr. Qu Xing,
President of China Institute of International Studies

Excellencies,
Ladies and Gentlemen,

Introduction

I am delighted to be back in China and appreciate the opportunity provided by the China Institute of International Studies (CIIS) to exchange ideas.

Mr. Ban Ki-moon, Secretary General of the United Nations, speaking in Shanghai at the Fourth Conference on Interaction and Confidence Building Measures in Asia last month, reminded the world that the “global future is being built in Asia, and that ours is a rising region of economic dynamism, innovation and potential.”

Drawing inspiration from a Chinese proverb: “No matter the distance between people, fate bring us together”, my remarks today will focus on how we position regionalism and regional connectivity , to bring the people of Asia together to enhance their welfare, sustainability and shared prosperity. I will do so by examining:

  • Asia’s rise, and China’s contributions within this context;
  • ESCAP’s perspectives on strategies to nurture regional connectivity as a driver of sustainable growth; and
  • Structural, institutional and regional financing solutions to broker regional connectivity and integration.

China’s Contributions to Rising Asia

The region currently accounts for 31% of global GDP (in constant dollars) and 35 % of global trade in goods and services. Most long-term projections confirm that the region will regain the historical lion’s share of the global economy, with the potential to exceed 50% by 2050, as it was some 200 years ago. This is no small achievement recognizing that the region constituted only 16% of global GDP in 1950 .

When the region will re-emerge at this level will depend on how swiftly we are able to foster greater regional unity for peace and stability; strengthen institutions and governance; and promote regional connectivity and resource-sharing to augment productivity and enhance regional welfare.

China could play a major role in this endeavour as it rigorously pursues broad-based economic reforms which will, among others, stimulate domestic demand; liberalize investments and the services sector; address structural rigidities; and strengthen its financial system. China – according to some estimates – could emerge as the world’s largest economy “around 2020 (2040 at constant relative prices)” , and is in a unique position to lead regional integration and connectivity.

China’s progress in driving regional success is astounding and will continue to grow. Its economic dynamism and rise in recent decades is unprecedented. Its home-grown economic model and development; its sheer size and resource strengths; its openness to rebalance the economy in order to shift to a more sustainable growth path; and its strategic planning promoting regional integration and connectivity are indeed noteworthy.

China has great potential to deepen Asian ties. China’s leadership in APEC this year, and its extensive involvement in other international and regional platforms, offers further opportunities to push for regional development. Fostering the mega-trade agreements, in particular the Regional Comprehensive Economic Partnership Agreement (RCEP) between ASEAN members, Australia, China, India, South Korea, Japan, and New Zealand (to be concluded in 2015), would create an integrated market with a combined GDP in 2013 of approximately $21.3 trillion . In parallel, the discussions regarding the Trans-Pacific Partnership (TPP) could, according to some estimates, liberalize about one-third of world trade, e-commerce, cross-border investment, and intellectual property (IP) rights by opening up market access.

To the region’s advantage, China has already proven the power of domestic connectivity. The country’s national, provincial and metropolitan multimodal transport links and development corridors have plugged even the most remote rural areas directly into the global economy. Besides holding lessons for broader Asia, this augurs well for enhancing regional connectivity.

My emphasis on high priority for regional connectivity stems from a number of important considerations:

  1. Asia-Pacific’s economic dynamism, driven thus far primarily by individual economies, will further intensify if the region effectively exploits its complementarities and diversity. This should be feasible because the countries of Asia and the Pacific vary so much in terms of endowment of natural resources; capital and work forces; size; income; and state of development.
  2. The Asia-Pacific region is undergoing demographic change of a magnitude and pace never-before witnessed. Population has nearly tripled in 60 years . The region has both high-income countries, with shrinking and aging populations, and least developed countries, with high adolescent fertility rates and which are now facing a youth bulge with 9.3% youth unemployment. Improved access to transport and information has enhanced labour mobility, and the region is now host to some 59 million migrants, or one-quarter of the world’s total migrant population.
  3. The region has large and growing domestic markets, and a middle class with growing income and purchasing power. There are, nonetheless, debates about Asia falling into the middle-income trap, and regional connectivity offers new growth opportunities to avert this threat.
  4. The countries of Asia and the Pacific have a track record of success in international trade and foreign direct investment, which has been nurtured by global and regional production networks and global value chains, and supportive trade and transport connectivity.
  5. The Asia-Pacific region has managed to promote intraregional trade (export plus imports), which in 2012 stood at $6.9 trillion . Intraregional trade, nurtured through global value chains, is a win-win for all in the region. Almost half of imports of intermediate goods by China, for instance, are sourced from developing Asia-Pacific economies and Japan. In China alone, income derived from trade flows within global value chains rose by 600% between 1995 and 2009, with the number of jobs sustained by export of value increasing from 89 million in 1995 to 146 million in 2008. Furthermore, China has played a pivotal role in linking the assembly of products coming from East and South East Asia and consumed in global markets.
  6. The Asia-Pacific region’s share in world exports of commercial services (including transport, logistics, tourism etc.) has grown from 21% in 2002 to 28% in 2012 . Tourist arrivals in the region accounted for nearly one quarter of total global tourism arrivals in 2013. There is scope to further expand the flow of these service sectors to offer alternative sources of growth for the region.
  7. Regional connectivity will further augment levels of intraregional trade, with intraregional exports alone expected to rise from $3.1 trillion to as much as $6.8 trillion by 2016. Despite an increase over time in the dollar value of intraregional trade, as a percentage of total regional trade it has hovered at around the 50% mark for a number of years . Intraregional trade has yet to exploit the benefits of geographical proximity, as the costs are often much higher than those of exporting to either more distant Asia-Pacific economies or to the traditional markets in the West.

Regional connectivity, defined as “the level and effectiveness of regional networks to facilitate flows of goods, services, people, and knowledge” ought to integrate both physical and non-physical parameters to offer the most cost- and time-effective multimodal systems. Regional connectivity involves developing a bundle of networks which connect urban and industrial hubs, and/or coastal and hinterland regions, with alternative cross-border routes. Proper leveraging of the public and private sectors will help to develop innovative, new, and sustainable cross-border infrastructure networks.

Our future challenge is how best to deepen regional connectivity. Among others, this has to better link the landlocked belt of Central Asia, traditionally operating at a competitive disadvantage because of the extra costs and time spent in transit for tradable goods before they can reach ports and their final delivery point. In this context, China’s role in promoting cross-border linkages for the Central Asian Republics is also beneficial to the western inland areas of China.

Supporting its other neighbours, China has also been active in developing road and rail networks such as the upgrading of the Kunming-Bangko in Lao PDR, the construction of a deep seaport, the Gwadar port in Pakistan, the new cross border rail link through Hogros to Kazakhstan, and the Dali-Rulli railway line linking to Myanmar. The long running Trans-Siberian Railway services have already linked the Russian Federation with China and Mongolia. Inspired by the ancient Silk Road, President Xi Jinping has further announced the Chinese Government’s aspirations to develop the Silk Road Economic Belt, including maritime network development, with the scale and potential to link to the Asia Pacific rim in the East, and to Europe in the West.

Standing in the way of the Asia’s further integration are “behind-the-border” barriers and relatively weak infrastructure connectivity. This is a challenging endeavour, but necessary to address because these economic costs far exceed the tariff barriers.

Trade facilitation alone, supported by improvement in customs and port efficiencies, would enhance regional trade by $250 billion in addition to reduction in costs and time. The benefits and gains of wider regional connectivity would be even higher. Not only does connectivity create opportunities for productivity enhancement, as goods and services are provided competitively and efficiently, but in due course connectivity will help Asia-Pacific countries to achieve their full output potential. This is critical as Asia is faced with cyclical challenges and China is rebalancing itself.

Strategies for Regional Connectivity

A range of advancements and development in recent years call for newer hubs to generate knowledge and to transform the model of regional connectivity.

Enhancement of regional connectivity across the Asia-Pacific region requires generating political will and cooperation, to explore what is achievable and optimal, to develop consensus on more conducive approaches and modalities of engagement, and to put in place a game plan for how this will be achieved.

By developing regional networks in a coordinated and integrated manner, the benefits from improved regional connectivity can be spread more evenly across countries, particularly the least developed, landlocked and small island developing countries. Given the unique spatial contexts in which they are located, these countries need to draw on their current endowments and focus on transforming the strategy and pace of connectivity to fully exploit the region’s potential in future. Not only does domestic connectivity need to be coordinated with regional networks, but getting agreements on the domestic and regional networks requires cooperation both on feasible projects and accessible finance.

Since they are still at the development stage, a number of countries in the Asia-Pacific region have the opportunity to agree on a new approach to strengthening regional connectivity. This would help not only to extend regional networks across borders, but will also generate significant externalities such as time and cost reductions, efficiency gains from the adoption of ICT, and positive spill-overs by way of enhanced productivity, sustainable development, and energy mix diversification opportunities. Regional platforms need to recognize the “public goods” aspects of networks, and set in motion processes to harness synergies across sectors.

Integrated and Sustainable Regional Connectivity

Drawing on the forthcoming ESCAP 2014 theme study on regional connectivity, and in view of a combination of factors such as multifaceted cross-border mobility demands, geographical characteristics, and the inter-sectoral nature of connectivity, ESCAP is advocating that the region’s connectivity agenda should adopt a more integrated and transformed approach. This would involve exploiting the interdependence and synergies of five elements: trade and transport networks; ICT networks; energy networks; people-to-people networks; and promotion of knowledge-based economies.

Trade and transport connectivity: Despite variations across countries in the state and quality of infrastructure, Asia-Pacific regional connectivity has facilitated growth in intraregional trade. There is scope for further growth, once transport networks are fully optimized and operationalized to support effective integration. There is need for thinking through how to benefit from the networks that are currently underutilized, especially the railways, and to remove impediments such as the non-physical barriers at borders which add to costs and delay movements of goods and people. Investing in intermodal facilities, such as dry ports, and fostering greater physical linkages between different modes, such as shippers and truckers, can further augment transport options. Greater use of ICT applications for trade and transport facilitation, both behind and at borders, will also improve the efficiency of freight movements, and pave the way for the development of paperless trade and e-logistics.

ICT connectivity: Technological breakthroughs, especially in internet and mobile communications connectivity, have radically transformed the ways in which businesses and infrastructure operate, and how people interact. To drive productivity and efficiency improvements across all sectors, ICT has opened doors for designing electronically operative modes of connectivity; knowledge-generation and sharing; as well as modes of transportation which reduce distances and connect remote rural areas. Together these features are enhancing the efficiency of trade, including financial services; information and data management services; as well as transport and logistics services.

While ICT connectivity is rapidly improving in the region, there is still a large “digital divide” both within and between countries. This is partly due to the region’s reliance on submarine cables and the lack of terrestrial fibre optic cables. A cohesive ‘meshed’ regional network of terrestrial optical fibre would provide cost-effective broadband access on both an intra-regional and intercontinental basis to link Asia with Europe as well. In moving forward there is a need to establish an “Asia-Pacific Information Superhighway”, based on a set of common principles and regulatory frameworks. The active involvement of private sector partners and international organizations also needs to be sought to promote the “co-habitation” of ICT and transport infrastructure networks. Already, fibre optic cables are being laid along some national highway and railway systems. Ultimately, synergistic approaches can reduce the cost of developing a regional ICT network and facilitate maintenance of the network.

Energy connectivity and security: The growing demand for energy resources in Asia and the Pacific contributes to more than half of the world greenhouse gas emissions. The region bears additional health service burdens caused by air pollution. In addition, 44% of all worldwide natural disasters over the past ten years have impacted the region.

A combination of insufficient supply, uneven distribution, and the region’s potential for cleaner and alternative sources of energy is encouraging development of new transportation corridors of energy, and greater investments in science and technology within the Asia-Pacific region. However there is a need for countries to consider new forms of energy cooperation and connectivity, which will help to balance the gaps in supply and demand across countries and to change the energy mix.

With recent advances in high-voltage transmission technology, it is now possible to envisage a regional energy network, which could reduce the gap in supply and demand by transferring power from energy-rich or lower-cost power countries to energy-poor or high-cost power countries. An “Asian Energy Highway” network could combine different types of energy transmission networks, including pipelines and cross-border power grids. The most efficient approach may be development of a regional electricity power grid, connected to a regional electricity market. A regional grid could also link renewable energy sources to a large enough market to justify investments, thereby enhancing the viability of such projects.

People-to-people connectivity: Increased mobility across borders, supported by transport and energy infrastructure, as well as by greater ICT connectivity, opens up vast new opportunities for international labor migration but also raises new challenges. Meanwhile, improvement in ICT connectivity and transport links are making it easier for people to study abroad or enroll in distance learning programmes, as well as contributing to the growth of business and civil society networks. Migrant origin and destination countries need to work together to take advantage of these labour flows and mitigate the risks which may accompany greater labour mobility. By promoting people-to-people connectivity, governments can help their people access the region’s vast knowledge resources, as well as foster better understanding about the region’s diverse cultures and value systems.

Promotion of knowledge-based economies: This will help much-needed innovation for new products and new processes which enhance regional competitiveness. Strengthening knowledge, research, and academic networks, as well as the development of high tech industrial clusters to generate and share knowledge and innovation can help build much-needed economic diversification across the region.

Dynamic Regional Institutional Frameworks and Financing

Ultimately, the driving force behind regional connectivity is the political will of the national governments which form regional blocs to negotiate such connectivity. Kick-started in 1967, ASEAN for instance has made good progress in promoting peace and stability, which in turn laid the foundations for economic progress to the mutual advantage of its member countries.

Other regional blocs, in particular SAARC and CAREC, which were somewhat later starters, and to an extent focused on historical rivalries, need to be incentivized by the international community to adopt confidence-building measures, because the economic imperatives for and gains of regional integration far outweigh the status quo.

Pooling resources and leveraging Asia’s finance to attract private sector investment will be critical. Asia’s share in global savings and reserves (including gold) accounts for 51% and 59% respectively. This provides a unique opportunity to move forward on the new approach to regional connectivity outlined above.

Asia has been at the forefront of proposing regional solutions to infrastructure development. The most recent of these have been China’s proposals to develop an “Asia Infrastructure Bank” as well as the “BRICS Bank.”

Once operationalized, these new vehicles will be in a better position to adopt and broker a more holistic and integrated approach to regional connectivity transactions. It is desirable that ADB and the World Bank, who have recently adopted innovative approaches to their capital base augmentation, along with the G20 initiatives on infrastructure development, should deploy part of their regional and global infrastructure funds for regional infrastructure.

This should be feasible if governments, with support of the international financial institutions, work towards introducing a stable policy environment, backed by good governance, sector regulatory frameworks, and strong project pipelines with supportive technical assistance and which also use suitable credit enhancement mechanisms and instruments and asset products, to leverage private institutional investors which are repositories of long-term funds.

ESCAP, with its intergovernmental mandate and advocacy role as an honest broker, is positioning itself to be more intensively engaged with different subregional groupings and plans to serve as a vital link in sharing good practices of the subregional blocs. ESCAP’s experience shows that there are a variety of mechanisms, ranging from formal intergovernmental agreements and international conventions, to voluntary commitments by national governments, which can be used to advance the region’s connectivity agenda at the regional level.

Given the significant role played by the private sector and civil society in shaping the region’s economic and social development, governments also need to explore ways to reach out and involve other stakeholders in the development and implementation of these mechanisms.

ESCAP’s intergovernmental dialogue has extended from debates on Asia-Pacific sustainable development and financing, to the Asian Information Superhighway initiative which aims to assist developing countries to create a seamless information and communication space. We have partnered with the ITU to map, for the first time, the routes and gaps in terrestrial Internet cables in the region and will be exploring options for strengthening ICT infrastructure by leveraging the connectivity of our Asian Highway and Trans-Asian Railway networks – and we count on China’s continued support for these efforts.

Conclusion

I would like to end my remarks today by quoting from Premier Li Keqiang’s keynote speech to the China-ASEAN Expo in Nanning last year, when he said: “Neighbouring areas have always been the focus and top priority of China's diplomacy. China's new government will more unswervingly uphold the foreign policy of friendship and partnership with neighbouring countries, more actively realize the conjunction between Chinese development strategies and the development goals of neighbouring countries, and more firmly and effectively build a community of common destiny to share peace and prosperity.”

China is already leading the way on regional economic growth, trade, transport and many other areas. It has also taken ever greater steps to lead on issues such as environmental stewardship and social welfare systems. As we move into the post-2015 development agenda, and begin to firmly address the shared challenges of our region, we are also looking to China to champion the cause of greater regional connectivity, integration and cooperation for the mutual benefit of all the people of Asia and the Pacific.

I thank you and look forward to our further discussions. Xie Xie.