Regional integration as a risk management tool for Southeast Asian countries

Coauthored with Darwin Marcelo Gordillo, Infrastructure Economist at the World Bank Group and Ruth Schuyler House, Consultant, the World Bank Group

Given the current slowdown of the Chinese economy, many are trying to predict the impact on the world’s economy as well as the regional trickledown effects. Countless developing countries are focused on building ties with large-scale, global economies like those of the U.S., OECD, India, and China.  But perhaps it’s time to consider what role enhanced regional integration can play -- not only as a way to enhance connectivity with larger markets, but also as an important risk management measure to protect countries’ economies in the event of economic downturns in the world’s larger markets.
 
This sort of regional integration can be accomplished by better connecting infrastructure such as roads, rail, and maritime routes – sectors that are good candidates for public-private partnerships (PPPs). This could bring benefits to Southeast Asia, the part of the world we work in, as well as many other regional economies.
 
 

Southeast Asia’s regional focus
 
When we examine trade among Association of Southeast Asian Nations (ASEAN) members over the past ten years, we see that there has been increasing regional economic integration, yet decreasing intra-ASEAN trade intensity (a measure that compares the share of Member States’ intra-ASEAN trade to shares in global trade). In other words, regional integration is increasing, but at the same time some ASEAN members still rely heavily on global trade, especially with major economies like OECD, China, and India. This is not a bad thing per se but it could expose some economies to global economic downturns to a greater degree.
 
However, it is not all bad news. Our recent analysis suggests that during the period that the Master Plan on ASEAN Connectivity (MPAC) has existed (2010-end of 2015), regional trade integration has increased. Furthermore, intra-ASEAN multiplier effects, which measure the impact of an economic shock in one economy on economic growth in a trade partner, have generally increased.^[1]
 
While the multiplier effects of ASEAN economies on each other remain much lower than those of OECD, China, and India on ASEAN economies (in line with the measures of trade intensity mentioned above), they have jumped nearly two-fold among some ASEAN economies. Conversely, while multiplier effects of major external trade partners on ASEAN remain higher, they are increasing at a lower pace.
 
This increase of bilateral economic interdependence within ASEAN implies that improved physical trade transport assets, coupled with increased trade facilitation and improved border management, have impacted the structure and pace of trade. Could this, therefore, be a risk management strategy to minimize exposure to OECD, China, and India?
 
Leveraging links
 
While these patterns of intra-regional and global integration remain in line with ASEAN’s policy of open regionalism, Member States must focus on two goals: leveraging links with key external economies to generate growth within the region, and improving intra-regional trade in order to hedge against the risk of major negative shocks in the global economy. The need to link Member States to major trading partners reaffirms the importance of physical connectivity projects (especially land-based projects) to link ASEAN to China, India, and ports serving key trade partners in the West.
 
This path, coupled with trade liberalization and transport cooperation policies that create an integrated production base for regional exports, underscores the importance of physical connectivity projects. These strategies of physical integration linked to trade integration validate ASEAN’s efforts to improve border facilitation, intra-regional trade infrastructures, trade harmonization, and other institutional measures to ease the flow of goods and people across the region.
 
Some trade infrastructure projects – roads, ports, rail links, and airports – are likely PPP candidates, representing a key opportunity to leverage the private sector to support infrastructure development within ASEAN. Furthermore, there is widespread recognition of the key importance of the maritime and air sectors to regional trade; thus, government support to develop these sectors is high.
 
However, challenges still exist.  The cross-border nature of some projects, coupled with limitations of the ASEAN regional coordinating mechanism, suggest that national projects are likely the most immediate viable opportunities for PPP. Improving trade infrastructure is also a key interest for the private sector generally, as it will reduce the time and costs of regional trade.
 
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