​Why institutional infrastructure is as important as physical infrastructure: Southeast Asia’s experience with air liberalization policies

 
Yet in the ASEAN community, as everywhere else, building infrastructure cannot be done in a vacuum.  Developing institutional infrastructure and improving the quality and efficient use of existing physical infrastructure is as important as creating physical infrastructure. The right policies and programs can ensure that existing infrastructure is efficient, provides quality services and is used to optimal capacity. As ASEAN’s successes have demonstrated, these goals are contingent on good planning and coordination among users and agencies.
 
Policies should be a priority
Institutions that govern trade issue a multitude of rules and programs meant to stimulate the flow of goods and people across borders. In ASEAN neighborhoods, geographic simulation modeling of policy measures to improve regional trade connectivity give us an idea of how these approaches impact the ASEAN members’ economies and ASEAN as a whole. These models show that the interventions with the greatest impacts are border facilitation and the development of maritime and air transport networks.  
 
I’ll focus here on liberalization of air services, and specifically the positive outcomes of agreements underpinning the ASEAN Open Sky policy and ASEAN Single Aviation Market.
 
Air liberalization
 
As the composition of traded goods shifts from mainly bulk cargo, typically transported by sea and rail, to lighter, higher value components largely transported by air, the development of the air sector becomes ever more important. Since the Master Plan on ASEAN Connectivity (MPAC) was adopted in 2010, growth rates of intra-ASEAN air passenger and air cargo flows have significantly increased. This is shown in the increase in annual air capacity for intra-ASEAN international arrivals, which has grown by more than 50 percent in the past 10 years.   
 




The tables above illustrate that passenger and cargo flows have risen markedly over the past decade. One reason is the increase in disposable income for families in the region, which translates into greater frequency of travel. Another reason is the steady growth in locally owned and operated low-fare carriers in the ASEAN region, which have capitalized on this rise in disposable income and intensified trade among member countries.
 
Our team’s work with economic modeling has been particularly useful in this area, and gravity models are especially revealing. Gravity models demonstrate the sought-after impact of granting third and fourth air freedoms on bilateral intra-ASEAN air passenger flows and cargo volumes. These air freedoms allow basic international service between two countries.

The third freedom is the right to carry passengers or cargo from one country to another; the fourth freedom relates to the right to carry passengers or cargo from another country to one's own. In other words, the ASEAN Open Skies initiative — a policy measure created to complement physical infrastructure goals — significantly increased intra-ASEAN air passenger flows and bilateral flows by an estimated 70.5 percent.
 
These results are significant, because they confirm the importance of air liberalization policies and demonstrate how significantly they impact air transit and transport levels. This suggests that institutional policies can influence and determine air traffic flows to a greater degree than physical factors, such as the quality of the sector infrastructure.
 
There is also a much larger lesson we can draw from this very specific example. Although policy makers and developers typically tend to focus all of their resources on improving and building physical infrastructure, institutional arrangements, including rules and processes, are an important complement to plans to rehabilitate, build or improve physical infrastructure.
 
Nowhere is this institutional infrastructure more important than in the case of traditional PPPs, where the rules of engagement are designed to reassure users, public entitiesb and investors. Integrated strategy and planning, such as the type prioritized and practiced by ASEAN, can help leverage these complementarities to offer greater gains in economic growth across regions.
 
Further context
These ideas were part of a large-scale Master Plan for ASEAN Connectivity (MPAC) study. MPAC offers 19 strategies for enhancing connectivity in pursuit of wider goals of enhancing competitiveness and economic growth, narrowing development gaps, and deepening social and cultural understanding among member states.
 
The realization of an integrated ASEAN Community demands connectedness via improved and expanded transport, communications, and energy infrastructure; the reduction of barriers to trade and investment; and the opening of new opportunities for ASEAN-wide communication and exchange. The MPAC provides a blueprint for such advances via three strategic dimensions of physical, institutional and people-to-people connectivity, each accompanied by strategies and key actions.

Under the physical connectivity dimension, MPAC responds to improving transportation, information communications, energy, and technology infrastructure. Institutional connectivity strategies focus on building effective processes, rules, structures, and organizations to facilitate the free flow of goods, services, investments, and skilled labor. People-to-people connectivity strategies promote social and cultural understanding among the people of ASEAN.