Role of complementary policies in economic corridors

Role of complementary policies in economic corridors
Published: 29 August 2019 - 4:30 a.m.
By: Logistics Middle East Staff

Policymakers are progressively keen on evaluating large transport infrastructure proposals using thorough techniques rather than a simple cost-benefit analysis.

This is in effort to guarantee that such infrastructure projects benefit both the big firms associated with foreign trade and the small enterprises that can exploit the expanded network and market access to seek new economic opportunities.

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The Belt and Road Initiative also known as the New Silk road is the most ambitious infrastructure investment effort in history.

A two-pronged plan: the overland Silk Road Economic Belt and the Maritime Silk Road. The vision includes connecting Asia to Europe and Africa through a vast network of railways, energy pipelines, highways and streamlined border crossings.

To date more than sixty countries accounting for two thirds of the world’s population have signed into projects or indicated an interest in doing so.

While several developing countries in need of new roads, railways, ports, and other infrastructure have welcomed BRI investments, the initiative has also stoked opposition.

Some countries take on large amounts of debt to fund the necessary infrastructure with some projects stagnating. But some governments, in places such as Kenya and Zambia, are carefully studying BRI investments before they sign up.

There is a lot of value in transport corridors in terms of economic growth. To maximize on this there a number of precautionary measures that governments can take such as implementing complementary policies.

To mention but a few, reducing trade obstacles will lower trading expenses and increase integration. In addition, making the business environment ideal for private participation in infrastructure financing can diminish fiscal risks and guarantee the long-term sustainability of projects. Nations can lessen tariff and non-tariff hindrances through international trade agreements and promote foreign direct investment (FDI) through coordinated reforms of their investment systems and dispute settlement mechanisms.

Trade reforms could amplify the gains from new and improved infrastructure network. A decrease in border delays would magnify the impacts of transport corridor projects on exports from corridor economies. For instance, if border delays were reduced by half, the reduction of shipment times along corridors would range from 7.7% for the China-Indochina Peninsula Economic Corridor to 25.5% for the China-Central Asia-West Asia Economic Corridor. These large effects are not surprising given the importance of trade facilitation bottlenecks between BRI economies. Reducing these frictions enables firms to import a larger assortment of inputs essential for production in a timely manner, increasing efficiency and exports. Supplementing transport corridor infrastructure projects with reduction in border delays is a need for low-income economies.

Complementing such projects with border delay reductions would increase real incomes for corridor economies and non-corridor countries owing to the higher efficiency gains related to the development of international trade. Trade costs would fall by 5.6% for the China-Indochina Peninsula Economic Corridor and by 21.6% for the China-Central Asia-West Asia Economic Corridor. The biggest GDP gains would be concentrated low pay economies.

Reducing tariffs among the corridor countries would create more trade among participating economies yet, in addition, some trade redirection with non-corridor economies. Dissimilar to reductions in border delays, which will, in general, reduce trade costs for all nations, tariffs can be reduced in a discriminatory (preferential) way for different countries. The outcome is that this policy reform has positive effects on within-the-corridor trade and ambiguous impacts on non-corridor economies. Switzerland’s Free Trade Agreement with China lead to an immediate export value of 22.8 billion of Swiss products to China, and has also shown that Switzerland can act as a bridge between China and the EU. Switzerland also enjoys a surplus trade balance with China.

Exports of all corridor economies would develop as infrastructure projects are supplemented by tariff reforms, however, there are noteworthy contrasts by regions. Average tariffs in developing economies are higher than those in advanced economies, however, they vary from around 14 percent in Sub-Saharan Africa and South Asia to 2 percent in East Asia and Pacific.

Private participation in an economic corridor initiative through public-private partnerships (PPPs) can add to affordable and superior quality infrastructure in three fundamental ways. In the first place, it can improve project selection and contribute to innovative solutions. Experienced privately owned businesses can identify infrastructure needs and come up with novel ideas to meet them, which can be capitalized through bidding processes that are competitive, transparent, and in the end open to new ideas.

Private capital accounted for 70 percent of the infrastructure investments with private participation in Eastern Europe and Central Asia in 2018, but only 55 percent in East Asia and Pacific. Governments or their state-owned banks, along with donors and multilateral development banks, account for the remaining financing (World Bank, 2018)

Secondly, where the incentive framework is well-aligned say, by tying the private operator's income to a set of pre-agreed performance indicators, private participation improves operational proficiency. Finally, to the degree that private capital is brought in and user fees are charged, private investment reduces the financing needs of government. In the event that user fees are not charged, private participation only reduces the immediate funding needs of government, in light of the fact that in the long haul the expense of the project must be covered by taxpayers.

Private sector participation goes beyond infrastructure. The potential gains of economic corridor interventions can be enhanced by a vibrant private sector that takes advantage of improved infrastructure and reduced trade costs. To increase private participation in the corridor, countries need to adopt complementary reforms to improve the business and investment climate facing potential investors.

Host nations can provide predictability by restricting arbitrary government interference and permitting dispute resolution and compensation when their obligations are violated. Cross-country variation matters because numerous corridor connectivity projects cross various jurisdictions. An investor faces a different legal and administrative system at whichever point its undertaking crosses a border which is a challenge since it implies investment protection varies along a single corridor.

Among the moves corridor economies can make to improve their investment climate and private sector performance are special economic zones (SEZs), including industrial parks and other variations. In the big examples of SEZ success, experimental policies have been piloted before being rolled out to the wider economy; and without the political will to embrace changes, SEZs acted as second-best environments and pressure valves to hold excess labour. The experience of SEZs in corridor economies helps to identify the elements that enable these trials to succeed.

From Cambodia to Ethiopia to Georgia, economic and industrial zones have become an increasingly important dimension of international cooperation within the framework of the Belt and Road Initiative (BRI). For example speaking at the Belt and Road Initiative Forum for International Cooperation, Georgian Vice Prime Minister Maya Tskitishvili said her country established a free industrial zone for global businesses and inked a free trade agreement with both China and the European Union (EU).

A decrease of trade costs forces adjustment costs, particularly in the short and medium runs. These expenses may emerge as a result of increased competition from foreign products, which could challenge local industries.

Corridor economies more exposed to competition ought to consider whether their social policies can manage the adjustment costs related to workers reallocating across occupations and regions triggered by sector-specific competition and trade demand shocks.

There is no one methodology for managing trade-induced adjustment costs (IMF, World Bank, and WTO 2017). The ideal strategy relies upon the shock, on country characteristics, and initial conditions. General inclusive policies, notably social security and labour policies, including education and training, are options. Well-designed credit, housing, and place-based policies may likewise facilitate adjustment. Also, trade-specific adjustment programs may play an integral role.

Complementary policies and investment can permit urban communities and subnational hubs to benefit from economic corridor investments; for instance, investments in the logistics industry. Large-scale transport investments in and around a particular city can help transform it into a local transport and logistics centre. Be that as it may, for this to happen productively and viably, targeted investments and upgrades to the logistics supply chain are required.

Despite the significance of infrastructure to development, only in conjunction with complementary policies and institutions will countries maximize the advantages from economic corridor projects. Policies that advance integration, inclusiveness, connectivity, and private sector development, will be critical force multipliers for project investments.

About the authors

Darryl Judd, COO, Logistics Executive Group (darrylj@logisticsexecutve.com)

In 2015, Darryl was named as one the “Top 50 influential individuals in Asia' Supply Chain, Manufacturing & Logistics industry” in the prestigious SCM Thought Leader publication by SCM World, recognising him as expert in the linkage of business strategy and supply chain best practices to human capital management. Darryl brings 28 years of executive leadership and consulting experience and is regular contributor on thought leadership across numerous industry publications and is a frequent speaker at international conferences and events on business leadership, strategy & people alignment and talent management. He was instrumental in the creation of Logistics Academy and presently holds an advisory board appointment with industry group LSCMS. In 2014, he was appointed as one of five global experts to IATA’s Global Innovation Award selection board and has held senior executive positions within the airline, air cargo and aircraft leasing industry.

Lynda Bomett, business intelligence specialist, Logistics Executive Group (lyndaB@logisticsexecutve.com)

Lynda Bomett is a Business Intelligence Specialist at Logistics Executive Group in the Middle East. She has a degree in Environmental Studies from Kenyatta University, Nairobi, Kenya . She specializes in market research in the Logistics and Supply Chain sector. Her past research spans topics including E-commerce, Food Security and Supply Chain Management. She can be reached at lyndab@logisticsexecutive.com.

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