2015 Seoul Conference on Trade & Industry: A New Paradigm for the World Trading System Korea on November 10, 2015) “The Impact of ‘One Belt, One Road’ Initiative on Changes in the Trading Environment in East Asia” Fukunari Kimura Chief Economist, Economic Research Institute for ASEAN and East Asia (ERIA) Dean, Graduate School of Economics, Keio University 1

1. The impact of AIIB and “One-belt One-road” The context of politics and economics Opportunity to review the existing system of infrastructure development For infrastructure development, “money” is not an ultimate bottleneck. – Just needs infrastructure investment at the level of 5- 8% of GDP. The issue is – How to find projects with large economic impacts and – How to design a bankable portion of a project when the whole project is financially unviable. 2

2. Projects with large economic impacts Production networks or the second unbundling calls for logistics/economic infrastructure of different grades. – Just to come into slow global value chains – To participate in production networks – To form industrial agglomerations – To create innovation hubs Appropriate quality is needed for infrastructure. A case: Comprehensive Asia Development Plan 2.0 for ASEAN and East Asia by ERIA 3

A new development strategy for ASEAN and East Asia and the quality of infrastructure Connectivity Medium grades  High grades  Turnpike connectivity Innovation Process innov.  Product innov. Under-developed economy before industrialization Hock up with global value chains (the 1 st unbundling): resource-based/labor- intensive industries Participate in production networks (the 2 nd unbundling: Jump-start industrialization with machinery industries Form industrial agglomeration: Accelerate technology transfer/spillover Create innovation hub: Urban amenities Attract/nurture human resources 4 [Cambodia, Laos, Myanmar] [Vietnam, Philippines, Indonesia] [Thailand, Malaysia, Singapore]

Appropriate grades for hard and soft infrastructure in Tier 3, Tier 2, and Tier 1 while thinking of the life cycle cost structure in time horizon Positive effects/externalities: e.g., technology transfer, human resource development Negative effects/externalities: e.g., environmental/social Impacts, disaster prevention 5

Source: IDE/ERIA-GSM simulation result. Economic Impacts of All -All Improvements (2030, Impact Density) Economic Impacts on GINI (2030) Geographical simulation model Economic impacts of All-All improvements (infrastructure development, NTB reduction, and SEZ development) will be huge. Regional disparity will be reduced. 6

3. How to design bankable projects Infrastructure projects – Market failure due to positive externalities, the existence of public goods, … – The whole project is often financially unviable. – The public sector should create a bankable project by taking care of unprofitable portions while keeping market competition. – Public money will not last; should not leave financially unviable operation/maintenance. Discipline for development partners 7

Competitive bidding: Should take care of both price and non-price competitiveness Operation and maintenance: Built-in mechanism for financing maintenance fees Macro discipline for development partners (bilateral, international): At least the disclosure of information on lending activities to keep fiscal sustainability, check consistency with development plans, and respect “ownership.” Micro disciplines on the partnership between public and private: Public private collaboration while keeping a playing field flat for private. - Public entities: SOEs, sovereign wealth funds, governmental financial institutions, … - “Subsidized” investment? (cf. competition in TPP) - Discipline on concessionality (out of DAC rule) 8 Discipline imposed on development partners

4. Disseminate a novel development strategy to the world East Asia leads the establishment of a novel development strategy with a new international division of labor (production networks, the second unbundling). Fully utilize the private dynamism. 9