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ACKNOWLEDGEMENT The Comprehensive Asia Development Plan (CADP) is the crystallization of various academic efforts, especially the strong leadership, rigorous analysis, deep insight and relentless efforts of Dr. Fukunari Kimura and Mr. So Umezaki, with support from many other scholars including, Dr. Mitsuyo Ando, Dr. Haryo Aswicahyono, Dr. Ruth Banomyong, Dr. Truong Chi Binh, Dr. Nguyen Binh Giang, Dr. Toshitaka Gokan, Dr. Kazunobu Hayakawa, Dr. Socheth Hem, Dr. Patarapong Intarakumnerd, Dr. Masami Ishida, Mr. Toru Ishihara and his team, Dr. Ikumo Isono, Dr. Souknilan Keola, Dr. Somrote Komolavanij, Dr. Toshihiro Kudo, Dr. Satoru Kumagai, Dr. Moe Kyaw, Dr. Mari-Len Macasaquit, Dr. Tomohiro Machikita, Mr. Mitsuhiro Maeda, Dr. Sunil Mani, Dr. Toru Mihara, Dr. Avvari V. Mohan, Dr. Siwage Dharma Negara, Dr. Leuam Nhongvongsithi, Dr. Ayako Obashi, Dr. Apichat Sopadang, Dr. Chang Yii Tan, Dr. Masatsugu Tsuji, Dr. Yasushi Ueki and Dr. Korrakot Yaibuathet. ERIA also owes grateful thanks to research groups in Nippon Koei and the National University of Singapore. ERIA is also grateful for valuable guidance and instructions provided by the ASEAN Secretariat and inter-alia His Excellency Dr. Surin Pitsuwan, Secretary-General of ASEAN, in making the CADP properly responsive to the needs of policy makers and in providing great support for our activities. Additionally ERIA would like to express its deepest gratitude to the Asian Development Bank (ADB), the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), and various donor agencies including the Japan International Cooperation Agency (JICA) for providing valuable information related to infrastructure projects, and other inputs. Especially we thank ADB for making time to conduct informal discussions with our team, and for the insights provided which were really useful for our analysis. ERIA also expresses sincere thanks to the members of supporting study projects, the teams of the Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO) and other research institutes who conducted thorough and time consuming analyses, such as the evaluation of the regional economic impact of infrastructure developmnet. The methodology of our research needs much refining and improvement, but we hope that the research will pave the way for improved collective actions among countries and international institutes, and that it will be a useful reference for further actions to be considered by donor agencies and funding institutions, inter alia ADB. Hidetoshi Nishimura Executive Director, Economic Research Institute for ASEAN and East Asia i TABLE OF CONTENTS ACKNOWLEDGEMENT i TABLE OF CONTENTS ii EXECUTIVE SUMMARY vi CHAPTER 1. CONCEPTUAL FRAMEWORK 1 1-1. What is the Comprehensive Asia Development Plan? 1 1-2. The emergence of international production networks 2 1-2-1. Novel pattern of industrial location and international trade 2 1-2-2. New trade and investment regime 2 1-2-3. Evolving vibrant role of multinationals 3 1-2-4. New development strategies 3 1-2-5. Logistics and economic infrastructure for industrialization 4 1-3. The augmented fragmentation theory and new economic geography 4 1-3-1. Fragmentation: location advantages and service links 4 1-3-2. Intra-firm and arm’s length fragmentation 6 1-3-3. Degree of freedom in fragmentation and investment climate 10 1-3-4. Technology transfers and spillovers 10 1-3-5. Knife-edge of agglomeration and dispersion forces 10 1-4. Fragmentation, agglomeration, and development stages 11 1-4-1. Evolution of fragmentation and agglomeration in development 11 1-4-2. Three tiers with different degrees of participation in 12 production networks CHAPTER 2. ASSESSMENT OF 13 THE CURRENT EAST ASIAN ECONOMIES 2-1. East Asian production networks leading the world 13 2-1-1. Global production networks and East Asia 13 2-1-2. Who is active in international production networks? 16 2-1-3. Export and import specialization in machinery parts 17 and components 2-2. Spatial structure of production networks 19 2-2-1. Evolutionary process of production networks in East Asia 19 2-2-2. Commodity composition and trading partners in 20 ii international trade 2-2-3. Geographical layers of transactions in production networks 24 2-3. Policy environment in East Asia 27 2-4. Durability and resiliency of production networks 30 2-4-1. Are production networks footloose? 30 2-4-2. Evidence from the survival analysis 31 2-4-3. Trough and rebound in the global financial crisis 32 2-5. Diversified degree of participation in production networks 38 2-5-1. Skewed geographical distribution of production networks 38 2-5-2. Why are production networks skewed? 41 2-5-3. How can we push out the frontier of production networks? 42 2-6. Industrial agglomeration, technology transfers, and innovation 43 2-6-1. Unprecedented formation of industrial agglomerations 43 2-6-2. Perspectives for further economic development 45 CHAPTER 3. THREE TIERS OF DEVELOPMENT STRATEGIES 47 3-1. Policy scope in our development strategies 47 3-2. Tier 1: From middle-income to fully developed countries/regions 49 3-2-1. Exploring positive agglomeration effects 49 3-2-2. Development of SMEs in industrial agglomerations 51 3-2-3. Making industrial agglomerations innovative 54 3-2-4. Expansion of middle-class population and human capital 57 3-2-5. Necessary logistics infrastructure and other 60 economic infrastructure 3-3. Tier 2: Participating in international production networks 61 3-3-1. Frontiers of international production networks 61 3-3-2. Cities or border areas? 64 3-3-3. Soft and hard infrastructure 64 3-3-4. Mekong-India Economic Corridor: a pilot study by ERIA 66 3-3-5. Necessary logistics infrastructure and other 68 economic infrastructure 3-4. Tier 3: Invigorating industrial development 69 by logistics infrastructure 3-4-1. Logistics infrastructure as a trigger 69 3-4-2. New perspectives for industrial development 71 3-4-3. Necessary logistics infrastructure 72 and other economic infrastructure iii 3-5. Interactions among three tiers: 73 Three sub-regions and industrial/economic corridors 3-6. Other considerations in planning and implementation 74 CHAPTER 4. ECONOMIC ASSESSMENT OF THE CADP: 76 THE GEOGRAPHICAL SIMULATION MODEL 4-1. Geographical Simulation Model (GSM) 76 4-1-1. Development of the IDE/ERIA-GSM 76 4-1-2. The third-generation IDE/ERIA-GSM 77 4-2. Economic effects of logistic enhancement: simulation results 81 4-2-1. Scenarios 82 4-2-2. Simulation results 84 4-3. Overall assessment 104 CHAPTER 5. FINANCIAL PROJECT DESIGN 105 AND PUBLIC-PRIVATE PARTNERSHIP 5-1. Investment demand for infrastructure 105 5-2. Theoretical foundation of PPP 106 5-2-1. When is PPP relevant? 106 5-2-2. Market failure and the role of government 108 5-2-3. Economic viability of the project 108 5-2-4. Additional gains from private incentives 109 5-2-5. Price and non-price competitiveness of private counterparts 109 5-3. Toward designing Asian PPP 110 5.3.1. Prepare key elements for successful PPP 111 5-3-2. Establish robust and transparent regulatory regime 112 5-3-3. Create a framework for funding support 112 and guarantee support 5-3-4. Provide adequate risk mitigation measures for private sector 113 5-3-5. Enhance predictability and certainty 114 for financial/contractual practices 5-3-6. Enhance mechanism for public sector 115 to facilitate PPP process 5-3-7. Conduct adequate measures 115 to encourage private participation, secure interest, and gain trust and confidence from market players iv CHAPTER 6. PROSPECTIVE PROJECTS FOR LOGISTICS 117 AND ECONOMIC INFRASTRUCTURE 6-1. Making the CADP strategy implementable 117 6-2. Prospective projects and the tier-wise development strategies 120 6-3. Selected prospective projects 129 and sub-regional development scenarios 6-3-1. Mekong sub-region 129 6-3-2. IMT+ sub-region 132 6-3-3. BIMP+ sub-region 135 APPENDIX 1. A LONG LIST OF PROSPECTIVE PROJECTS 138 FOR LOGISTICS AND ECONOMIC INFRASTRUCTURE APPENDIX 2. ERIA PRE-F/S PILOT PROJECTS IN FY2009 177 REFERENCES 208 v CHAPTER 1. CONCEPTUAL FRAMEWORK The Comprehensive Asia Development Plan (CADP) will provide a grand spatial design of economic infrastructure and industrial placement in ASEAN and East Asia and will claim to pursue both deepening economic integration and narrowing development gaps. This chapter presents our novel conceptual framework based on new waves of international trade theory: the extended fragmentation theory and new economic geography. 1-1. What is the Comprehensive Asia Development Plan? East Asia1 has been leading the world in sustained economic growth for the past three decades. The strength of the ASEAN and East Asian economies has resided in the unprecedented development of international production networks. After demonstrating strong recoveries from two massive economic crises and further upgrading of the economy, East Asia has now truly become the “Factory of the World.” However, East Asia is now facing a big challenge. On the one hand, economic forces in the globalizing era require an even higher level of de jure and de facto economic integration than now. On the other hand, East Asia consists of countries and regions widely different in their development stages, with diversified historical, cultural, and political backgrounds. The reconciliation of two objectives, i.e., deepening economic integration and narrowing development gaps, is an urgent issue for policy discussion in East Asia. The Comprehensive Asia Development Plan (CADP) will provide a grand spatial design of economic infrastructure and industrial placement, and will claim to pursue both deepening economic integration and narrowing development gaps at the same time. We apply a novel analytical approach based on new waves of international trade theory: the extended fragmentation theory and new economic geography. The CADP is “comprehensive” in the sense that the whole plan is based on a rigorous conceptual framework, provides robust empirical evidence, and presents 1 In the CADP, the geographical concept “East Asia” is defined in a flexible manner as “ASEAN and beyond,” depending on the context.