Assessing the Value of Market Access from Belt and Road Projects
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Policy Research Working Paper 8815 Public Disclosure Authorized Assessing the Value of Market Access from Belt and Road Projects Public Disclosure Authorized Tristan Reed Alexandr Trubetskoy Public Disclosure Authorized Public Disclosure Authorized International Finance Corporation April 2019 Policy Research Working Paper 8815 Abstract The present value of market access from the Belt and Road projects provide market access gains. However, consider- Initiative in Eurasia does not exceed its costs. Many trans- ing the proposed new transport infrastructure as a system, portation projects are of little value because they fail to the share of projects that provide gains increases to almost create new least-cost paths between large population centers, two-thirds. International coordination and rigorous proj- or because they create redundancy with paths already on ect selection allow mutual benefit from the investment the network. If built in isolation, only about one-third of program. This paper is a product of the International Finance Corporation’s Economics and Private Sector Development Vice Presidency. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http:// www.worldbank.org/prwp. The authors may be contacted at [email protected] and [email protected]. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Assessing the Value of Market Access from Belt and Road Projects1 Tristan Reed Development Research Group, World Bank Alexandr Trubetskoy Department of Statistics, University of Chicago Updated February 2021 JEL Classification Codes: R42, O18 Keywords: market access; transportation infrastructure; cost benefit analysis; Belt and Road 1 GIS shapefiles of the database of Belt and Road Initiative projects developed for this study are available here: https://github.com/sashatrubetskoy/bri_market_access. We thank Sam Asher, François de Soyres, Caroline Freund, Indermit Gil, Bert Hofman, Gabriel Kriendler, Somik Lall, Martin Melecky, Megha Mukim and Michele Ruta and participants at the Harvard Cities and Development conference for helpful comments. Robert Mwanamanga assisted with the compilation of Appendix A. The views expressed in this paper are those of the authors and do not necessarily represent those of the World Bank Group or its Directors. Correspondence to: [email protected]. 1. INTRODUCTION The Belt and Road Initiative is the largest infrastructure construction program of the current era, but it has been officially defined only in broad terms. The initiative is described in the Chinese government’s 13th Five Year Plan (Ch. 51) as an “all-around opening up in which China is opened to the world through eastward and westward links and across land and sea,” a reference to previous domestic reforms initiated by Deng Xiaoping in 1978. While Deng’s Open Door Policy welcomed the world into China, the Belt and Road are understood to carry the country’s influence out into the world, in part by building a new network of road, rail and port infrastructure to lower trade costs between China and its neighbors. Despite ambition for mutual benefit, concerns have been raised that certain projects are not economically viable, and will leave countries burdened by debt that cannot be repaid by incremental economic growth (Hurley, Morris, and Portelance, 2018; Financial Times, 2018, 2020). Though a literature has applied quantitative spatial equilibrium models to value transportation investments, which comprise many Belt and Road projects, these models have not yet been widely applied by policy makers in ex-ante project evaluation. Given limited transparency regarding the results of economic feasibility studies for Belt and Road projects, there is an opportunity for quantitative spatial equilibrium models to fill a gap. For this purpose, we develop an original geographic information system (GIS) database that identifies as comprehensively as possible all proposed, ongoing or recently completed road, rail and port projects along six strategic Eurasian corridors laid out in 2 two Belt and Road strategy documents published by Chinese government agencies, and complete an ex-ante economic evaluation of these projects.2 This paper does not seek to push the theoretical frontier in urban economics, but rather to apply widely-accepted frameworks to study the largest and most geo-politically consequential infrastructure construction program in recent history. To our knowledge, ours is the first analysis to systematically compare the potential economic benefits of individual Belt and Road projects. Project benefits are quantified in terms of expected changes in market access—the sum of the size of all markets on the transportation network, each weighted by the inverse of the ad-valorem trade cost needed to reach it. Theoretically, increases in market access lower the cost of consumption and the cost of production in a location, leading to an increase in the value of land in a location. Total 2 Open access GIS shapefiles of the BRI project database developed for this study are available here. These projects, whose names, locations and status (i.e., proposed, planning, under construction, operational) are listed in Appendix A, are located within 30 kilometers of at least 223 million urban residents, and span 23 different countries, which together produce 24 percent of global GDP. Excluding China, 22 countries and 9% of world GDP. Other estimates of the number of countries covered by the BRI are typically larger, as they include projects in Africa and Western Europe, which do not lie on the corridors identified in the two Chinese government documents on which we base our database. The nodes in our network include all cities described in the UN World Urbanization Prospects for 2015. Note that our database includes only transportation projects, which account for approximately 25% of BRI projects, the remainder of which comprise primarily electric energy projects, and select investments in chemicals, metallurgy and mining (World Bank, 2019). The value of non-transportation projects is outside the scope of this study. 3 land value generated summarizes a project’s benefit. Consistent with this idea, increases in market access have been shown empirically to predict growth in population (Redding and Sturm, 2008), land values (Donaldson and Hornbeck, 2016), and night lights (Alder, 2019). When valued according to expected changes in market access, approximately half of the 68 Belt and Road projects in Eurasia generate little benefit. Remarkably, this result holds regardless of assumptions about the economy (i.e., city income, factor shares, and the responsiveness of trade to trade costs) because projects fail to create new least-cost paths between population centers or because they create redundancy with paths already on the network. These results are validated by evidence that some projects expected to generate little market access have now been cancelled or scaled back by sponsors, and are consistent with a view that the Belt and Road program is guided by non-economic motivations. For instance, one view suggests that some default on loans associated with Belt and Road projects is desired by the Chinese government, since it would allow state-owned banks to foreclose on strategic assets, so called `debt-trap diplomacy’. An alternative explanation could be that local elites select bad projects based on their own interests (Lee and Hameiri, 2020). Having evaluated each project individually, we ask what economic assumptions one would have to believe such that all projects built in complement are worth more than total project costs, including the cost of those projects that provide least-cost paths to nowhere. This exercise evaluates the hypothesis that optimism about economic benefits, rather than non-economic motivations, could justify the investment program. We find that such a break-even scenario obtains only with the assumption that the infrastructure program increases GDP growth in all Eurasian cities by 40 basis points, in perpetuity, beyond any static gains already accounted for by changes in market access. Such an increment to growth could be motivated by external economies of scale in urban production (see, e.g., Glaeser and Mare 2001). Though such additional growth may be 4 plausible in certain cities nearby to projects creating large gains in market access, the existence of many individually uneconomic projects makes it less certain that such an increment to growth could be shared across all of Eurasia. Beyond the results specific to the Belt and Road, the analysis illustrates four heuristics from the spatial equilibrium model that may be applied in transportation planning. First, projects may be complements or substitutes.