Perspectives from Around the World

Connectivity between ASEAN and India and the Significance of the Dawei Development Project

Executive Director, Economic Research Institute for ASEAN and East Asia (ERIA)

For NISHIMURA Hidetoshi's full bio,

From the 1980s and onward and particularly against the backdrop of the yen's sharp rise following the 1985 Plaza Accord, Japanese manufacturers have accelerated their foreign direct investment in developing East Asian economies. They have linked industries within the region into networks and promoted the fragmentation of production processes across member economies of the Association of Southeast Asian Nations (ASEAN). Today, East Asia is home to extensive cross-border production networks that are among the most advanced in the world, and the region as a whole is achieving remarkable economic development. However, these networks are still limited to specific areas--typically, industrial agglomeration areas near the capital city within each country--and there remain significant economic disparities in East Asia. In order to expand the production networks so as to bring benefits to a broader range of countries and regions, further infrastructure development is indispensable.

The key in considering infrastructure development is the concept of "economic corridors." The significance of this concept is detailed in the Comprehensive Asia Development Plan (CADP)(Note 1) prepared by the Economic Research Institute for ASEAN and East Asia (ERIA) and submitted to the Fifth East Asia Summit held in October 2010. The idea is to promote the fragmentation of production activity by improving distribution infrastructure and thereby strengthening the linkage or connectivity among regions located along the economic corridors, i.e., roads, bridges, and other transport infrastructure, while at the same time properly controlling agglomeration and dispersion forces that operate between industrial clusters and neighboring regions. This will enable East Asia to achieve its two goals--i.e., deepening economic integration and narrowing intra-regional development disparities--at the same time. The CADP provides a detailed analysis of economic plans designed to accommodate local needs. By evaluating the economic effects of 695 infrastructure projects with a total investment of $390 billion and setting the priority order for them, we showed that infrastructure development can turn the existing economic disparities into the source of economic development. We also pointed out that the Mekong-India Economic Corridor (MIEC)--which would link Ho Chi Minh City, Phnom Penh, Bangkok, and Dawei by land and construct a deep-sea port in the southern Myanmar city to connect to Chennai, India by sea--may have a greater economic impact compared to two other major economic corridors in the Mekong region, namely, the East-West Economic Corridor (EWEC) and the North-South Economic Corridor (EWEC). Estimates made by the ERIA shortly after the Great East Japan Earthquake of March 2011 showed that the MIEC--which includes the construction of new bridges and highways as well as the opening of a new port--would not only boost the economic growth of the countries along the MIEC but also have a significant economic impact on Japan, if accompanied by the development of a major industrial artery extending from the corridor to Japan, which involves enhancing not only hard infrastructure such as air and sea routes but also soft infrastructure including reductions in non-tariff barriers(Note 2). Specifically, it was found that the MIEC plus the development of the MIEC-Japan industrial artery would have a net impact of 4.14 percentage points on Japan's gross domestic product (GDP) in 2030 including the effects of the March 2011 earthquake, compared to a fictitious baseline scenario where the earthquake did not occur and there was no development of the MIEC or the MIEG-Japan industrial artery. Based on those estimates, the ERIA conducted the Phase II of the CADP (CADP2) in 2011 focusing on the connectivity between the ASEAN and India, which together boast high growth potential, and this resulted in a set of policy recommendations for the development of MIEC including the enhancement of non-physical infrastructure(Note 3). In particular, it called for the development of Dawei, the largest missing link in the MIEC, as a project of crucial importance.

As of the time of the drawing up of the policy proposal in 2011, it was still unpredictable that Myanmar would subsequently embark on nationwide economic reform and development, and it is against such backdrop that the special importance was attached to Dawei's development. Myanmar's domestic reform has since made considerable progress, and it is now expected that infrastructure development will occur across the country in due time. Particularly, significant progress has been made on infrastructure development in Yangon and Thilawa, and it is expected that the ongoing domestic reform, which is taking place at a rapid pace, will result in an even greater concentration of industries in Yangon. This leads us to a natural question. Given the progress on domestic reform and with so much attention directed to Yangon and Thilawa, what is the significance of the stalling Dawei development project?

The Geographical Simulation Model (GSM), which has been jointly developed by the ERIA and the Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO), provides one answer to this question as described below(Note 4). Constructed based on the theory of spatial economics, the model is capable of estimating the economic development effects of infrastructure projects by region using detailed data, such as industrial composition and population, for all of Asia and at a city level.

Scenario 1 is a business-as-usual scenario, assuming that the institutional reform in Myanmar will proceed at the current rapid pace and the Yangon-Thilawa development will continue. Compared to the baseline scenario, which represents the case in which there will be no institutional reform and no Yangon-Thilawa development, Myanmar's GDP will be significantly higher in 2030 under this scenario. There would be a greater concentration of population in Yangon, trade flows to and from the city would increase, and the concentration of firms and labor force would boost productivity in Yangon. As such, Scenario 1 would have a positive economic effect on Yangon and its nearby areas, but the northern areas of the country would suffer a negative effect.

Scenario 2 assumes the development of Mandalay and a gradual connectivity enhancement within the country in addition to the institutional reform and the Yangon-Thilawa development. As shown in the Figure, the red areas--i.e., those that would be better off than under the baseline scenario--spread across the country, indicating that the addition of the Mandalay development and domestic economic corridors would contribute to regionally balanced development through the distribution of benefits. The assumptions for this scenario are based on the Myanmar Comprehensive Development Vision, which was drawn up by the task force of the Myanmar government and the ERIA to set a direction for the country's economic development over the medium- to long-term horizon.

Scenario 3 assumes that the Dawei development will proceed in addition to those under Scenario 2, whereby the Dawei deep-sea port will be constructed to link the domestic economic corridors and Thailand by roads. Simulation results showed that this scenario would bring a positive effect not only on Myanmar but on the entire Mekong region, India, and Japan.

Figure: Economic impacts of institutional reform, development, and connectivity enhancement in MyanmarFigure: Economic impacts of institutional reform, development, and connectivity enhancement in Myanmar
Light blue lines in the sea area indicate enhanced or newly developed sea routes. In Scenarios 1 and 2, the sea routes from Thilawa to Kolkata, Chennai, Colombo, and Singapore will be enhanced, whereas Scenario 3 will include the opening of new sea routes from Dawei to each of the four cities in addition to the enhancement of the existing routes from Thilawa to those cities.
Impact density = Economic impact in U.S. dollars per square kilometer in 2030
Source: Isono and Kumagai (2013), ERIA Policy Brief, No. 2013-01, May 2013.

In other words, while the development of Yangon, Thilawa, Mandalay, and domestic economic corridors is sufficient to bring a significant economic impact so far as the development of Myanmar is concerned, the Dawei development project has significant importance from the viewpoint of bringing benefits to the entire Mekong region. What we can see from the above is that by pursuing the development of the MIEC with the Dawei project as its central piece and enhancing connectivity across ASEAN countries with the MIEC as the core element, we can reduce economic disparities in the ASEAN and East Asian region and promote further economic development. Japanese companies have been playing the leading role in creating and operating advanced production networks in the region, and the development of the MIEC and other economic corridors will enable them to further enhance and upgrade their respective networks, which in turn will further increase the significance of those economic corridors. The Dawei development project, which constitutes the very core of the entire development plans for the region, is extremely important for Japan.

November 2013

November 1, 2013

Article(s) by this author