October 2018 · Number 4 The Growth and Welfare Effects of the Belt and Road Initiative on East Asia Pacific Countries 1 François de Soyres Introduction Asia Pacific region reaping the largest gains. Using a combination of precisely geo-localized information on BRI transport projects and a The Belt and Road Initiative (BRI) is a development strategy proposed by China that network algorithm, it is possible to compute the shipping time before and after the BRI focuses on connectivity and cooperation on a trans-continental scale. Although its scope is between all country pairs in the world. Results show that shipping time is expected to decrease still taking shape, the initiative roughly follows and expands the old Silk Road on the land side by an average of 1.2% across all country pairs in the world. Countries located in the East Asia and complements it with a maritime part to and Pacific region are expected to experience build a series of economic corridors with the the largest gains, with an average reduction of goal of boosting trade and stimulating shipping time to other countries in the world of economic growth across Asia, Europe and Eastern Africa. The range of activities that will 2.31%, including a gain of 4.35% with respect to countries in South Asia region and 2.87% be part of the BRI is very wide, including policy coordination, infrastructure, trade and toward countries in Middle East and North Africa.2 investment, financial and people-to-people exchanges. In this Box, we focus on the The associated reduction in trade costs is a consequences of transport infrastructure linked function of the “time sensitivity” of each sector, with the Belt and Road Initiative and quantify and results show that East Asia Pacific the associated decrease in shipment time and countries are again expected to experience trade costs and ultimately estimate the impact on GDP and welfare for countries in the East large gains. Using estimated “value of time” from the literature, the reductions in trade costs Asia Pacific region. exhibit significant geographical heterogeneity, driven by the different export and import Implementation basket across country-pairs. Those trade cost reductions will have an impact on production The implementation of all BRI transport costs for all countries and will change the projects will have a systemic impact on distribution of comparative advantage. The shipping time across the world, with the East effects in terms of GDP and welfare can be 1 This note has been published as a box in the East Asia Pacific Economic Update, October 2018. Author: François de Soyres (MNACE), based on two papers by François de Soyres, Alen Mulabdic and Michele Ruta (2018) and François de Soyres, Alen Mulabdic, Siobhan Murray, Nadia Rocha and Michele Ruta (2018). 2 Those numbers were constructed by taking the average decrease in shipping time between all pairs of countries where the origin country belongs to East Asia Pacific and the destination country belongs to South Asia or Middle East and North Africa, respectively. estimated using general equilibrium modeling to account for the interaction between many forces. Figure 1. Average percentage change in shipping time (left) and trade costs (right) of East Asia and Pacific Countries due to the BRI. Sources: Based on de Soyres, Mulabdic and Ruta (2018). For each country, the decrease in shipping time and trade cost is the average taken with respect to all other countries in the world. in the EAP region contribute to an important Results amplification of the effects. Results from a quantitative trade model Welfare effects, while large on average, are indicate that the Belt and Road Initiative will mitigated by the cost of building those increase GDP between 2.6% and 3.9% on infrastructure projects. Many countries in the average for countries in “developing EAP”, world will benefit from new or upgraded which is higher than the expected gains for the infrastructure and faster shipping, but only a world as a whole. 3 Those effects are very few countries are expected to pay for those heterogenous across countries, with Cambodia, improvements. Resources devoted to paying Vietnam and Malaysia experiencing larger for the project cannot be used for consumption, gains in GDP. The magnitude of these effects is which reduces welfare gains and can even lead due to the combination of two forces: first, the to welfare losses depending on the financing nature of transport networks implies that scheme. This creates a discrepancy between the increasing the efficiency of a given rail line or a geographical distribution of costs and benefits port results in a trade cost reduction for all and can impact the way the initiative is countries using the infrastructure. Second, large perceived in different countries. For example, production linkages and regional value chains the model predicts that if Mongolia were to pay 3Those numbers are based on de Soyres, Mulabdic represent the view of the World Bank. Countries in and Ruta (2018) which builds a general equilibrium “Developing East Asia Pacific” included in the quantitative model along the lines of Caliendo and analysis are Mongolia, Indonesia, China, Lao PDR, Parro (2014). They rely on assumptions described Philippines, Thailand, Malaysia, Vietnam and precisely in the paper and do not necessarily Cambodia. October 2018 · Number 4 · 2 the entire cost of its infrastructure associated with the improved access to both improvements linked to the BRI, it would export and import markets. experience larger costs than the gains Figure 2. Average percentage changes in GDP and welfare for countries in “Developing East Asia Pacific”. Average Changes in GDP and Welfare (%) Countries in "Developing East Asia Pacific" 5.00 3.88 4.00 2.59 2.81 3.00 1.73 2.00 1.00 0.00 Lower Bond Upper Bound GDP Welfare Sources: Based on simulations presented in de Soyres, Mulabdic and Ruta (2018). Countries in “Developing East Asia Pacific” included in the analysis are Mongolia, Indonesia, China, Lao PDR, Philippines, Thailand, Malaysia, Vietnam and Cambodia. Conclusion model accounts for complex production linkages across countries and for possible The potential benefits and costs highlighted import and export substations leading to a above have been built using a specific set of reallocation of comparative advantage, it assumptions that should be acknowledged. abstracts from other elements such as First, the analysis focuses on infrastructure technology diffusion, foreign direct investment transport projects that can be mapped precisely or capital accumulation that could affect GDP and hence represent only a subset of all projects and welfare gains. Finally, both the exact cost currently being developed under the BRI and the distribution of payment for the projects umbrella. Second, while the structure of the under consideration is not generally known. About the author(s): François de Soyres, Young Professional, World Bank’s Middle East and North Africa Regional Chief Economist’s Office fdesoyres@worldbank.org October 2018 · Number 4 · 3 References • Caliendo, L., and Parro, F. Estimates of the Trade and Welfare Effects of NAFTA. Review of Economic Studies 82, 1 (2015), 1–44. • de Soyres, F., Mulabdic, A., and Ruta, M. (2018). The Belt and Road Initiative: A Structural Analysis, Unpublished Working Paper, World Bank. • de Soyres, F., Mulabdic, A., Murray, S., Rocha, N. and Ruta, M. (2018). How Much Will the Belt and Road Initiative Reduce Trade Costs?, Policy Research working paper; no. WPS 8614., World Bank. • Djankov, S., Freund, C., and Pham, C. S. Trading on Time. The Review of Economics and Statistics 92, 1 (February 2010), 166–173. • Hummels, D. L., and Schaur, G. Time as a Trade Barrier. American Economic Review 103, 7 (December 2013), 2935–2959. • World Bank East Asia and Pacific Economic Update, October 2018: Navigating Uncertainty. World Bank publication, Washington, DC. October 2018 · Number 4 · 4