The One Belt, One Road Initiative-Impact on Trade and Growth

09 May 17

By James Villafuerte (ADB), Erwin Corong (Purdue University) and Juzhong Zhuang (ADB)

Executive Summary *

In the aftermath of the global financial crisis, two important trends emerged. First, the growth of global trade decelerated below output growth. Second, the People’s Republic of China (PRC) growth moderated on account of cyclical and structural factors. Faced with this twin and inter-related challenges, PRC unveiled a set of domestic and external reforms. Domestically, it has identified hundreds of reforms to address wasteful investment, increase consumption and innovation, and lift productivity growth. Externally, it unveiled the Silk Road Economic Belt and the 21st Century Maritime Silk Road—referred to here as One Belt, One Road (OBOR)—which is meant to strengthen infrastructure on the westward land route through Central Asia and Europe, and the southern maritime route through Southeast Asia, on to South Asia, Africa and Europe. OBOR could help PRC: (i) foster a trade revival; (ii) address overcapacity issues; and (iii) develop the less connected provinces in PRC. For countries in the OBOR route, OBOR gives them access to PRC’s overseas direct investment, helps them invest and upgrade their infrastructure. OBOR also strengthens regional integration in the region. The OBOR initiative is a large initiative covering more than 60 countries with a combined population of about 3.2 billion (around 45% of the world’s population) and a combined gross domestic product (GDP) of $13 trillion.

The economic and infrastructure developments in countries along the OBOR route are mixed. At present, there are: (i) 9 low-income economies; (ii) 16 lower-middle-income economies; 14 upper-middle-income economies; and 7 high-income economies along OBOR. Thus, alleviating poverty remains a major challenge for countries in the OBOR route. There is also a great diversity among countries in OBOR in terms of physical measure such as land area, population density, road density, paved road, and rail density. Many countries along the OBOR route have poorly developed transport infrastructure networks, relative to their population density. The proportion of paved roads to total roads is also relatively low and there is fairly limited rail access or movement for some of these economies. These gaps in transport infrastructure hamper trade and investment flows to the OBOR region.

Using the GTAP model, its version 9A database, and comparative static simulations, this study confirms that the OBOR initiative has non-trivial effects on Asia.1 For instance, improving the transport network and trade facilitation in countries along the OBOR route could raise the GDP growth in Central, West and South Asia ranging from 0.1 to 0.7 percentage points. It could also contribute to an increase in welfare from about $6 billion to about $100 billion. The total exports of countries in the OBOR could also increase by about $5 billion to $135 billion. More importantly, the distribution of benefits arising from OBOR is not equal—with some countries benefitting more than others. Certainly, PRC would gain a lot from the OBOR initiatives, but some countries such as Mongolia or Pakistan; and sub-regions such as Central Asia and Southeast Asia stand to gain significant benefit as well. However, many factors and challenges could hamper the realization of these potential benefits including the diversity of characteristics and institutional development of countries in the OBOR route. Mismatches in policy framework, legal and regulatory rules, and credit and payment standards could hamper effective cooperation and coordination.

* This is a draft version.

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