Building on resilience

Photo: AIIB

Regional integration is the special focus of the 2/2021 issue of the OPEC Fund Quarterly, which includes interviews with some of the world's foremost development professionals. Here, Konstantin Limitovskiy, Asian Infrastructure Investment Bank (AIIB) Vice President of Investment Operations (Region 2), shares his insights on how boosting investments in human capital and strengthening policy frameworks can help drive regional integration in Asia.

OPEC Fund Quarterly: Why is regional integration important to development?

Konstantin Limitovskiy: The world, including many Asian economies, has benefited from globalization of production. For developing economies, participation in global value chains is a path towards economic growth and modernization. For developed economies, production sharing keeps the cost of production low and allows them to reach the rising markets in emerging economies. Such integration supports cross border investments, facilitating transfer of capital and knowledge. These have very positive effects on workforce and firm productivity. 

But markets alone cannot drive integration. For developing economies, the right infrastructure, regulatory systems and policy frameworks also must be in place to maximize the potential benefits. Cross-border connectivity is a case in point. The right investments will not only benefit the communities in which they are located, but also will have far-reaching, positive impacts on markets and trade across the region. No country in the past five decades has been able to maintain high levels of economic growth and improve the living standards of its citizens without increasing integration with the global economy.

It is also important to note the recent stagnation in the participation in global value chains, which poses a risk to future growth as many countries are focused on grappling with the economic fall-out from the COVID-19 pandemic. 

OFQ: Which areas of the world face the biggest challenges in terms of regional integration?

Konstantin Limitovskiy: Generally, “landlocked” Asian countries or inland regions stand to benefit the most from regional connectivity. According to the OECD and recent industry studies, the large connectivity investments planned in Central Asian, MENA and South East Asian countries—together with foreseeable improvements in border custom procedures—have the potential to increase connectivity to foreign markets from five to 11 percent. And with higher trade volumes and higher productivity, this can result in a potential for economic growth that ranges between one and 11 percent. 

Yet integration is not just about physical connections. Policy matters too. Many studies have shown that non-tariff measures prevent further integration of regional economies. Without trade facilitation, there will be little use of more ports or cross-border highways. Integrating economies is a difficult exercise of policy coordination, but progress can be made. The recent Regional Comprehensive Economic Pact Partnership and EU-China Comprehensive Agreement on Investment are exciting initiatives towards the right direction. These will open up more space for  foreign direct investment and cross-border infrastructure development.

OFQ: Are some sectors more conducive to regional integration than others?

Konstantin Limitovskiy: Generally, manufacturing is seen to be more conducive for integration—it has proven economically feasible for production to be broken up, with each country taking a slice of the value chain according to their comparative advantage. Of course, these sometimes lead to dislocations that result in the trade tensions we see today. The key for the manufacturing sector is to prevent trade tensions from disrupting the large gains in integration made over the past decades. 

Services on the other hand are seen as more difficult to integrate. The need for coordination of standards and regulations is high. But with more ICT development, more services are now being traded across borders. During the pandemic, services trade that requires travel and face-to-face contact declined very sharply (tourism for example). The good news is that non-contact services trade, such as ICT and financial services, have remained very resilient. It is important to build on that.

OFQ: How important is human capital in terms of regional integration for development purposes?

Konstantin Limitovskiy: Asia is the world’s largest and fastest-growing region representing 60 percent of the world’s population and 45 percent of the global economy. Asia’s role in connecting people, goods, services and markets worldwide is growing. However, the development of its economies, human capital, and infrastructure has so far been uneven. 

Robotics, AI and 3D printing are changing manufacturing. Importantly, this will also allow some activities to be re-shored back to developed economies. The effects are being played out, but this trend could potentially mean less demand for low-skilled labor and some early studies are already pointing to that. Labor intensive, low-wage developing economies will need to invest to upskill their workforce to participate in this new digital world or risk being left behind. Most studies point to the potential of machines and workers complementing each other, providing the right investment on human capital is made. Investment into digital infrastructure is becoming ever more critical, and AIIB will prioritize this. 

OFQ: What has COVID-19 taught us about regional integration?

Konstantin Limitovskiy: Firstly, the global supply chain has been resilient throughout the crisis, notwithstanding some disruptions. To a large extent, it shows the strength of regional integration. Secondly, the pandemic also brought home the need to integrate disease surveillance, control, sharing of vaccine information, etc. This is particularly important given the rise of cross-border travel, which is an essential part of economic integration. 

The pandemic also highlighted the unevenness of infrastructure within and between countries. One example is the uneven access to high quality broadband internet. Another example is the disparities in public health and healthcare provisions. Addressing these infrastructure constraints will facilitate greater regional integration. 

This is where AIIB will add incremental value in the post-COVID19 recovery. While we have had to adjust our lending program to meet the changing needs of our members and clients during the pandemic, we have also increased our efforts in preparing for our mainstream business once the crisis is past.

We think the opportunity will be to invest in what we call the ‘Infrastructure for Tomorrow.’ This is green infrastructure with sustainability, innovation and connectivity—all intertwined at its core.

OFQ: What role can the international development community (DFIs, the UN, governments, NGOs) play in supporting regional integration?

Konstantin Limitovskiy: Investing in connectivity or cross-border infrastructure is a priority across several initiatives and networks across Asia. ASEAN Connectivity 2025, the CAREC 2030, and the South Asian Association for Regional Cooperation (SAARC) are just a few examples of multilateral efforts to bring decision-makers together to facilitate better regional integration. It is within these fora that the right conversations and discussions can happen to develop the kind of policy frameworks necessary to decide on the most beneficial connectivity investments that will help the region as a whole. 

There are of course barriers to accessing global markets, but none more so than obstacles at the political and policy level when it comes to cooperation and integration. When governments come to the table under a multilateral umbrella, with a regional rather than just a national view, it helps pave the path towards better mutual understanding of how benefits can be shared across borders.