Enhancing ASEAN's Connectivity

4. The Development of Logistics Infrastructure in ASEAN: The Comprehensive Asia Development Plan and the Post-AEC Initiative

4 The DevelopmenT of logisTics infrasTrucTure in asean: The comprehensive asia Development plan and the post-aec initiative Fukunari Kimura importance of physical connectivity in asean Physical connectivity, together with institutional connectivity, is the key for economic development in ASEAN and East Asia. Production networks in ASEAN and East Asia, particularly those in the manufacturing sector, are the most advanced in the world. Baldwin (2011) introduces the concept of the “2nd unbundling” for international division of labour in terms of production processes or tasks that extend the boundary of corporate activities, beyond the national border. Connectivity backed up by physical logistics infrastructure and institutional economic integration is crucial to the development of production networks. 38 Fukunari Kimura Both ASEAN and East Asia have substantial differences in develop­ ment stages. Such diversity actually enhances opportunities to expand production networks. By effectively utilizing the mechanics of production networks, the regions can achieve both the deepening of economic integration and the narrowing of development gaps. In the process, it is important to identify the demand for logistics infrastructure by geographical location and stages of development. At the East Asia Summit 2010, ERIA submitted the CADP, which presented ASEAN’s logistics and other economic infrastructure deve­ lopment plans that were consistent with the process of industrialization and the extension of production networks. The applied conceptual backbone is the extended fragmentation theory and new economic geography. ERIA, in parallel, supported the ASEAN Secretariat to complete the Brunei Action Plan and the Master Plan on ASEAN Connectivity, both of which shared a common conceptual framework. This chapter is organized as follows: the next section briefly explains the conceptual framework based on the extended fragmentation theory and new economic geography, which logically links logistics/institutional connectivity with overall development strategies. The three tiers in terms of the degree of participation in production networks are also introduced. The third section assesses the current status of logistics infrastructure and services in ASEAN, while the fourth proposes further logistics and supplementary economic infrastructure development by the three tiers of economic development. The fifth section concludes the chapter by addressing the significance of presenting a new development strategy and a pathway beyond 2015. production networks and Three Tiers of economic Development The competitiveness of ASEAN and East Asian economies resides the development of production networks, particularly in the manufacturing sector, with logistics links playing an essential role in the functioning of such production networks. The mechanics of production networks are analysed by the fragmen­ tation theory and its extension.1 The theory formalizes fundamental differences between intermediate goods trade and finished products trade, The Development of Logistics Infrastructure in ASEAN 39 particularly in the flexibility of a firm’s decision­making in cutting out production blocks and the existence of service link costs. Figure 4.1 illustrates the original idea of fragmentation. Suppose that a firm originally produces a product from downstream to upstream in a big factory located in a developed country. The production processes in the factory, however, may have various characteristics; some would be capital or human­capital­intensive while others would be purely labour­ intensive. Some would be capital­intensive, but need 24­hour operation under the close supervision of engineers. Hence, if the firm can separate some of the production processes, design production blocks, and locate them in other places, the final total cost may be reduced. This is the so­called fragmentation of production. Fragmentation of production is economically viable if the saving of production costs per se in production blocks is large and incurred service link costs for connecting remotely located production blocks are small. Whether the first condition is met depends on the production processes being technically separable and the availability of different location advantages. The second depends not only on logistics and figure 4.1 The fragmentation Theory: production Blocks and service links Source: ERIA (2010). PB: production blocks SL: service links SL SL SL SL SL pB pB pB pB pB Before fragmentation Before fragmentation Large integrated factory 40 Fukunari Kimura institutional connectivity, but also on various coordination costs, which make transactions in production networks relation­specific. In addition, service links often present economies of scale. Production networks in ASEAN and East Asia have advanced further than simplistic fragmentation of production. Cross­border production sharing between the U.S. and Mexico, for example, has a relatively simplistic structure with back­and­forth, closed­loop, and intra­firm transactions (see...