Common transport infrastructure: Welfare effects of the Belt and Road Initiative

Francois de Soyres, Alen Mulabdic, Michele Ruta 12 July 2019

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China proposed the Belt and Road Initiative (BRI) in 2013 to improve connectivity and cooperation on a transcontinental scale. Its scope involves two main components: the Silk Road Economic Belt (the Belt), and the New Maritime Silk Road (the Road), as in Figure 1. 

Figure 1 Belt and Road transport corridors

The overland Belt links China to Central and South Asia and onward to Europe. The maritime Road links China to the nations of South East Asia, the Gulf, East and North Africa, and on to Europe (Pomfret 2018, 2019).

Common transport infrastructure can improve welfare, but it also creates challenges for countries participating in the projects. For any country, building a railway or a road has some value, but it also has value to the countries around it, because improvements in one part of the transport network reduce shipping times for all countries in the network. If each country individually decided how to invest in infrastructure, there spillovers would not be taken into account. This is even more true when transport infrastructure crosses one or more borders, pointing to the value of international cooperation in this area. 

But common transport infrastructure also creates challenges. It has large implications for public finances, and may have asymmetric effects on the trade and GDP of individual countries. This raises the possibility that the countries that build – and bear the cost of – large sections of the project may not be the ones that will gain the most from it.

In our recent work (de Soyres et al. 2019), we employ a quantitative trade model to quantify the consequences of the transport infrastructure projects associated to the BRI in terms of GDP, welfare and trade flows. This is part of a broader research effort by the World Bank Group to understand the impact of the BRI, including debt sustainability, environment and local development (Ruta et al. 2019). Our analysis is based on the framework developed by Caliendo and Parro (2015), which we extend to study the impact of infrastructure investment and its budget implication. It builds on de Soyres et al. (2018), which uses a combination of geographical data and network algorithms to compute the reduction in shipping time and trade costs between all country pairs in the world resulting from the implementation of all BRI transport projects. 

Quantifying gains … and losses

Our results show that BRI transport infrastructure projects increase GDP for participating economies by up to 3.35% and welfare, which accounts for the cost of infrastructure, by up to 2.81%. These effects are equivalent to the impact of a coordinated tariff reduction of one-third for all countries along BRI corridors. Welfare effects of BRI transport projects could increase by a factor of four if participating countries were to reduce delays at the border and tariffs by half, stressing how important are complementary policy reforms. 

Results are highly heterogenous across countries. This reflects different connectivity, but also different import and export structures that translate into complex reallocation of comparative advantage. Some countries (Azerbaijan, Mongolia and, in a lower-bound scenario, Tajikistan) could experience welfare losses as infrastructure costs outweigh gains. Despite these disparities, all countries would be better off if infrastructure projects were coupled with policy reforms. 

The model also shows that BRI-related transport projects could increase GDP for non-BRI countries by up to 2.61%, and for the world as a whole by up to 2.87%. These numbers are larger than typical findings we would get for regional trade agreements such as NAFTA, using a similar methodology. Unlike regional trade agreements, which decrease tariffs within a narrowly defined set of countries, the BRI is expected to decrease trade costs between a large number of countries, including many economies that are not part of the initiative, but whose trade flows benefit from the improved transport infrastructure network when accessing (or transiting through) countries along BRI corridors.  

To better understand the impact of the BRI on GDP changes, Figure 2 plots the gains against the reduction in trade costs. 

Figure 2 GDP gains and changes in trade costs

Source: de Soyres et al. (2019)
Notes: Top panel: changes in export weighted costs. Bottom panel: changes in import weighted costs.

Changes in import-weighted costs explain almost 40% of the variation in GDP gains, while changes in costs to export destinations account for less than 30%. Results are very heterogenous across countries. This reflects different connectivity, but also different input-output structures that translate into a complex reallocation of comparative advantage. For example, the GDP gains for Lao PDR are much larger than the ones for Bangladesh, despite similar reductions in trade costs, or for Mongolia even though the latter is expected to sustain a higher investment.

Figure 3 presents the correlation between welfare gains and relative investment size. 

Figure 3 Welfare gains and investment (as a share of GDP)

Source: de Soyres et al. (2019)

Once we factor in the cost of the infrastructure, the gains for participating economies are much smaller and, in a few cases, even negative. For instance, the welfare gains for Lao PDR, which is expected to sustain a large investment relative to the size of its economy, are around one-third of the GDP gains. Moreover, the figure shows that there is virtually no correlation between welfare gains and infrastructure investment over GDP. These results highlight the strong spillover effects of infrastructure investment where the size of the investment is not a good predictor of gains.

Funding common infrastructure  

This highlights the heterogeneity of gains, but also the mis-alignment of gains and costs across countries. Mis-alignment is linked to the systemic nature of a transportation network: the value of a project cannot be determined in isolation, but potentially depends on all other projects implemented around the world, as well as the current state of the network. By creating complex interdependence in production costs, input-output linkages across countries not only magnify the gains, but also affect the distribution of those gains across countries. 

We perform an additional quantitative exercise in which we keep total investment costs unchanged at the estimated value and compute a counterfactual allocation of payments among participating countries. This counterfactual equalises the proportional welfare gains. 

More precisely, keeping the total cost constant, we iterate over the share of total payment attributed to each country, reducing the payment share for countries with low welfare gains and increasing payment share for countries with high welfare gains, until all welfare gains have been equalised. The final payment allocation is an average welfare gain of 2.8% among all countries along BRI corridors, which is almost exactly the same as the baseline simulations. 

Figure 4 shows country-specific results of this exercise.

Figure 4 Counterfactual payment allocation

Source: de Soyres et al. (2019)

Because some countries end up with a negative payment, our counterfactual payment allocation looks more like a transfer scheme. To equalise welfare gains among participating countries, it is necessary that some countries with large gains in the baseline allocation transfer money to countries with losses. As expected, countries that experience a welfare loss in the baseline allocation, such as Mongolia and Azerbaijan, are compensated for their losses. 

As an example, Mongolia, which annualised payment was estimated to more than 5% of its GDP in the baseline, would benefit from a lump sum transfer of close to 3% of its GDP under the counterfactual allocation. 

While it is just a thought experiment, this exercise illustrates the need to think about the appropriate funding of common infrastructure projects.  

Conclusion

Quantifying the impact of common transport infrastructure projects such as those associated to the BRI is an arduous task, but it is also a very important one, and necessary for many countries. Our results show that the gains from the BRI could be positive on aggregate. But they are unevenly distributed across countries, with some economies potentially losing from the infrastructure investment. This raises the question of how to optimally fund an initiative as complex as the BRI to ensure that all countries experience net gains. 

Authors’ note: The views expressed in this column are those of the authors and they do not necessarily represent the views of the World Bank Group.

References

Caliendo, L and F Parro (2015), “Estimates of the Trade and Welfare Effects of NAFTA”, The Review of Economic Studies 82(1): 1–44.

de Soyres, F, A Mulabdic, and M Ruta (2019), “Common Transport Infrastructure: A Quantitative Model and Estimates from the Belt and Road Initiative”, World Bank policy research working paper 8801.

de Soyres, F, A Mulabdic, S Murray, N Rocha, and M Ruta (2018), “How Much Will the Belt and Road Initiative Reduce Trade Costs?”, World Bank policy research working paper 8614. 

Pomfret, R (2018), “The Eurasian Landbridge and China's Belt and Road Initiative”, VoxEU.org, 2 May. 

Pomfret, R (2018), “The Eurasian Land Bridge: The Role of Service Providers in Linking the Regional Value Chains in East Asia and the European Union”, ERIA working paper ERIA-DP-2018-01.

Pomfret, R (2019), The Central Asian Economies in the Twenty-First Century: Paving a New Silk Road, Princeton University Press.

Ruta, M, M Herrera Dappe, S Lall, C Zhang, E Churchill, C Constantinescu, M Lebrand, A Mulabdic, (2019), Belt and Road Economics: Opportunities and Risks of Transport Corridors, World Bank.

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Topics:  Development International trade

Tags:  Belt and Road Initiative, China, trade, infrastructure

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