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WhyConnectivityMatters

DISCUSSIONPAPER

Draftupdated:10May2018

gica.global

WhyConnectivityMatters 2

TableofContents

1 Introduction ..................................................................................................................... 3

2 NetworkLogicofConnectivity .......................................................................................... 4

3 WhyConnectivityMatters ................................................................................................ 7

3.1 EconomicGrowth ................................................................................................................... 7

3.2 SupplyChainEfficiency ........................................................................................................... 8

3.3 Resilience ............................................................................................................................. 10

4 MeasuringtheImpactofConnectivity ............................................................................ 11

4.1 QuantifyingConnectivityforGrowth .................................................................................... 11

4.2 ConnectivityandMarketAccess ........................................................................................... 12

4.3 EstimatingImpactsofConnectivityonNetworkResilience ................................................... 13

4.4 PotentialNegativeConsequencesofConnectivity................................................................. 13

References............................................................................................................................ 15


WhyConnectivityMatters

DiscussionPaper—Draftupdated:10May2018

1 IntroductionThe idea of connectivity has risen to prominence as sine qua non in themodern economy.Increasingconnectivityisoneofthedefiningtrendsofthe21stcentury.Thisisreflectedintheincreasing demand for resources to be invested in linking communities, economies andcountries. In theAsia-Pacific region alone theGlobal InfrastructureHub (GIH) estimates thatinvestmentinconnectinginfrastructurewillmorethandoubleintenyearstoreach$2.5trillionperyearby2020(MarshandMcLennan2017).However,theneedsremainsignificant,withtheAsianDevelopment Bank (ADB) estimating that Asia-Pacific region needs to invest some $26trillionby2030,whiletheglobaldemandforinvestmentininfrastructureoverthesameperiodis estimated byMcKinseyGlobal Institute (MGI) andOECD at between $4.7 trillion and $6.0trillionperyear(MGI2016;OECD2018;).Middle-incomecountriesaccountforaboutaquarterof this demand (ADB et al forthcoming). There are multiple initiatives to meet the growingdemandfortransport,energyandtelecommunicationsnetworksspanningtheglobe,tolaythebasicinfrastructureforeconomic,politicalandsocialinteractionsofevengreaterintensity.Connectivity is high on the policy agenda of most countries and global development andfinancial institutions.1 With the huge sums of money already being spent or needing to bespent,aquestionthatisoftentakenforgrantediswhyisitimportanttoenhanceconnectivity?Whydoesconnectivitymatter?Thisshortnoteoffersasuccinctanswertothisquestion.Afterall,whilethereislittlecontroversyovertheresourcesthatneedtobeinvestedinconnectivity,there are varying expectations of what connectivity is intended to achieve. Suffice to say,improving connectivity is considered desirable as a public good. However, the transmissionmechanismsfortheimpactsitisexpectedtohaveoneconomies,firmsandsocietyareatbesttakenforgrantedifatalltheyareexplicitlystated.Whatisconnectivity?Different infrastructurefinancingagenciesemployvaryingdefinitionsofconnectivity.Anintrinsiccharacteristicofconnectivity isthat it issynonymouswithnetworks,whichinturnareasetofinterconnectednodes.Anodecanbeaperson,firm,city,countryorotherspatialentity.Acommonthreadrunningthroughthedefinitionsisthatconnectivityisamulti-layerconceptcomprisedofdifferenttypesofnetworks.Ithashardandsoftdimensions,andthatitsimpactcanbefeltbyhouseholds,firms,cities,countriesandregions.Connectivitycanbeexploredatdifferentscales,fromthelocaltotheregionalandglobalscales.Connectivityistherefore,anattributeofanetworkandisameasureofhowwellconnectedanyonenodeis

1TheG20in2016launchedtheGlobalInfrastructureConnectivityAlliance(http://gica.global)inordertopromoteacoherentapproachtoconnectivity.


toallothernodesinthenetwork.Thevalueofconnectivityandthereforeitssignificanceliesintheroleanodeanditshinterlandplaysorisexpectedtoplayinanetwork,thecostofaccessingthatnodeandthereliabilityofconnectingtothenode. Inthisnoteweassociateconnectivitywith interaction between social and economic agents along the links of, or in the nodesconnected by, a network.When the cost of interaction is low thenwe are likely to achievecompleteconnectivitywhereaswhenthecostishighinteractionislimited.Connectivityhasthreeimportantattributes:aphysicaldomain,informationandfinancialflows.Thelargeresourcesaimedatconnectivityarethereforeaimedatloweringcosts,oftenwithanemphasisonphysicalconnectivity.However,andinaddition,allnetworkcentricconceptssharethesimpleideathatinformationsharingisasourceofpotentialvalue.Incommercesuchvalueismeasuredintermsfunctionality,reliability,convenienceandcost.

2 NetworkLogicofConnectivityThe science of networks provides a common language that helps to unify the tools andapproaches to understanding connectivity and why it matters. Network analysis is useful inshowing how any connectivity initiative influences the distribution of power between theconnectedparties,beitregions,cities,firmsorcommunities.Throughanetworkapproachwecanunderstandhowpowerisinherentlyrelational.Anodethatisconnectedtoothernodeshasopportunitiesorfacesrisksonlybecauseitisconnectedtoothernodes.Itisforthisreasonthatthepositionandimportanceofanodeisfundamentalinnetworkscience.Thereareseveralmeasuresthattrytoconveyhowimportantanodeisinanetwork.Anode’sprominencereflectsitsvisibilitytotheothernodeswhileanode’slocationtakesaccountofthedirectrelationswithothernodesaswellasitsindirecttieswithallothernodes.Theseconceptsare captured in the measure of network centrality. The three most widely used centralitymeasuresaredegree,closeness,andbetweenness(Freeman1977;Freeman1979).Anodethathashighdegreeofcentralitymaintainsnumerouslinkswithothernetworknodes.Ithasgreatinfluenceoverothernodes.Acentralnodeoccupiesanetworklocationthatservesasaconduitfor larger flows of goods, information, finance, and other transactions with other nodes. Incontrast,aperipheralnodehasa fewornorelationsandtherefore is locatedspatiallyat themarginsofanetwork.In the closeness concept, a central nodehasminimumpathdistances fromothernodes anddoes not have to go through many intermediaries in interacting with them. Lastly, a nodeoccupiesa“between”positiononthegeodesicsconnectingmanypairsofothernodes in thenetwork. As an intermediate node along the shortest path connecting two other nodes, abetween nodemight control the flow of information or the exchange of resources, perhapsaddingvalueorchargingabrokeragecommissionforservicesprovided.


These theoreticalprinciplesare important tounderstanding someconnectivity initiativesandwhattheyareintendedtoachieve.Forexample,Krugman(2017)usesasimplifiedmodelthatisbasedontheseprinciplestoillustratehowtheBeltandRoadInitiative(BRI)mightaffectChina’splace inglobal tradeandtransport interactions.Heuses theexampleof three locations,A,BandC thathavesimilar transport linksbetween them(dotted lines inFigure1).Assuminganeconomicactivitythathasstrongeconomiesofscale,acommoncharacteristicoftradeflows,there would be a case to centralize such an activity, and serve multiple markets from onelocation.ThatwouldmeannoneofthethreelocationsinFigure1hasanobviousadvantage.Figure1 Figure2

Source:Krugman2017

However,ifweassumethattwoofthetransportconnectionsarethenimproved(solidlinesinFigure2)thenlocationCwouldhaveanadvantageasitwouldnowhaveloweraccesscoststobothAandB.Allotherthingsbeingequal,firmswouldthenlocateinCastheycanservethetwo other markets at lower cost. Of course, in practice the advantages of accessing twodifferent destinations that have similar time and cost should include ameasure that reflectstheirrelativeattractionandtherewouldbeadecayfunctionofcost.Assuch,theconnectivityofonelocationforonetypeoftravelortradecanbequitedifferenttothatforanothertypeoftravelortrade.BasedonKrugman’ssimplifiedmodel,Chinacanbearguedtopresentlybe inanyoneof thepositionsinFigure1,competingforconnectivitytomajormarketsinEuropeandNorthAmericawithportsandtransportlinkselsewhereinAsiaandinotherregions,e.g.,Singapore,Colombo,Long Beach, Hamburg, etc. By improving the overland corridors through BRI, China cantransform its position in the networks to be more central (like C in Figure 2). The BRI canthereforeberegardedasmuchaconnectivityinitiativeasitisastrategictradepolicy.Theabovemodelcanbeextendedtounderstandtheimportanceofbetweennesscentralityinnetworks.WhereasinFigure1therearedirectlinksbetweenthethreenodes,inFigure2therecanbeanindirectlinkbetweenAandB,intermediatedbyC.Thisillustratesanotherattributethat is key to the one of the impacts of connectivity initiatives, which is that links within anetwork can be transitive, the links between A and C and C and B can lead to a direct link


between A and B. However, this is beneficial to A and B only if the transfer through C isefficient, and to C if there is some value adding that takes place at that node or there iscompensationforservicesprovided.Thisaspectofconnectivityis importanttounderstandingthewidereconomicbenefitsofconnectivityandinthecaseoftransitterritoriesorcountries,howtheycanbenefitfromparticipatinginbroaderinitiatives.ThecaseofKhorgosdryportinKazakhstan is illustrativeofanattempt toextract rents from transitive trafficbetweenChinaandEurope,whichgenerateasignificantvolumeofglobaltradetraffic.Economicdensityhasadistinct influenceon the topologyofnetworksand themagnitudeoftheirimpacts.Inaddition,andbasedontheconceptofpreferentialattachment,networksgrowbyconnectingtonewnodeswithabiastowardsbetter-connectednodes.Thisismostapparentintherolethatcitiesplayinconnectivityatthenational,regionalandglobalscales.Citieshavelongbeenand remain amajor engineof growth anddevelopment,muchas theyhavebeenthroughhistory.Leadingcitieshavehigher levelsofproductivity,areoftenthemainnodes inmanyGVCs,andinmanyinstances,arewellconnectedwithcitiesinothercountries,attimesmore than they are with urban centers in the same country. Connectivity has always beenimportanttothe locationofcities.Forexample, in1900allmajorcitieswere locatedalongawaterwaywhilemanyotherswereseaor riverportcities (GlaeserandKohlhase2003).Sincethen connectivityhasplayedan important role in theprospectsof cities, through facilitatingtrade, as centers of high productivity, and through spillovers to surrounding areas. In fact,connectivity at the global scale is defined more by the links between cities, as the nodesthroughwhichmaterials, informationandfinanceflows.This isoneofthereasonswhytradecorridors havebeendefined as “coordinated bundles of transport and logistics infrastructureand services that facilitates trade and transport flows between major centers of economicactivity” (Kunaka and Carruthers 2014, 1).2 As such, depending on a city’s position in aconnectednetwork,itcanintermediateflowsofcomponentsandgoodsbetweenothercentersandbenefitfromitsposition.Ultimately,connectivityis largelyaboutincreasinginteractions,productivity,competition,andmarketopportunitiesbetweencities(seeStraub,Vellutini,andWarlters2008).3Theintensityofinteraction,bothintermsoftransportationandcommunicationsnetworksisausefulmeasureofconnectivitybetweencities.Toassesslevelsofconnectivity,ameasuresuchascentralitycanbeused.Thiscanshedlightonhowwellconnectedandintegratedcitiesarealongacorridororbetweenanygroupofcountries,bothwitheachotherandtotherestoftheworld.

2“TradeandTransportCorridorManagementToolkit”:http://documents.worldbank.org/curated/en/7199714683257814733“InfrastructureandEconomicGrowthinEastAsia”:https://openknowledge.worldbank.org/bitstream/handle/10986/6520/wps4589.pdf


3 WhyConnectivityMattersTheaboveexampleillustratesoneofthereasonswhyconnectivityisimportantforcountries.Thereareseveralotherreasonsasidentifiedbelow.

3.1 EconomicGrowthDuringtherecentglobalfinancialcrisismanyadvancedeconomiesimplementedvarioustypesof fiscal stimulus plans. The plans were based on Keynesian economics where increasedgovernment expenditure is used to stimulate demand and recover from a depression. Asignificantproportionofthedeficitspendingwenttowardsinfrastructure,particularlytransportandenergynetworks.PricewaterhouseCoopers (2016)argues that in the short-term,buildingsuchnetworkscanindeed,boostaggregatedemandthroughincreasedactivityinconstructionandassociatedemploymentcreation.Ineffect,FeyrerandSacerdote(2012)didfindthatintheUnitedStatesthefiscalstimulusexpenditureoninfrastructure(andlowincomehouseholds)didhaveanexpansionaryeffect. In fact,PricewaterhouseCoopers (2016)estimate thatoneextradollarspentoninfrastructureinCanadaincreasedGDPinthelongtermbybetween$2.46and$3.83.Evidenceaboundsfromelsewhereonthepositiveeffectsthatconnectivityinfrastructurehas on the economy even at the micro scale. In addition to the short-term impact ofinvestments in connectivity infrastructure, there are also medium and long-term effects instrengthening the foundation for future economic growth, including through making labormarketsmoreefficientandproductive.Twoexamplesbest illustratetheroleofconnectivity interritorialdevelopment.Thefirst isoftheformerSovietUnionandtheotherisIndiaundertheRaj.UpuntilthebreakupoftheSovietUnion cities were developed by the central authorities based on transport efficiency,interregionalequity,andaneedtoestablishadefensivecapacity.Insomeinstances,citieswereestablished to colonize empty territory. The Soviet authorities used the development of anextensive railway network to achieve their objectives. The first line was the Trans-CaspianRailway in 1880, from Krasnovodsk to Samarkand and Tashkent, followed by the Trans-AralRailwayfromOrenburgtoTashkent.Great importancewasattachedtointersectingeast-westandnorth-southlines(Coulibalyetal2012).OtherlinestowhichthisnetworkconnectedweretheTrans-SiberianRailwayandtheChineseEasternRailway,whichconnectedRussiawithChinaandprovidedashorterroutetoVladivostok.TheevolutionofthetransportandcommunicationssystemsintheformerSovietUnionledtoahierarchicalnetworkofcitiesthatweremoreevenlydistributedbysizethaninothercountries.Fromaspatialpointofview,itbecameclearthatmanyEurasiancitiesweredevelopedinplaceswhere they should not have been. The collapse of the Soviet economy weakened theconnectivity between Eurasian cities. Without subsidies for transporting goods and servicescheaplyfromonecitytoanother,themoreremotecitiesareisolatedfromglobalmarketsandincreasingly uncompetitive. Rail networks became hard to run efficiently while the roadnetworkswereunderdevelopedandexpensivetomaintain.Formuchofthepastthreedecades


airtransporthasplayedanimportantroleinconnectivitywithinandbetweentheformerSovietUnionrepublics.A secondexample is thedevelopmentof the railwaynetworkof Indiaby theBritish colonialgovernment. Donaldson (2010) maintains that the railway system brought transformativechangetotheinfrastructurefortradeonthesubcontinent.Byphysicallyconnectingalldistrictsof the country, the railways allowed the British to deploy administrative staff and militarypersonnel as well as transport goods andmaterials for trade. Britain was therefore able tocontrolalargeterritorywithlimitedmanpowerandtointegratetheeconomyofIndiatothatofBritain.Oneoftheunintendedconsequencesoftravelwasofcourse,greatersocialawareness,whicheventuallyledtoprotestbyMahatmaGandhiandeventuallyindependence.TheSovietandIndiaexamplesshowedthatconnectivitycanlegitimatelybeusedasastrategytoachievepoliticalbutnotalwayseconomicobjectives.InthiscasewhiletheSovietexperiencehasresultedinunderutilizedrailwaysandsomedyingcitiesinIndiatherailwaysystemisoneofthelargestintheworldintermsoftrack,infactthelargestintermsofpassengervolumesandnumberofemployees.Theroleofconnectivityinmeetinggeopoliticalobjectivesisstillasrelevanttodayasitwasinthe previous century. One of the abiding narratives on the objectives of the Chinesegovernment inpromoting theBRI is that it seeks to enhance its sphereof influence throughenhanced connectivity. For instance, Bastian (2017) argues that the BRI allows China toleverageitseconomicandpoliticalinfluenceonEuropeasawhole,whileLuft(2016)arguesforChina the BRI is as much a geopolitical strategy as it is an economic one. Several scholarssuggest that China is aiming to use for influence its vast reserves of capital, engineeringcapabilities,excessproductioncapacityasitgoesthroughadownturn.Morebroadly,however,Chinaisbynomeanstheonlycountrythatispromotingabroadregionalorglobalconnectivityagenda. Some of the prominent initiatives include Connecting Europe Facility, Central AsiaRegionalEconomicCooperationProgram,PowerAfrica,IntegrationInitiativeofSouthAmerica,SouthAsiaAssociation forRegional Integration,and theGlobalAllianceonTradeFacilitation.Whilesomeof the initiativesarecomplementary,othersarecompeting.Thiscan leavesomepoorcountriesinadilemmaandunabletodecidewhichinitiativestoparticipatein,fearingthattheymaybeexcludedfromtheevolvingnetworks.

3.2 SupplyChainEfficiencyGlobalvaluechains(GVCs)areadefiningcharacteristicofthe21stcenturyeconomy.Theyhavetotally transformed the links between firms and countries, and redefined the relationshipsbetween trade and competitiveness. The growth of GVCs has been in tandem withimprovements in transportation and communications technologies, which have allowed thefragmentation of production in tasks in different locations. Taglioni and Winkler (2016)maintain that among the actions that Governments seeking to join GVCs should create areworld-class relationshipsandclimates for foreign tangibleand intangibleassets.Bothactions


dependinpartonconnectivitytointernationalmarketsandborderefficiency.ThisisthereasonwhyinternationalindicessuchastheWorldBank’sLogisticsPerformanceIndexandtheWEF’sCompetitivenessIndexareimportantasglobalindicatorsofperformanceandcompetitiveness.Theconnectivityoffactoriesandtheabilitytocontractacrosscountriesarekeydeterminantsof GVCs and the decisions firms make to buy and whether to do so domestically orinternationally.Undersuchcircumstances,poorconnectivitycanmeanhighcosts, lowspeed,and high uncertainty and can increase the risk of exclusion from GVCs. Thus, successfulparticipationinGVCsrequiresnotjusttoefficientcross-borderlinkages,butalsoresilientandefficientdomesticsegmentsofsupplychains.Inadditiontoconnectivityfortheflowofgoods,informationandfinance,theeraofGVCshasalsoincreasedthedemandforcountriestocooperatemorewitheachother,especiallyintrade.In fact, Buchan, Fatas andGrimalda (2012) argue that connectivity has greatly increased theprospectsofcooperationbetweencountries,whichinturnhasfacilitatedtradeandeconomicgrowth. It is not a coincidence that enhanced global connectivity and shrinking trade andtransport costs has grown in tandem with a proliferation of regional and multilateral tradeagreements.Recentresearchhasdemonstratedthepotentialoftradefacilitation,oftenbasedonglobalrules,toreducelogisticscostsandboosttrade(HoekmanandNicita2010;Portugal-Perez and Wilson 2008). However, most of the studies focus on the link between logisticsperformanceandaggregatenationaltradeflows.Thisinpartduetoarecognitionthatwhereasdistanceandgeographyarefixed,connectivityandlogisticsperformancearesubjecttochangethroughpolicymakinginindividualcountries.While thenational levelanalysis isnecessary toassesshowcountries fare in termsofoverallconnectivity,amoregranularapproachisneededtounderstandhowparticularsupplychainsare affected by the effects of geography. A common approach is to explore logisticsperformance through the concept of supply chain connectivity. The World Bank and UN-OHRLLS(2014,9)definesupply-chainconnectivityas“theabilityofthetradersinonecountryto effectively establish reliable supply chains with their customers or suppliers” — theirperformancebeingdependentnotonlyonthetransportroutebutalsoonthelogisticsbusinessenvironment,whichmight even change at the product level. They further argue that supplychainconnectivityultimatelynotonlydependsonthequalityofphysicalinfrastructure,butalsoonthequalityandsophisticationofservices, includingcustomsandbordercontrol,andtradeortransportationpoliciesthataffect logisticsperformance(WorldBankandUN-OHRLS2014).Similarargumentscanbeextendedtotheothernetworkindustrieswherereliabilityandcost,forinstanceofinformationtechnologyservicesorenergysupply,aremoreimportantattributesratherthanjustbeingconnected.Related to supply chains, some of the impacts of connectivity are at the local level. A fewstudiessuchasRaballandetal(2010)andKunaka(2010)haveappliedmoremicro-levelanalysisbylookingattherelationshipbetweenroadinfrastructureandroadtransportandtheaccessofsmallproducerstomarkets.Theyconcludethatthehurdlestoconnectingtomarketsarenotsomuchinfrastructurerelatedbutmoretodowithsupplychainorganizationandinstitutions.AnexamplethatillustratesthisphenomenonistheeffectthatinvestmentsinVietnam’sNational


Highway No. 5 (NH-5) had on the development of private industrial zones and the localspillovers that it has had. The ADB, DFID, JICA, and theWorld Bank (forthcoming) find thatregionsadjacenttothehighwayhaveexperiencedrapidstructuralchange,transformingfromagriculturetoindustrialproductionlargelyduetoenhancedtransportcapacityandattractionofforeigndirect investment. The firmsalong thehighwayarepartofmajor global value chainswithleadingfirmsinAsia,especiallyJapan.Ultimately,itistheeffectsofconnectivityonsupplychainsthatwilldeterminethemagnitudeoftheeffectsinaneconomyandthesmallandlargescales.

3.3 ResilienceBetween2010and2011therewerethreeeventsthathadsignificanteffectsonglobalsupplychains,whichservedtounderscoresomeoftheeffectsofglobalconnectivity.ThefirstwastheeruptionofthevolcanoEyjafjallajökullinIcelandandtheothertwoweretheJapanesetsunamiin2011and floods inThailand thesameyear.The threeeventsbetween themcausedmajordisruptions to supply chains across the world, affecting auto and electronics production inseeminglydisparatelocationsacrosstheglobe.Theeventsunderscoredtheinterconnectednessof supply chains across theworld and the importance of investing in diversified connectivitylinks. Improvements in connectivity have enabled firms to enhance their supply chainefficienciesandtomaintainveryleaninventories.However,suchrelianceespeciallyinaneraofglobalvaluechains,onalimitedsetofsuppliersandthemaintenanceofcentralizedinventorieshasexposedfirmstoincreasedrisksfromdisruptionsintheirsupplychains.Adisruption,evenashort-lived one, in one location can have ramifications across the world. Understandingnetworkresilienceisincreasinglyimportantinanyconnectivityprogramorproject.Disruptionscanbeexperiencedalsowithwholecountries,especiallylandlockedonesthataredependent on onemajor trade route for access to overseas markets. There aremany suchcountries including Armenia, Bhutan, Malawi, Nepal, Uganda, among others. With suchcountries,therisksassociatedwithconnectivitybasedonafewoptionsarequitehigh.WhenUganda in2008experiencedafewweeksofdisruptiontotraffic flowsalongtheroutetothePortofMombasainKenyaandNepalin2015ablockadeofthebordercrossingatBirgunjintoIndiatheeventsresultedinpricesspikingwithinshortperiods,andsignificanteconomiclosses.Consequently,diversifyingtraderoutesisnotjustmatterofeconomicefficiencybuteconomicsurvivalforsuchcountries.Reliabilityofconnectivitycanthereforehavesignificanteffectsforfirmsandcountries.Ithasthereforebecomeimportantforfirmsandcountriestoinvestinredundancysystemssoastoenhancetheirresilienceintheeventofinterruptions.However,theeconomiccostsofsuchredundancyarenotalwaysstraightforwardtoestimate.


4 MeasuringtheImpactofConnectivityBased on the objectives of connectivity initiatives identified above, there are some generalapproaches to quantifying connectivity. The impacts can be transmitted through differentchannelsdependingon thescaleofanalysis, ranging fromtheglobal to local scale.The toolsthatcanbeusedtoassessimpactsandquantifytheirmagnitudewouldhavetobesuitedtothescale. Fortunately, there is an increasingly robust suite of tools that is available to appraiseprogramsandprojects.However,thewidereffectsaretheonesthatarethesubjectofongoingefforts tomake sure they arewell capturedduringprogramandproject appraisal.However,thereisagenerallyagrowingbodyofempiricalevidenceontheimpactsthatcanbeexpectedfromconnectivityinitiatives.Objective ExamplesempiricalevidenceofimpactsPromotinggrowthandproductivity LeducandWilson(2009)establishedthatduringthe

globalfinancialcrisiseach$1spentonhighwaysincreasedstateannualoutputby$2

Enhancingaccesstomarketsandopportunities

Djankov,FreundandPham(2006)estimatedthatadaysavedininternationaltradeshipmentswasequivalentto1%tradevolumeoradistanceof70km

Buildingnetworkresilience WilmsmeierandNotteboom(2009)estimatedthatdoublinglinershippingconnectivityreducesfreightratesby15%

Someof themain issues tobeconsidered foreachobjectiveof connectivityare summarizedbelow.

4.1 QuantifyingConnectivityforGrowth

Connectivityinvestmentstypicallyarelargeandlumpy,anditisoftendifficulttoestimatetheirimpacts.However,somegeneralpatternshavebeenobservedbasedonempiricalevidence.Forinstance,StraubandTerada-Hagiwara (2011) found that inAsia investments in infrastructurehad a strong positive correlation with growth. While in their case the correlation withproductivewas inconclusive, the International Air Transport Association (2007) carried out areview of 48 economies over nine years and found a strong positive correlation betweenconnectivity to the global network and labor productivity. In fact, IATA concluded thatinvestmentinaviationcangeneratesignificantwidereconomicbenefits,andestimatedthata10percentriseinconnectivity,relativetoacountry’sGDP,willboostlaborproductivityby0.07percent(IATA2007).Inadditiontothewideraffects,oneofthewaysthatconnectivityaffectseconomicactivity isthroughpromotingagglomerationeffects.Theconceptofagglomerationhasa longhistory ineconomics, going back to David Ricardo’s theory of comparative advantage. Krugman andVenables(1990)showhowregionscanbenefitfromimprovementsininfrastructure,andeasier


access to factors of production and markets. In addition, Romer (1990) shows how aconcentrationofknowledgesustainsinnovation,givingrisetoendogenousgrowth.Usingpaneldata, De la Roca and Puga (2017) show that a Spanishworker joining a large agglomerationincreaseshisorherproductivityoverthetime(QuinetandRaj2014).The approaches to estimating the growth and productivity effects of connectivity includegrowthmodelling,with labor,materials and capital—asmain variables. Themodels canbesued to also explore changes in productivity according to a number of factors, includingresearch and development and the level of capital assets available to eachworker. Anothercommon approach to assessing economy wide effects is Computational General Equilibrium(CGE), which is a multi-market model describing how individual businesses and householdsrespond toprice signals andexternal shocks,within the limitsof available capital, labor, andnaturalresources(DixonandRimmer2002).Theadvantageofthisapproachisthatthemodelcantakeintoconsiderationbehavioralcontextandcanalsoutilizepricesandmarkets(RoseandHuyck2016).However,theapproachrequiresalotofdata,especiallytheinput-outputtables.

4.2 ConnectivityandMarketAccessA widely used approach to estimating interactions between any two nodes in a network isgravitymodeling.GravityModels incorporateageographicalperspectiveasa functionof twocriteria:mass (i.e.,GDP,capitalstocks,population,etc.)anddistance.Themodelsattempttoexplain connectivity between two economic centers by their bilateral links assuming thatinfrastructure and institutional frameworks are conducive to increased interaction. Forinstance,gravitymodelscanbeusedtoassessthechangeinthevolumeoffreightthatmightresult from transport time or cost savings as a result of corridor improvements. However,gravitymodellingisdifficulttoexplorepolicychanges.Theproblemisthatwhilecostcanbeapolicyvariableandwecanusethemodeltoestimatetheimpactofchangeincost,distanceisnotapolicyvariablesowecannotusethemodeltoestimatechangingdistancesbetweenthenodes. In addition, gravitymodelling is generally not used to evaluate a package of corridorimprovements.Moreover,themodelscanbedifficultandtimeconsumingtoapplyandrelyonmassivecostdatabasesfortheirapplication.Cost benefit analysis is particularly employed to assess the impacts of specific projects.However, it is generally not utilized for programs or wide area network assessments. Inaddition,itisalsonotwidelyutilizedtoanalyzegeneralpolicymeasures.However,costbenefitanalysishasbeenfoundtobeunsatisfactoryforotherreasonschiefamongthem,itsinabilitytoassess the underlying conditions of some of the key dimensions of connectivity such ascontestabilityofmarkets,increasingreturnswhichareakeycharacteristicofmostelementsofconnectivity,andexternalities;afailuretodistinguishbetweenbeneficiaries;andlimitedabilitytoassessthebigpicture,intermsofeffectsongrowthandGDP.Oneofthedirectwaystomeasurethe impactofconnectivity isby focusingonspecificvaluechainsorproductflows.Suchsupplychainassessmentsenabletheanalysisof impactsonthe


chains that would benefit from specific connectivity interventions. Supply chain analysesincludeinvestmentcostsasacomponentofthecostsofthesupplyorvaluechain;estimatingthesecostsisdifficultandrarelydone.Althoughsupplyorvaluechainanalysescanaddtotheunderstandingofhowthebenefitsoftheconnectivity investmentmightberealized,theyarenotusuallyusedaspartoftheeconomicevaluationofproposedcorridorimprovements.

4.3 EstimatingImpactsofConnectivityonNetworkResilienceTherearetwodivergentperspectivesofnetworkresilience—oneappliestoinstanceswhereanodeisconnectedtotherestofthenetworkbyonemajorlinkorisreliantononeothernodefor access to the rest of a network. The other perspective is of a highly connected networkwhereagglomerationforcesorotherscaleeffectshaveencouragedaconcentrationofactivityinoneofthenodesoralongonelink.Whilethecausesmaybeverydifferentthetwonetworksface similar risks of vulnerability to disruptions to the node or link on which they aredependent. However, in the first instance the effects are isolated to one nodewhile in theother the effects can be transmitted to the rest of the network and over a large area. Anexample of a «node» being affected by disruptions to the link on which it depends wasEthiopiain1998whenitsaccesstotheseaportofAsmarainDjiboutiwasinterruptedovernightdue to the outbreak of war. An example of the second perspective was the flooding thatoccurredinThailandin2011whenitisestimatedthatthedisruptionsreducedThailand’sGDPgrowth rate from 4.0 percent expected to 2.9 percent (World Bank 2012, 202) and reducedglobal industrialproductionby2.5percent (UNISDR2012).Even then the localizedeffectsasmeasuredbyinsureddamagewasassessedatonly$10billion(MunichRe2012,29).Theeffectswerethereforesignificantlymagnifiedastheyweretransmittedthroughtheglobalproductionnetworks.Ontheflipside,thefirmsinThailandthatwereconnectedtoglobalnetworkswereabletorestoreproductionmuchfasterthanthosethatwerelesswellintegrated.Theapproachestoquantifyingtheeffectsofresilience innetworkshaveevolvedmainlyfromthe financial sector and from information technology. They include path and node criticalityanalysis,networktopologyandresilienceanalysisandcapitalat riskanalysis.Theapproachesaresimilar inthattheyfocusonthelikelihoodofthreatstothenetwork,theidentificationoflinksandnodesthataremostatrisk,anddeterminationofwhichofthoseelementsaremostvulnerableandtheirpotentialeffectsontherestofthenetwork.Usingtheseapproachesit ispossibletoquantifythelikelyconsequencesofanypartofthenetworknotbeingavailable.Theinformationcanbeusedforprojectplanningandjustifyinginvestmentsthatmayotherwisenotseemobviouslyjustifiedwhenemployingstandardapproaches.

4.4 PotentialNegativeConsequencesofConnectivityIn addition to the desirable impacts on connectivity it is also important to incorporate andfactor in any analysis the likely negative spillovers that it can have. Someof the unintendedeffectsthathavebeenobservedare:


• Socialandenvironmentalexternalities suchas from increasedcongestionoraccidentsfromchannelingtrafficflowsoverafewlinksandnodesinanetwork;

• Encouragingspatialdistortionsanddisparitiesinaneconomy;• Mismatchesbetweenwherecostsandbenefitsareincurred—forinstanceregionsthat

serveastransitfornetworktrafficthatpredominantlybenefitsthehigherdensitynodeswiththenetwork;and

• Increased risks of contagion from being interconnected, e.g., the example above offloodinginThailand.

Theapproachestoquantifyingthenegativeexternalitiesofconnectivitycanbesimilartothoseoutlinedabove.Theimportantissueisthatestimatingtheimpactsofconnectivityshouldtakeinto account the differentiated effects it can have on different regions, groups, firms orsocieties.


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