*4.1. The Economic Impacts of Connectivity in the Mekong Subregion*

The coordinated development of soft and hard infrastructure is also essential to maintain growth in the region. The new international division of labor calls for a novel approach to infrastructure development, in which the Mekong Subregion is prepared to participate actively in the promotion of economic corridors: the Southern Economic Corridor, the EWEC, and the North–South Economic Corridor. These economic corridors—together with the fast acceleration of domestic infrastructure development including SEZ, urban amenities, and other economic activities—have already promoted regional participation in the production network by reducing the cost of service links that connect remote locations. Mekong Subregion connectivity is just one piece of the puzzle in ASEAN connectivity with the rest of the world. China's BRI is another very large 'connectivity for development' strategy, linking China to Eurasian countries and the rest of Asia.

As the region embarks on rapid infrastructure development, quality infrastructure, connectivity, and innovation are key to ensure prosperity and sustainable development. Infrastructure development and stages of economic development can be explained by the development of recent economic theories: fragmentation theory and new economic geography [72]. The theory classifies infrastructure projects into three tiers. Tier 1 includes projects that serve countries/regions that are already in production networks and have started forming industrial agglomerations. Tier 2 consists of projects supporting countries/regions that are about to participate in production networks. Tier 3 consists of projects in remote areas where participation in production networks is difficult in the short run, but where better and more reliable connectivity can generate new business models in agriculture, mining, tourism, and other industries. Thus, the ultimate aim of quality infrastructure and services development is in tier 1, in which some ASEAN Member States are experiencing and enjoying quality growth, particularly Singapore and to some extent Brunei Darussalam. Malaysia and Thailand are also doing well, with the quality of infrastructure in tier 2 possibly moving to tier 1 in the near future. The Mekong Subregion has achieved lower middle-income status, improving infrastructure quality from tier 3 and possibly joining tier 2 in the near future. Indonesia and the Philippines have achieved middle-income status and infrastructure development is in the early stage of tier 2, likely catching Malaysia and Thailand in the near future.

By and large, connectivity and innovation promote agglomeration forces and dispersion forces generated by production–consumption interactions in both internal and external economies in which people and ideas can move easily. Agglomeration forces mean that economic activities and people are attracted to the core, where positive agglomeration effects are found in the form of the ease of finding business partners and proximity to the market, etc. On the other hand, dispersion forces generate movements of economic activities and people from the core to the periphery. One source of dispersion forces is negative agglomeration effects or 'congestion' in the core, which includes wage increases, land price hikes, traffic congestion, and environmental pollution [72].

One practical example of new economic geography creating 'location advantages' through connectivity and innovation is Cambodian labor force migration. Currently, about 1 million (out of a population of 16 million) Cambodians are in Thailand working in unskilled labor-intensive sectors and the informal sector rather than in Phnom Penh. The question is: How can Phnom Penh attract labor from rural areas and, at the same time, attract production blocks from Thailand? If the wage gap between Bangkok and Phnom Penh is too large, people will not move to Phnom Penh; however, at the same time, production blocks may be motivated to move. On the other hand, if the wage gap is too small, production blocks will not move even though people may flow into Phnom Penh.

Then, how can Phnom Penh attract both production blocks and people? The answer is the improvement of location advantages and liveability in Phnom Penh.

Another example is the Mekong–India Economic Corridor (MIEC)/EWEC connecting Ho Chi Minh (HCM) City, Phnom Penh, Bangkok Metropolitan Area, and Dawei. This has great potential to become a major manufacturing corridor in the near future. However, the question is how to attract labor and investment to Dawei. In this regard, the MIEC will need to have at least three projects implemented at the same time—industrial estates, highway connection to Thailand, and a deep seaport. According to Han [4], the road situation between Phnom Penh and HCM City was relatively bad in 1999. Before the road was upgraded, travel time from Phnom Penh to HCM City was about 9–10 h, and cross-border trade at Moc Bai (Vietnam)–Bavet (Cambodia) was worth about USD 10 million per year. However, the situation completely changed in 2014 after implementing hardware and software infrastructure between Phnom Penh and HCM City. The travel time was reduced to 5–6 h, and cross-border trade at Moc Bai–Bavet grew to USD 708 million per year [72]. Further, connectivity promoted other economic development corridors, such as investment brought to Trang Bang Industrial Park (in Moc Bai), consisting of 41 projects with USD 270 million in new investment, creating about 3000 jobs.

The top 10 beneficiaries from the MIEC, based on ERIA (2015), are Dawei, Phnom Penh, Dong Nai, Kawthoung, HCM City, Kandal, Sihanoukville, Banteay Meanchey, Svay Rieng, and Battambang. For Phnom Penh, it was estimated that the connectivity would increase gross domestic product (GDP) by almost 400% as a cumulative impact during 2021–2030. ERIA also estimated the remainder of the economic corridor in the Mekong Subregion, and found significant impacts for all participating countries in the connectivity.

For power connectivity in the Greater Mekong Subregion (GMS), ERIA's study on energy markets in ASEAN and East Asia examined the power trade and development in the subregion for the foreseeable future [73]. The study showed that the 2030 Scenario (in which the GMS realizes the potential of hydropower) will provide both economic and environmental benefits. The GMS at large will benefit by about USD 40 billion and reduce CO2 emissions by almost 70 million tons per year. For ASEAN power connectivity as a whole, the study estimated that ASEAN would save USD 25 billion over 20 years by substituting hydropower for fossil fuels.
