Soft Infrastructure, Trading Costs and Regional Co-operation

The main purpose of this paper is to clarify some important links between regional co-operation, (soft) infrastructure and trading costs, and to suggest some hypotheses for further investigation. Khan and Weiss(2006) discuss the issue of both hard and soft infrastructure in this context. This paper is a continuation of Khan and Weiss(2006) but in the specific context of soft infrastructure, and particularly governance, including corporate governance. As Khan and Weiss(2006) point out, conceptually such discussions can be seen as a part of the analysis of the 'New Regionalism' The key idea here is co-operation through preferential trade and investment agreements that aim to strengthen structural economic reform, aid economic transformation, attract foreign investment and generally raise the international competitiveness of participating countries. This paper identifies several crucial areas of future research with potentially large value added. The general hypothesis with significant policy implications which can be elaborated and tested is that trade costs are negatively related to the existence of and improvements in soft infrastructure. A related hypothesis is that cross-border cooperation in building and maintaining both hard and soft infrastructure synergistically will lead to a reduction in trade costs. More specifically it will be useful to know the how high are the barriers to trade created by factors like high freight costs, slow port handling, customs delays, lack of competition in the insurance sector, poor corporate governance, unofficial payments and so forth. Some of these factors may be intrinsically difficult to quantify but the potential pay-off from policy-relevant research of this type is enormous. Optimal policies for regional cooperation in soft infrastructure will be difficult if not impossible to formulate in the absence of this type of research.