Infrastructure as economic booster

opinion March 03, 2014 00:00

By Suwatchai Songwanich
Chief e

A senior financial adviser in China has come up with an idea on how to kick-start the global economy. Justin Yifu Lin, a professor at Peking University and former World Bank chief economist, has proposed the launch of a "global infrastructure initiative"

Infrastructure spending was used by China to stimulate growth after the 2007 global economic crisis and this certainly helped countries such as Thailand to recover quickly. However, while this helped support economic recovery, it also created problems of over-investment and inefficiency in China.

The most important distinction between the earlier programme and Lin’s proposal is that he recommends that this should be a joint initiative between China, Europe and the US, and the focus of investment should be building infrastructure in the developing world.

Professor Lin points out that many countries are held back in their development due to the lack of high-quality infrastructure and that an investment development programme in poorer countries such as in Africa and Asia would have multiple benefits, not just for the target countries but elsewhere. For example, infrastructure spending would help build up their production capability, stimulate demand for capital goods and increase the spending power of consumers – and this would stimulate economic growth in the developed world.

Lin suggests such projects could be funded by a combination of private investments, pension funds and sovereign wealth funds, backed by guaranteed loans from governments and development banks and developed under the guidance of the G-20.

Since the World Bank has estimated that more than $1 trillion (Bt32.4 trillion) in annual investment will be needed to meet basic infrastructure requirements in developing countries between 2010 and 2020, there is certainly demand for such spending. Moreover, there is demand for high-quality investments including from China as investment funds seek diversified and secure asset classes. What’s needed, however, is a vehicle to channel such investments and one such vehicle could be the Asian infrastructure development bank proposed by Chinese President Xi Jinping in October.

President Xi said it would cooperate with existing multilateral development banks.

While details are still sketchy, there seem to be parallels to the Asian Development Bank (ADB), which was founded at the initiative of Japan in the 1960s with the support of the US. While being based in the Philippines, the ADB has always had a Japanese president.

The new bank might have a similar arms-length relationship with China. It would enable China to pursue its programme of investing in infrastructure in China and Asia, without creating resentment or political difficulties about China having undue influence in other countries.

Moreover, the sheer scale of the investment needed means that China cannot do it alone and a multinational approach would attract investment from many sources.

Some see China as playing the role of “leading dragon” – a reference to Japan’s development policies of the ’60s dubbed the “flying geese”, in which it helped lead the industrial development of Southeast Asian countries.

While Lin’s development ideas have received many favourable comments, there are many details yet to be developed with challenges ahead, so it will be interesting to see how it progresses.