Author: Andrew Elek, ANU
China’s president, Xi Jinping, announced the creation of an Asian Infrastructure Investment Bank (AIIB) just before the October 2013 APEC meeting in Bali. If the new bank is managed professionally to finance commercially viable investments in economic infrastructure, it can begin to correct a very significant failure of global financial markets.
At present, despite very low interest rates, as Mahendra Siregar says, huge gaps in infrastructure coexist with a comparably massive accumulation of savings and under-used global economic capacity. There is vast unmet demand for productive economic infrastructure, especially in the emerging economies of Asia. In 2011, the OECD estimated that global infrastructure requirements over the next two decades will cost around US$50 trillion. The Asian Development Bank (ADB) estimates that developing Asian economies need to invest US$8 trillion from 2010 to 2020, just to keep pace with expected infrastructure needs. The supply of savings, much of which is generated in Asia, is more than adequate to begin to fill some of the demand for infrastructure.
Yet it will not be easy to steer more savings towards infrastructure, either globally or in Asia. The investments needed are typically for public goods, which are large-scale, long term and illiquid, and present challenging cost-recovery problems. The constraints on investment, especially attracting private investment in infrastructure, include problems of project selection and preparation, implementation risks, the need to translate sound economic rates of return into financial returns, and intermediation challenges.
These formidable problems can be overcome if political leaders and international financial institutions are determined to do so, and APEC leaders are now committed to improving connectivity in the Asia Pacific. China certainly needs far better links to its neighbours: the supply of cheap factory labour from the countryside is drying up and labour costs are rising rapidly, creating an urgent need to re-orient supply chains. The opening of Myanmar makes it possible to meet this need and allow more economies at various stages of development to participate in international production networks in line with their evolving comparative advantage.
There is room for a new development bank, specialised in financing large-scale economic infrastructure on commercial terms, working alongside existing multilateral development banks, including the World Bank and the ADB. These well-established institutions have the expertise to lend a lot more for infrastructure, but have moved in a different direction. Net lending by multilateral development banks on commercial terms has been negative in five of the last ten years, including 2011 and 2012. The World Bank and the ADB are now focusing on concessional lending and knowledge sharing with low-income countries, leaving an important niche to be filled by a new financial institution.
Following China’s decision to set up the AIIB, consultations are likely to take place around the Asia Pacific, encouraging governments as well as private investors to become foundation shareholders. Potential investors in the AIIB will want to be assured that the management of the new bank will be of high quality, preferably selected on a competitive basis, and will be overseen by independent, commercially experienced directors. Sound procedures for project selection, designing financing plans and tendering for project implementation can be based on those developed by existing multilateral development banks.
It should also be possible to clarify that the AIIB will operate on commercial principles. Subsidising the capital costs of some infrastructure can be justified by externalities that are created, but these subsidies should be injected by the governments of the economies which expect to reap the benefits, not by the new bank. The world does not need yet another window for overseas development assistance.
If it is carefully set up and well managed, the AIIB should be able to attract shareholding from Asia Pacific governments committed to their new APEC Framework on Connectivity, as well as from some private sources. If APEC governments on both sides of the Pacific participate in the new infrastructure development bank, the AIIB could be transformed into an Asia Pacific Infrastructure Investment Bank, which could invest in projects to upgrade connectivity among all Asia Pacific economies.
The composition of foundation shareholders and the official launch of operations could be announced at the 2014 meeting of APEC leaders in China. Early initiatives could be to finance a high-quality APEC Master Plan on Connectivity and improved trade logistics in the region — for example by lending to improve some of the region’s ports and airports.
To have a significant impact on the need for economic infrastructure, the AIIB would have to expand as rapidly as it can acquire the necessary expertise. In time, its impact on the region could be greater than the ADB or the World Bank, depending on whether those institutions decide to rediscover their capacity to finance productive infrastructure on commercial terms. The AIIB will create new competition for the World Bank and the ADB, but the new bank will also have a strong incentive to cooperate with them. Tapping into the expertise of experienced development banks is the most efficient way, and perhaps the only way, to build the capacity of the new bank to assess and implement projects successfully.
Andrew Elek is Research Associate at the Crawford School of Public Policy, Australian National University. He was the inaugural Chair of APEC Senior Officials in 1989.
Follow this link:
The potential role of the Asian Infrastructure Investment Bank
ASEAN weathering the COVID-19 typhoon
Author: Sandra Seno-Alday, Sydney University
The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.
Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.
Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.
Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.
A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.
Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.
Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.
ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.
In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.
This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.
What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.
It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.
Over the longer term, ASEAN is faced with the question of whether it should seriously look…
Tiger Trade Launches SGX Trading, Meeting Demand from Asian Investors
Access to the Singapore Exchange (SGX) adds to Tiger Brokers’ current menu of stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (NASDAQ), the world’s two largest stock exchanges, as well as the Hong Kong Stock Exchange (HKEX).
Can Asia maintain growth with an ever ageing population ?
To boost productivity in the future, Asian governments will have to implement well-targeted structural reforms today.
- Canberra ties the knot with Washington
- 2024 China IIT Reconciliation: Appointment Through IIT App Opens on February 21st
- The Year of the Dragon brings record-breaking travel and consumption during the 2024 Chinese Spring Festival
- China’s Minimum Wage Guide (Updated as of February 19, 2024)
- Getting Vietnam’s economic growth back on track
- Legal Ways to Manage Sensitive Personal Information in China