Today’s global economic landscape features growing regional integration, but weak infrastructure and lack of connectivity continue to constraint development – a difficult issue that must be resolved to ensure sustained growth of the Asian economy.
Infrastructure development in many low and mid-income countries lags far behind what is needed for the development of these countries. For instance, some Asian countries are plagued by serious shortage in electricity supply; underdevelopment of transport facilities, power grids, drinking water systems, etc. has taken a toll on the development of the countries and improvement of the people’s livelihood. Imbalance in the development of different countries, and problems related to financing channels, means, participants and institutions are yet to be resolved. All these factors have stood in the way of Asian development. China’s experience over the past 30-plus years shows that infrastructure connectivity is essential for job creation, improvement of living standards, and economic growth. Infrastructure investment will not only provide new impetus to the growth of Asian countries and the whole region, but also serve as an engine of global economic growth for years to come.
The development of infrastructure in Asia, both in qualitative and quantitative terms, is below international standards, and has been a drag on the economic development in Asia. It is estimated by the Asian Development Bank (ADB) that, in the coming decade, 8.22 trillion dollars need to be invested in Asian infrastructure, amounting to 820 billion dollars of additional investment each year. In comparison, the combined GDP of Asia, if those of China, Japan and South Korea are not counted, merely stood at around 8 trillion dollars in 2013. In addition, for low and mid-income countries, the capital formation rate accounts for only a quarter of the GDP, and only 20% of the capital is used for infrastructure investment. In the coming years, India alone will need 1 trillion dollars for infrastructure investment. There is a huge gap in financing.
Paradoxically, Asia abounds in saving funds and has a huge foreign exchange reserve. As of June this year, the Asian foreign exchange reserve had reached a record high of 7.47 trillion dollars. Take China for example, with a foreign exchange reserve of almost 4 trillion dollars, it is the third largest FDI investor in the world. On the other hand, its investment is confined to a few areas and made through limited channels. As a matter of fact, over the past decades, a large number of Asia’s foreign exchange reserves and savings have flown into U.S. or European debt and bond markets, while the needs of regional economic development, particularly in the field of infrastructure, are not adequately satisfied.
Currently the World Bank, ADB and other multilateral development institutions have mainly focused their efforts on regional and international poverty reduction. Only a limited amount of funds are invested in infrastructure in the region. In 2013, as a major investor for Asia’s infrastructure development, ADB only provided 21 billion dollars of loans to Asian infrastructure development. Even if we take into consideration the investment of the World Bank and the ODA of developed countries, there is still a big financial gap that can hardly be filled when it comes to infrastructure investment in Asia. Moreover, to seek profit, infrastructure investment of global private financial institutions mostly flows into mature markets in developed countries. The infrastructure needs of developing countries, including those in Asia, and the needs of emerging economies cannot be sufficiently served.
It is worth mentioning that trans-regional connectivity projects are different from large-scale domestic projects. It is difficult to press ahead with regional and sub-regional connectivity projects such as the Asian Highway and the Trans-Asian Railway, which have been under discussion for many years, as they involve several countries, large amounts of investment and a long investment-to-profit cycle. It takes the coordination and investment of multilateral development institutions to execute such projects.
To enlarge the capital pool indispensable for infrastructure development in Asia, China initiated the establishment of the Asian Infrastructure Investment Bank (AIIB). As an innovative platform for multilateral cooperation, AIIB will advance Asian financial cooperation under the principle of openness and universal benefits. China welcomes the participation of other Asian countries in the establishment of AIIB.
In the light of the development trend of the region and the world, AIIB may employ diversified means of investment and financing. The existing investment funds have a bigger role to play in infrastructure financing; long-term bonds may be issued and various innovative financing tools utilized; it is desirable to promote the PPP model to increase the appeal of infrastructure projects to investors from the private sector, and enlist the participation of more financial institutions, such as funds, banks and development banks. Infrastructure projects involving a large amount of investment may raise funds through loans of international financial institutions, government budgets, foreign ODA, and joint financing of domestic companies and financial agencies. It is highly necessary to harness the savings in Asian countries to promote the infrastructure development and economic growth of the region.