Why does East Asia Need to Invest in Infrastructure?

5.1 Basis for future high growth

Despite the strong economic development achieved by Asia in the last decade, there are many people still living in poverty. Infrastructure spending has the intention of creating an economic spin-off, thus helping countries grow out of the crisis. According to a projection of infrastructure needs, low-income countries should increase infrastructure stocks by 2.3% each year until 2010, while middle-income countries and high-income countries should increase infrastructure stocks by 3.5% and 1.4%, respectively (Fay and Yepes 2003).

World Bank studies have concluded that if Africa had matched the infrastructure growth rates of East Asia in the 1980s and 1990s, then it could have had 1.3% higher annual economic growth. According to Richards (2008), Latin America witnessed 1% to 3% lower long-term growth because it invested less in infrastructure. At the 2007 World Economic Forum's Indian Economic Summit held in New Delhi, infrastructure analysts estimated that the lack of infrastructure is holding back India's economic growth by 1.5% to 2% a year (World Economic Forum 2007). Infrastructure in many studies is used as an input that will raise productivity and output and deliver economic growth (Gramlich 1994; Neill 1996). The recent growth of East Asia is generally attributed to a successful export model, but it has also relied on effective infrastructure, particularly logistics and distribution.

Export activities in East Asia are a good transportation system. Developing logistics infrastructure in Asia will further increase intra-regional trade. This is because, based on freight costs and service levels, a number of developing countries in Asia are actually closer to developed countries in terms of economic distance than to their regional neighbors Regional infrastructure will lower the costs of East Asian intra-regional trade. The case for investment in logistics infrastructure is further supported by a multi-country study showing that a 20% reduction in logistics costs would increase the trade-to-GDP ratio by more than 10% in Cambodia, PRC, and Lao PDR; by more than 15% in Mongolia; and by more than 20% in Papua New Guinea.

Investment in logistics infrastructure fosters economic growth, as long as parallel improvements in the information and communication technologies (ICT) infrastructure are made. Colecchia and Schreyer (2001) confirmed that ICT contributes to economic growth in both developing and developed countries. It does this by raising productivity and improving the efficiency of individuals, firms, sectors, and the economy as a whole. In particular, the adoption of ICT creates unprecedented opportunities for businesses in developing countries to overcome the constraints of limited access to resources and markets. SMEs can get better access to trade finance and e-finance through improved credit and e-credit information. ICT also lowers transaction costs and facilitates trade, thus opening up new international business opportunities and increasing the participation of developing countries in the information economy. Alongside greater levels of trade, outsourcing and foreign investment coming into Asia from developed countries—and increasingly from developing countries as well—also increases. Developing better ICT literacy and infrastructure can help countries improve competitiveness and attract more offshoring activities that add value to the region.

5.2 Recycling Asian international reserves and domestic savings

The export-led growth model pursued by Asia has led to the accumulation of large international reserves, as shown in Table 9 [ PDF 18.1KB | 1 page ]. These reserves grew strongly after the Asian financial crisis of 1997–1998 as insurance against further currency attacks and financial crises (Aizenman 2007). The accumulation of large foreign exchange reserves is due to the trade surpluses the region sustained, although there are claims that the East Asian countries had not allowed their currencies to appreciate in order to keep exports competitive. The extent of the accumulation of foreign exchange reserves by countries in the region is more than merely adequate. At the end of 2006, the reserves of PRC; Hong Kong, China; India; Republic of Korea; Malaysia; Singapore; and Taipei,China were many times more than needed to cover their external debt (Park 2007). However, not all reserves can be spent. Examples are the reserves from central banks or those arising from borrowing overseas, which are not for disposal, despite their accumulation, because they have counterpart liabilities.

A significant part of the accumulated foreign exchange reserves under central bank management is invested in the US dollar. Figure 1 [ PDF 73.3KB | 1 page ] shows that 61% of the emerging and developing economies' reserves were US dollar denominated assets. As of 31 May 2009, East Asian countries hold 15.7% of the total Special Drawing Rights available, at an interest rate of 0.35%. There have been calls for East Asia to recycle its huge foreign exchange reserves for investment in the region, including in infrastructure, so that they can be used to support further economic growth in the region and bring in higher returns.

5.3 Narrowing the developmental gap between countries in the region

Investment in infrastructure has the additional benefits of helping to close the income gap and reducing poverty because low-income countries and areas will have a better chance of generating higher economic activities when infrastructure is available. Infrastructure development can connect the agricultural and poorer areas to urban and economic growth hubs, which will enable the former to market their products and receive their economic needs at reasonable prices. Transportation and energy projects are an effective way for development to reach the poorer regions of East Asia. Sixty percent of the region's population lives in the countryside, which is where poverty tends to be concentrated. In rural areas, an inadequate and unstable power supply, inefficient transport systems, poor-quality roads, weak and aged railroad systems, badly equipped and congested ports and airports, and unreliable communications systems raise transaction costs, curtail productivity, and often render investments unviable. Transport and energy supply improvements have been shown to reduce poverty in rural areas. Improvements in rural transport are associated with falling costs; increased income from agriculture; increased access to employment, education health, and social participation; and even better emergency relief in the event of natural disaster (Cook et al. 2004).

Investment in energy infrastructure can increase access to electricity to support the increasing population. Increased electrification of rural areas helps to reduce poverty and helps the area move closer to achieving the Millennium Development Goals (Cook et al. 2004; Estache 2004). Rural populations benefit from the reduced energy costs, increased farming activity, better quality of education and health services, increased flow of information, and improved security that all come from rural electrification. However, there are climate change and environment considerations. If the developing Asian countries generate and use energy at the current level, by 2030 they will be responsible for 17 billion tons of energy-related carbon dioxide emissions, or 43% of the world's emissions from energy use (Asian Development Bank 2009). Therefore, it is essential that infrastructure investment strategies address the balance between a higher level of development and environmental protection.

Increasing Asian urbanization will also call for infrastructure investment. In 2006, developing countries such as Indonesia, Malaysia, Philippines, and Thailand had already reached more than 30% urban population. With increasing migration to cities, the incidence of urban poverty will rise, as will stress on the water supply, sanitation system, and transport network. Infrastructure spending in these areas will continue to be needed.

Download this Paper [ PDF 423.7KB| 40 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.