Filling Asia’s Infrastructure Gap: Financing the Region’s Growth
Larry Greenwood ([email protected]) is president of the Japan Society of Northern California, senior advisor at Bower Group Asia and non-resident senior adviser at the Center for Strategic and International Studies.
As the economies in Asia continue to grow, many countries – particularly developing economies – are facing big challenges in building new or improving outdated infrastructure to accommodate this growth. While multilateral development institutions, such as the Asian Development Bank, World Bank, and International Monetary Fund, have traditionally stepped in to fulfill this role of financing infrastructure projects in Asia, the Asian Infrastructure Investment Bank (AIIB) has recently emerged as a potentially formidable new player.
I joined Vinod Aggarwal from UC Berkeley and Aaron Bielenberg of McKinsey for a program co-sponsored by the Asia Society of Northern California and the Federal Reserve Bank of San Francisco to take a critical look at the sources for financing economic growth and sustainable development in Asia. Vinnie started by framing the geopolitical context in which China proposed and executed the AIIB concept, noting China’s frustration at the slow pace of reform of Bretton Woods institutions and its relative lack of voice in them. He skillfully told the sad story of Washington’s feckless attempts to block broad participation in the Bank and China’s success in attracting virtually all Asian borrowers and Western donors to join.
I explained the order of magnitude of the infrastructure financing needs in the Asian region – about $8 trillion over the next 10 years – and stressed that funding from Asian governments themselves together with the multilateral development banks would still fall far short of closing that gap. MDBs could do much to help improve the way they support infrastructure in the region, including speeding up processes while ensuring compliance with environmental and resettlement safeguards, minimizing political pressure within the banks by its major shareholders, and especially finding ways to better leverage private sector financing which is critical to mobilizing sufficient resources for infrastructure.
Aaron pointed out that there was plenty of capital in the region, but a lack of bankable projects. We talked about some of the challenges governments face in putting together effective public private partnerships to attract that capital. Changes in incentives for both the MDBs and the borrowers were also needed. I stressed in particular the need to get more long term institutional investors, such as insurance companies and pension funds, into infrastructure financing in Asia, since these long-term investors are more appropriate investors in long-term assets like infrastructure than are banks.
For more information on my views on AIIB, please see my blog at the following link: http://csis.org/publication/aiib-now-comes-hard-part