East Asia's road to success
By Alan Boyd

SYDNEY - East Asia might be able to achieve economic growth of 5-6% in the next five years, according to development agencies. The bad news is that it probably won't happen without better infrastructure, and no one has the cash to pay for it.

A joint study by the Asian Development Bank (ADB), Japan Bank for International Cooperation (JBIC) and the World Bank has concluded that developing countries in the region will need to spend US$200 billion a year improving basic services to realize their income potentials. That equals more than $1 trillion by 2010 for transport, electricity, piped gas, information and communications technology, and water and sanitation systems in 21 countries - though 80% has been targeted at just one market, China.

A separate report released at the Asia-Pacific Infrastructure Forum (APIF) in Australia in December put the bill at $300 billion annually, with 30-40% earmarked for new projects and the remainder for the maintenance or upgrading of existing services. The crunch is that few governments have the money to spare, while private financiers are deterred by the perpetual foreign investment curses of corruption, inefficient or absent regulatory frameworks and poor revenue returns.

Based on APIF assessments, developing East Asian states will have to invest 11% of their gross domestic product (GDP) each year to maintain existing growth levels. About $90 billion is needed for electricity services, $30 billion for water and sanitation and $40 billion for roads. But they are currently setting aside only about 2% from the combined resources of governments, donors, development banks and the private sector, and most of this investment is happening in the more advanced economies like Malaysia, Thailand and Indonesia.

These data may overstate the scale of the funding gap: the ADB-JBIC-World Bank study, for instance, suggests that China needs to allocate 7% of GDP, mostly for power generation and transmission networks. It is already spending more than 6% of GDP. Nevertheless, there is agreement that the withdrawal of donors from underwriting infrastructure projects - most have switched their attention to poverty alleviation, environment, and the removal of structural impediments to investment - has created a significant funding gap. The proposed solutions: charging consumers for the use of infrastructure services and boosting the appeal of projects so that more private investors get involved. Both are political gambles that would require changes in the mindset of planning agencies.

Prior to the 1997-98 East Asian economic crisis, most developing countries relied heavily on development grants from the ADB and other donors to upgrade essential services without having to bite the bullet and dispose of public assets, which might inflame nationalist passions. When growth took off in the "tiger" economies of Singapore, Taiwan, Korea and Hong Kong, private investors were lured with offers of so-called greenfield investments, rather then the successful Latin American formula of hiving off public services.

The next tier of economies - Thailand, Indonesia, Malaysia and the Philippines - opted for an indigestible mix of partial privatization and operating concessions that essentially kept most assets under state control. For the less-developed countries like Laos, Cambodia, Myanmar and Vietnam, which have few assets to sell and even lower prospects of attracting greenfield cash, there has been a much starker choice: top up donor funds with soft loans repayable in hard currencies, or go without.

Most of the $190 billion that private banks injected into East Asian infrastructure in the 1990s went to those countries in the second tier that had attained growth levels and consumer profiles capable of providing a reasonable return on investments. There was a further splintering after 1997-1998, when investors were spooked by the poor growth outlooks and spiraling budget deficits of Indonesia and the Philippines. Thailand and Malaysia just managed to stay in the frame despite their high debt levels, but investors generally went back to Latin America.

Growth in East Asia has since rebounded but the banks are still disillusioned, despite substantial progress toward economic integration that offers financiers easier access to markets and supposedly uniform investment climates. In fact, says the Organization for Economic Cooperation and Development (OECD), there are inconsistencies at just about every level of policies and regulation, including the reliability of arbitration systems and the enforcement of contracts. And then there is the endemic problem of corruption, in an era when Western companies are under intense pressure from their governments to practice good governance abroad.

East Asia has the highest ratio of cancellations for foreign investment contracts, with an extraordinary 5% failing to go the full distance. In South Asia, the failure rate is only 2.5% and in Latin America 2%. Indonesia leads the way, with an accumulated $4.7 billion of canceled contracts, followed by China with $3.5 billion and Malaysia with $2.5 billion. Among the major recipients, Thailand has the best record with $632 million worth of investment failing. Not surprisingly, the ADB and its co-authors warned that East Asia has to do more to compete with other regions, including Eastern Europe and Latin America.

"In the past, infrastructure has been a key driver of economic growth and for reducing poverty. Getting the policies right is clearly going to be a priority for countries in the region to attract the private funds needed to promote economic growth and to share the benefits of that growth with poorer groups," ADB vice president Geert van der Linden said after the study was released. But as yet, there has been little evidence that these benefits are distributed evenly as private financing is usually insufficient, unavailable, or too expensive for the deprived smaller countries.

And, there is little correlation with economic performance. Cambodians experienced an average economic growth of 6.8% between 1994 and 2003, but only 44% have access to clean water, 17% are connected to electricity and 0.2% have access to the Internet, according to the study. A mere 4% of roads are paved. In Laos, which experienced an average annual growth of 6.2% in the same period, 58% have access to clean water, 41% have electricity, 0.3% have Internet access and 15% of roads are paved. By contrast, 95% of Malaysians have access to clean water, 97% have electricity, 62% telephones and 34.4% Internet access. The comparable figures for Thailand are 93% with clean water, 84% with electricity, 50% with telephones and 11.1% with Internet services.

One opportunity for less-developed nations to get a bigger piece of the pie might be to exploit a drive by the emerging industrial states to make Asia more self-sufficient in financing as a buffer against the sort of erratic capital movements that caused havoc in 1997. The 26-member Asian Cooperation Dialogue (ACD), which has been meeting in Islamabad, wants to float a fund of $40 billion to $50 billion to support infrastructure and provide a currency buffer against exchange risks.

As currently envisaged, most of the cash would come from direct government contributions; but the average commitment would be only 2-3% of GDP, about the same as many East Asian states now spend on infrastructure. In essence, the proposal hinges on the willingness of more affluent states like Japan and Korea to subsidize their smaller neighbors, which in some cases they are already doing through loans and other development aid. Stretching this fund to cover the development needs of nations as diverse as Bangladesh, Mongolia and Nepal will be a big challenge for regions that historically have been unable to agree even on common trade and investment regimes. Expecting them to put the interests of their less-developed neighbors ahead of their growth demands may be even more unrealistic.

Alan Boyd, now based in Sydney, has reported on Asia for more than two decades.

(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us for information on sales, syndication and republishing.)