Conference on Sustainable Growth and Enhancing Integration in Asia

1. Conference on  Sustainable Growth and Enhancing Integration in Asia Session II: Infrastructure for Enhancing Asia’s Economic Integration Alok Sheel Joint Secretary, Department of Economic Affairs Ministry of Finance, India ADBI and RIS New Delhi November 15, 2010

2. The Big Picture: ADBI Study • Large but uneven investment in infrastructure in Asian countries: big gap with advanced countries that needs to be quickly bridged. • Infrastructure Investment gap of over $ 8 trillion in 2010-2020. • Investment on this scale will increase aggregate Asian national income by $ 13 trillion. This would accelerate the process of per capital income convergence with the West. • Historical experience and current trends indicate that cross-border infrastructure the most challenging. Alok Sheel

3. Cross Border Asian Infrastructure • Broadly defined to include wholly nationally owned infrastructure with cross border connectivity to contiguous countries • Since intra-Asian trade is growing faster than trans-continental trade, the need for greater cross border connectivity is manifest. • Problem particularly acute in South Asia: least integrated region in the world. • Post global financial crisis, this need is even more manifest on account of the imperative of global demand rebalancing: domestic demand set to grow faster. Alok Sheel

4. Asia’s strategic advantages • Extensive waterways, that connected Asian markets with the west right through history, can be leveraged: the old trade route from the Chinese coast to Europe and Africa now extends to the American coast. • Domestic savings surplus that can be re-directed to infrastructure investment. • Infrastructure investment has a public investment bias, and fiscal position of Asia is much better than in advanced countries. • Such investment would automatically rebalance global demand and raise global trend growth. Alok Sheel

5. The Financing Problem • Advanced economies are bust: so foreign aid likely to shrink in real terms. • Most of accumulated savings with Asian Central Banks rather than with governments. • Bulk of the investment would have to be publicly funded/guaranteed in the best of circumstances • IFIs scale of financing pales in relation to Asia’s investment needs: no global appetite to scale up this financing: the G 20 experience. • Private investment likely to be limited, and even then may need to be guaranteed by governments and underwritten by IFIs or RFIs to address political risks in cross-border projects. Alok Sheel

6. What is the solution? • If private investment is an issue, ‘sterilized funds’ could be used for investment in infrastructure: constraint is absorptive capacity and political will (for cross border infrastructure) rather than funds. • Basically means redirecting private savings to government debt. • What level of debt is sustainable? Depends on potential growth and interest rates. (Domar Debt Sustainability equation*) • If borrowing is invested it will pay for itself through higher growth and revenues. • Asian Investment Fund is another possibility. This would entail (a) foreign public debt for domestic expenditure and revenue streams, and/or (b) Sovereign guarantees. Akin to World Bank and ADB financing. *Interest paid on debt should be less than aggregate GDP growth provided primary balance is nominal. Alok Sheel