Asia's $11 trillion opportunity
By Ronald Man, HSBC economist
Asia’s great urbanization wave is changing the face of the continent’s cities on an unprecedented scale. Take China between 2005 and 2010, the country’s urban population increased by more than 100 million, around 10 times the number of European settlers who took part in the great wave of immigration to the U.S. between 1820 and 1880. And China is only half way through the process of urbanization.
At the same time, that giant human magnet _ the attraction of city life _ is only going to get stronger throughout the region. The United Nations estimates that Asia’s urban population will increase by 650 million by 2030, led mainly by China, India and Indonesia. We estimate that to meet their needs, $11.5 trillion will have to be invested in infrastructure over this period, the equivalent of 80 percent of the region’s current annual GDP.
A new wind is blowing across the region. In Indonesia, Jakarta (with a population larger than London’s) recently started building its first subway system. Thailand unveiled its most ambitious public infrastructure program ever, including plans to transform the country into a key conduit ahead of the ASEAN Economic Community in 2015. The Philippines will launch infrastructure spending with a record amount in 2013 after years of sluggish investment. And in Malaysia, Prime Minister Najib Razak is set to speed up infrastructure investment following his recent re-election.
Although by our calculations Asia’s infrastructure has improved since 2007, there is still much more work to be done and no time to waste. At its current level of development, the region stands to benefit most from infrastructure investments that are made now. But there is no “one-size fits all” solution and the state of infrastructure in Asian economies reveals a lot about the region’s diversity, be it economic, political or cultural. We identify three groups of economies within Asia.
First are what we call the “foundation” economies: the Philippines, Indonesia, Vietnam, Thailand and India. They have the weakest infrastructure in Asia and even immediate improvements in their systems may not have much impact on economic development for several years. Funding represents a big challenge too. These economies have tried to promote the use of public-private partnerships, but the current rate of infrastructure investment is likely to prove insufficient to accommodate their growing urban populations and these economies may face an urban infrastructure investment shortfall of $1 trillion over the next two decades.
Second are the “take-off” economies: China, Malaysia and Sri Lanka. The boost to growth in these economies provided by infrastructure is expected to be the greatest in the region, building a strong case for the benefits of governments playing a prominent role in funding such projects. Both China and Malaysia have experienced the largest increase in the rate at which people have flooded into cities over the past decade, which is consistent with our view that urbanization will be a powerful driver of infrastructure investment. Sri Lanka, where urbanization has not risen so fast, should be treated as a special case because of the distortions caused by a generation of civil war that ended only in 2009.
Third are the “flying” economies, Singapore, Hong Kong and Korea. Their infrastructure systems are well developed, with urbanization rates already ahead of the U.S. Consequently, the additional boost to growth from infrastructure may not be as large as in developing economies. We find that the emphasis is on improving the quality of life.
In Korea, for example, the government has gradually shifted its focus toward sustainable energy, aiming at capturing 10 percent of the global clean energy market (around 2 percent in 2010) and having one of the world’s top five energy industries by 2020.
The Incheon tidal power plant, which will be five times bigger than the world’s current biggest tidal plant, is due to be completed by June 2017. Developing alternative energy sources will continue to be priority given the excess demand for electricity in Korea. This is a result of low costs compared against oil: electricity prices in Korea are regulated and are still relatively low.
But for Asia as a whole, bricks, mortar, steel and glass are not enough by themselves. While infrastructure is important, we recognize the importance of institutions such as the rule of law, functioning markets, a skilled workforce and macroeconomic stability. They help shape how and where infrastructure investment is made and whether it functions properly. As millions continue to flock to Asia’s cities, the process of urbanization would create strong incentives for officials and politicians to build what is necessary. In turn, infrastructure should drive policy, helping to open new doors of opportunity for many years to come.