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31 May 2013

Asia infrastructure shortfall

by Ronald Man

Economist, HSBC

World’s longest sea bridge to open in East China

Urbanisation will be a powerful driver of infrastructure investment in China

Asia’s great migration is changing the face of the continent’s cities on an unprecedented scale. Take China: between 2005 and 2010, its urban population rose by more than 100 million. That’s around 10 times the number of Europeans that migrated to the United States from 1820 to 1880. And China is only halfway through the process of urbanisation: its railway network is still shorter than the US system in 1880, for instance, and more than 80 Chinese cities with populations exceeding 5 million still have no subway systems.

We calculate that
to meet their needs,
USD11.5 trillion must be
invested in infrastructure
over this period – the equivalent of 80 per cent of the region’s
current annual GDP

That giant human magnet – the attraction of city life – will only get stronger. Asia’s urban population will increase by 650 million before 2030, according to United Nations estimates, led mainly by China, India and Indonesia. We calculate that to meet their needs, USD11.5 trillion must be invested in infrastructure over this period – the equivalent of 80 per cent of the region’s current annual GDP.

We have produced an Asia Infrastructure Measure by analysing 11 economies there. It shows a close relationship between each economy’s measure and its urbanisation rate. It also reveals how the region’s infrastructure has developed significantly since 2007, closing the gap with the US, but there is no “one size fits all” solution. Some economies require improvements across the board while others will benefit more by focusing on specific areas.  

We have identified three broad groups: foundation economies, take-off economies and flying economies.

The “foundation economies” – the Philippines, Indonesia, Vietnam, Thailand and India – score low on our measure. Even immediate improvements in their infrastructure may have little impact on GDP per head for several years. They have tried to promote public-private partnerships but the current rate of investment is unlikely to be sufficient.

For the “take-off economies” of China, Malaysia and Sri Lanka we expect the greatest boost to per capita GDP from infrastructure in the region – which is a strong case for governments to play a prominent role in funding such projects. China and Malaysia have had the largest increase in the rate of people flooding into cities over the past decade and urbanisation will be a powerful driver of infrastructure investment.

The infrastructure systems of the “flying economies” of Singapore, Korea and Hong Kong are well developed, with urbanisation rates already ahead of the US. The additional boost to growth from infrastructure may thus not be as large as in developing economies, but their emphasis is on improving the quality of life through, for example, better housing.

However, bricks, mortar, steel and glass are not enough by themselves. While infrastructure is important, so are 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, urbanisation will create huge incentives for officials and politicians to build what is necessary. But in turn, infrastructure will drive policy, helping to open new doors of opportunity for years to come.

This research was first published on 20 May 2013.
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