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Analysis

Take care bridging Asia’s infrastructure gap

Countries can’t abandon fiscal discipline

by Kat Usita in London

Mon 7 Aug 2017

The 20 years since the Asian financial crisis of 1997-98 show how much the region learned from the economic disaster. Financial reforms and fiscal restraint helped the affected countries build what appeared to be collective resilience against subsequent shocks, including the 2008 financial crisis. But the measures that saved these countries are now stifling growth because they resulted in years of underinvestment in infrastructure.

Poor transport links, insufficient energy generation and unreliable telecommunications hamper productivity and lower the quality of life. They also deter investors who like to see physical indicators of stability and sustainability before bringing in their business. Developing the right infrastructure network creates jobs, improves mobility and raises confidence in an economy.

With a few exceptions, such as China and Japan, east Asian countries underspent hugely on infrastructure in the decade following the Asian crisis. The gap is so obvious that China is stepping in through the Asian Infrastructure Investment Bank. Its growing membership indicates widespread attention to the region’s infrastructure deficit and the prospects that it offers. The Asian Development Bank predicts that Asia needs to spend $26.2tn on infrastructure between now and 2030 to maintain its growth trajectory. This figure is not surprising given the many years that countries have failed to focus on their infrastructure needs.

In Thailand, where the 1997 crash started, the government waited until 2013 to launch a major upgrade of the transport system. The $60bn initiative should have been fully under way by now but has been affected by political upheaval. The military junta that seized power in 2014 continued some infrastructure projects, including crucial ones for mass transit and flood control, and has committed to its own masterplan. But, so far, only a fraction of the proposed investment has been made.

Indonesia’s infrastructure has likewise been neglected. President Joko Widodo was elected in 2014 on his promise to correct this. The World Bank estimates that Indonesia loses 1% of GDP every year because it lacks adequate infrastructure to support development and connect its 17,000 islands. High logistics costs raise the price of goods, stunting trade and manufacturing potential. The 245 projects planned by the government require investment of around $300bn. The government says that nearly half are either under construction or have been completed. This is despite persistent land acquisition issues, political infighting and other bureaucratic hurdles.

In the Philippines, a comprehensive infrastructure programme was put in place only in 2010 when the government turned to public-private partnerships to build railways, toll roads and airports. However, strict enforcement of anti-corruption rules and a dearth of technically skilled civil servants delayed project delivery. Even with private investment, spending lagged. President Rodrigo Duterte’s government, elected in 2016, promises to build faster. It wants to abandon PPP schemes and instead seek Chinese loans for what it promises will be a ‘golden age of infrastructure’ at a cost of $165bn. The plan is an ambitious step in the right direction, but also reminiscent of the ‘golden era’ of the dictator Ferdinand Marcos, whose massive, overpriced white elephant projects buried the country in foreign debt.

Many Asian countries have to make up for lost time. They are rightly turning their attention to much-needed infrastructure. But they must find the correct balance between building aggressively and maintaining the fiscal discipline that has kept them relatively stable in the two decades since the region’s seminal economic mishap.

Kat Usita is Research Assistant at OMFIF and a student of public policy at the University of Oxford. 

Second edition of The Tides of Capital
To mark the 20th anniversary of the Asian financial crisis OMFIF is publishing a second edition of The Tides of Capital: How Asia surmounted financial crisis and is guiding world recovery. The new edition has a revised introduction by author Julia Leung. Pre-order a copy.

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