Conference on Sustainable Growth and Enhancing

Integration in Asia

ADBI and RISNew Delhi

November 15, 2010

Alok SheelJoint Secretary, Department of Economic Affairs

Ministry of Finance, India

Session II: Infrastructure for Enhancing Asia’s Economic Integration

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.

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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.

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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.

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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.

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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.

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*Interest paid on debt should be less than aggregate GDP growth provided primary balance is nominal.