AbacusAsia’s infrastructure problem is not what you think

Picture US$40 trillion. It’s a lot of money. It is, for example, bigger than the annual economic output of the United States, China, Japan, Germany and Britain combined. Well US$40 trillion is how much developing Asia needs to spend on infrastructure between now and 2030, says Danny Alexander, the former British cabinet minister who now fills the number two job at the Shanghai-headquartered Asian Infrastructure Investment Bank. Happily, adds Alexander, the AIIB is on hand to help raise the private capital Asia needs so badly to build all those roads, railways and other stuff necessary for the region’s development.

Except Alexander has got it the wrong way round. If Asia has an infrastructure problem, it is not a shortage of capital. The region is a massive exporter of capital. What Asia lacks is economically viable infrastructure projects that any sensible investor would want to go anywhere near with their money.

AIIB will test China’s ability to run an international organisation

That might sound like a strange assertion. After all, the conventional wisdom is that infrastructure investment is a sure-fire route to growth for developing economies. Infrastructure, the theory goes, raises productivity, and by reducing costs, increases returns, pushing up incomes. As evidence that the theory works in reality, economists point to China, where the pace of infrastructure investment over the past two decades has been awe-inspiring.