A new multilateral organisation, the Asian Infrastructure Investment Bank (AIIB) gathered up 57 founding members to sign a historic agreement. This is the first multilateral institution in which China will play a leadership role (ANZ's Chief Economist for Greater China Li-Gang Liu wrote an earlier article on the AIIB prior to the formal signing here.)
"If done properly the AIIB could offer a refreshing new approach for emerging Asia's infrastructure financing."
Will Rathvon, Global head of resources, energy and infrastructure | ANZ
The AIIB's next step comes at an opportune time where infrastructure financing and the political will for new infrastructure could come together (call me an optimist!).
The traffic clogging and air choking needs for infrastructure could lessen over the coming decade with new AIIB capital complimenting other development agencies.
This, combined with two other factors could set the stage for a self-reinforcing cycle:
- Favorable demographics in terms of working age people shifting populations and production platforms necessitating a greater priority to close the infrastructure gap; and
- Lower oil prices allowing specific countries to unwind fuel subsidies freeing up 2.5 per cent of GDP for infrastructure spending.
A BROAD VIEW
The AIIB is a broadly represented multinational financial institution, potentially competing with and complimenting the existing regional and global development agencies such as the World Bank and the Asian Development Bank.
In brief terms, the bank's purpose is to foster economic development, create wealth, and improve Asian infrastructure connectivity while promoting regional cooperation and partnerships by working closely with other multilateral and bilateral development institutions.
China has clearly stated the AIIB intends to provide financing for the infrastructure needs of Asia. This differentiates AIIB from other multinational development financing institutions.
The AIIB has a broad membership including China, Russia, Korea, Australia, Indonesia, India, UK, Germany, France, to name a few of the 57 prospective members. The bank will focus on emerging Asia's infrastructure which has attracted 37 members from Asia and Oceania.
With an authorised capital stock of $100 billion, this could be leveraged at least five-fold to bring more capital to the needs of Asia's infrastructure demand. Over time, the AIIB could possibly rival the World Bank.
Despite the world volatility today, the basic principles and drivers of growth and prosperity remain and will continue.
By 2050, the world's population is expected to grow by a third. Africa's population should double and within a generation India's population is set to overtake China. 2.5 billion people are expected to move to an urban environment. This growth requires more infrastructure development to provide for sustainable economies.
By 2020, the world will need $57 trillion for infrastructure development, with Asia representing the largest growth area over the coming years.
China's economy will grow more in the next 10 years than in the last 25 years. India's economy will almost double.
This will demand more iron ore (a key infrastructure building block), more oil and gas (the key ingredients for power and transport) and more copper which will remain as valuable through the 'silicon era' as it has been since the bronze era.
A LARGE NEED
There is a large need for infrastructure development in Asia. According to the World Economic Forum, emerging Asian economies' infrastructure quality score is below average.
In addition, the investment share of GDP has still not returned to pre-1997 levels in most ASEAN economies representing an infrastructure deficit of $US8 trillion through 2020.