With unconventional monetary policy approaching the limits of its effectiveness, fiscal spending on infrastructure is finding favour as a means to stimulate economic growth. This has lent weight to the arguments of Asian Infrastructure Investment Bank (AIIB) chairman and president Jin Liqun in favour of such spending. “There is empirical evidence showing an undeniable link between infrastructure investment and economic growth,” Jin tells Emerging Markets.
In a wide ranging interview he defends the AIIB’s push to strengthen the focus of multilateral development banks (MDBs) on infrastructure. The former vice finance minister of China argues that MDBs need to boost infrastructure investment rather than simply talk about a mission to reduce poverty.
There is a need for radical rethinking on this issue, says Jin, citing China’s success with infrastructure-linked poverty reduction. The AIIB head notes that “largely owing to the broad benefits of improved infrastructure, China managed to lift over 500 million people out of poverty by World Bank standards, and 600 million by China’s standards, in a little over two decades, with the percentage of the population living in poverty falling from 65% in 1981 to just 4% in 2007.”
Emerging Markets talked to Jin as the AIIB — which has attracted 58 member countries from within and beyond Asia — entered the second half of its first year of operations and after he had presided over the bank’s first annual meeting in Beijing.
A former Asian Development Bank vice-president and alternate governor for China at the World Bank, Jin has shown confidence and skill at the helm of the new Beijing-based bank, many say, raising his profile on the regional and international stage.
The bank has approved just half a dozen loans so far while its business plan for 2016 sees lending of $1bn with a staff of around 50 people.
While the AIIB has made a solid start to its endeavours, it will be a “lean” operation, says Jin, who has demonstrated this principle by dispensing with resident executive directors at the bank. However, he highlights the importance of the oversight exercised by the AIIB board, whose role he says is strong despite the bank’s different approach.
Use of modern technology “can ensure that our non-resident board has no less ready access to information about what is going on in the bank than if its members were here on the premises,” Jin says. “Physically, board members are scattered over the world. Functionally, they remain close to management and staff on a daily basis. This also allows us to save on costs, which ultimately benefits our shareholders.”
He insists that being lean does not stop at the non-residency of the board. “It means that, at its core, the bank will prioritise efficiency in all aspects of its business and operations. We are already seeing this implemented in various ways.
“We have delivered our first four projects barely six months into operation and we have adopted a measured approach to staffing, ensuring there is no [functional] redundancy. The AIIB will strive to remain a small organisation relative to the size of its operations. The lean structure will be institutionalised as part of the corporate culture.”
CORE REQUIREMENTS
It is not just in improved efficiency that the AIIB can make a difference, Jin suggests. China’s economy, he notes, “continues to get bigger and now it is China’s turn to do a bit for the rest of Asia and the world”. China can, for example, demonstrate to others the value of infrastructure investment. “China’s fast growth in virtually all sectors of the economy over the last three decades was preceded by infrastructure investment.”
But such investments can be effective only when they are well co-ordinated, he says. “A power plant once completed should not wait for the transmission lines to be built. Port upgrading and expansion should be supported by road and rail connections. Infrastructure will exert a greater impact if it is part of a regional development strategy. It is important to consider a project’s regional impact to ensure its long term viability.”
In order to ensure this, he says the AIIB sets three core requirements for projects on which it is approached for support. “They must be financially viable, environmentally friendly and socially sustainable.”
The types of infrastructure most likely to contribute to growth, Jin suggests, are “those that can create jobs, pave the path for private sector development and generate tax revenues through increased economic activity. At the same time, they certainly should be good for the environment.
“If a region lacks transportation infrastructure, then roads, railways or ports are what is needed. If it lacks access to clean drinking water, then water treatment is the most crucial. If a region lacks access to power, then power transmission is the most pressing need.”
Jin challenges the popular orthodoxy that poverty reduction should be the “overarching goal” of development banks. “The real experience in much of Asia is that infrastructure construction has had a meaningful impact on improving the lives of ordinary people,” he emphasises.
“I have a deep conviction that any poverty reduction programme in and of itself will not go very far in making a difference to the livelihood of the poor and the needy. It is certainly necessary for some MDBs to address poverty reduction directly with their concessional funding. In most cases, however, the approach needs to be refined and improved.
“Suppose there is a community in a remote mountainous area, cut off from the outside world and dependent on aid from government and from international donors. Such areas may be rich in natural resources but locals have no way of tapping natural endowments. The only solution, in my view, is connectivity. Resulting economic opportunities will bridge the gap between the livelihood [of poor areas] and that of the outside world.”
For most MDBs, Jin suggests, “division of labour is necessary”. It is, he says, “the duty of some of them to tackle poverty directly and I have noted that their approaches are being adjusted so as to make their interventions more effective and efficient.”
The AIIB should meanwhile “learn from the experience of other MDBs from time to time and we will see if new strategies and new approaches are worth experimenting with.
“While poverty reduction is a laudable cause and a poster child for the virtue of development banks, it does not go very far in and of itself. Broad-based economic and social development is the ultimate solution for poverty reduction. Taking poverty reduction as the overarching objective will do nothing but restrict [development banks’] effectiveness.”
Jin says he is “pleased to see that since the AIIB was initiated, with its clarion call for infrastructure investment, more institutions and investors have come to embrace this development approach”.
Some existing MDBs, he adds “have fine-tuned their mandate and have been more explicit about infrastructure investment. It is gratifying too to see that the G20 [Group of 20 emerging and advanced economies] chaired by China this year has taken infrastructure development as a major theme.”
COLLABORATION AND CO-ORDINATION
The AIIB head says he is very keen on working in collaboration with the World Bank Group, the ADB (Asian Development Bank), the EBRD (European Bank for Reconstruction and Development) and other MDBs in co-financing infrastructure projects, which by their nature are usually very large. “Often, it is not a good idea for one institution to invest in such projects single-handedly,” he says.
The public sector, he says, “naturally has an important role in funding infrastructure investment. However, rising public sector debt and shrinking fiscal space means public sector resources are insufficient to meet demand. We attach great importance to the role of the private sector in infrastructure development and will certainly mobilise resources of the private sector.”
The shortfall of resources for infrastructure investment is, Jin adds, “undisputed, but the exact amount could be controversial. There is often a huge gap between what is desired and what is practical. What is needed does not mean that it is feasible to satisfy the need in one go.
“The onus for infrastructure investment does not fall on any single class of investor, whether it is sovereign governments, MDBs or private investors. But MDBs should work more closely with borrowers to ensure a stable policy environment that can help reduce perceived investment risk for the private sector.”
In Japan, Emerging Markets suggests, Abenomics is likely to involve further increases in the Bank of Japan’s purchases of government bonds, with some of this funding being used to finance infrastructure. Could this become a more general pattern in advanced and emerging market economies?
“Traditional monetary policy actions taken by many central banks over the last seven years have yet to bear significant fruit in terms of economic growth,” Jin notes. “If this situation persists, it is reasonable for central banks to consider alternative forms of monetary policy, such as the purchase of infrastructure bonds.”
But such a policy is not without risk, he cautions. “Debt sustainability is one of the factors weighed by investors. A rise in government debt to fund infrastructure investment may actually dissuade other classes of investors if projects are not efficiently implemented. The most critical element is ensuring that infrastructure projects are well designed and properly co-ordinated and that they meet a real need.”