The demand for infrastructure has risen on the global agenda over the past five years and is partially a result of many countries making strong economic progress. Countries, as they become wealthier, can afford and demand more infrastructure. At the same, China has emerged as a new aid donor and has laid out a compelling vision for the developing world with the Belt and Road Initiative – a vision that is financed by its own bilateral aid agencies as well as through Chinese-led multilateral institutions like the Asian Infrastructure Investment Bank (AIIB). A few decades ago, aid agencies spent an enormous amount of efforts, resources, and time into infrastructure and built roads, airports, and large hydropower plants in the developing world. However, with the 1973 Foreign Assistance Act (also known as “New Directions”), the focus of foreign assistance (at least in the United States, if not elsewhere) began to turn away from infrastructure. Guided by a concept called the “Basic Human Needs (BHN) Mandate,” foreign assistance was re-envisioned as a tool to provide direct service assistance to nations with a largely rural poor citizenry.
The good news is that this is not your grandparents’ development world, the world of New Directions. Today, much of the developing world is richer, freer, far more urban, and more capable. So, to the extent that the West (Italy, the United States, Europe, and others) do not meet the hopes and aspirations of developing countries in Africa and Asia, they will take their business to the Chinese.
So, what needs to be done? Currently, the annual global infrastructure demand is estimated at $3.7 trillion. The challenge of infrastructure is a challenge of governance, with inadequate infrastructure development not due to a lack of capital but because of an insufficient number of bankable projects. There are roles for development finance institutions, aid agencies, multilateral development banks, private investors, and others. The United States and its allies in Europe (along with the multilateral institutions that they lead) should take the emergence of China as a blessing in disguise for at least two key reasons: (i) it has had a salutary effect on the rejiggering global development priorities towards infrastructure and, (ii) a number of institutions have begun to rethink how they operate as a result of this. Japan, for instance, has taken the initiative to expedite the approval, execution, and implementation processes for the infrastructure project proposals it receives.
The Asian Development Bank, with the emergence of AIIB, undertook efforts to raise the amount it can lend for infrastructure projects by 40 percent. Both the World Bank and the International Finance Corporation (IFC) are seeking a capital increase. The United States is willing to go along with this primarily because they see the World Bank and the IFC as force multipliers of a Western form of globalization, and not a Chinese-led form of globalization. The main selling point in the United States Congress (should Congress approve this) will be the challenge posed by a rising China.
At the same time, it is critical that we help the world close the multitrillion-dollar infrastructure gap on its own. Over the past few years, Japan has put forth constructive ideas on how to achieve such a feat and called the set of ideas “quality infrastructure,” a concept that was recognized at the 2016 G7 Summit in Ise Shima. Despite the number of efforts been taken in various international fora to sharpen its definition, quality infrastructure continuous to be an amorphous term. However, it is an important and interesting concept because it encompasses a number of issues including transparency, environmental sustainability, and financial viability. It should be in no one’s interest for developing countries to buy the same infrastructure project twice. This coming year, Japan will assume the G20 Presidency starting in January and will be hosting the Summit at Osaka towards the end of June. I am prepared to bet a fancy dinner at the famous Ristorante Il Vero Alfredo, that “quality infrastructure” will be one of Japan’s top two priorities.
So, what should be an outcome of the 2019 G20 Summit? Sustainable infrastructure development requires developing countries to make significant reforms to their public sector practices, especially in the area of financing, procurement, planning, implementing, and maintaining infrastructure. Often, infrastructure is not only a national government challenge and extends to cities and provinces in developing countries of Africa, South Asia, and Southeast Asia. There are literally hundreds of thousands (and possibly millions) of officials in the public sector in the developing world upon which the world relies on to plan and procure critical infrastructure. The primary opportunity over the next decade is to work towards improving the quality and capacity of these public sector actors. Large pools of capital could be mobilized through accessing sovereign wealth funds, global capital markets, and domestic savings, to finance infrastructure. It is also worth noting that domestic tax revenue currently plays the dominant role in funding infrastructure projects and will likely continue to do so. A 2013 estimate suggests that the most significant source of infrastructure financing in emerging economies was domestic tax revenues, accounting for 60 percent of the total annual infrastructure spending, while multilateral development banks and development finance institutions played only a small role and provided about 6 percent of the total funding. Similarly, it is also clear that China – on its own – cannot help close the infrastructure gap, leaving the world a significant challenge with infrastructure finance.
In 2015, the world created the Addis Tax Initiative, through which a commitment was made among donors to spend 2 percent of all global foreign aid on taxes, put some additional political will, and have a coordinating mechanism of a variety of disparate actors to work more closely together to get developing countries collect more taxes and spend that money better. In essence, the G20 meetings in 2019 ought to agree on the equivalent of an Addis Tax Initiative for quality infrastructure. This new initiative would seek to concentrate foreign assistance, political will, and expertise, towards providing assistance to partner countries to undertake meaningful changes in how they deal with infrastructure. If infrastructure development is indeed a challenge of governance, then we need a global “coalition of the committed” that will draw upon countries to come together and focus their attention, experts, and resources on efforts to help close the global infrastructure gap. The 2019 Osaka meetings provide a perfect opportunity to create such a coalition.
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