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Into Asia: How infrastructure can help

17 May 2012 09:47

Peter McCawley is a Visiting Fellow at the Indonesia Project, ANU, and former Dean of the ADB Institute, Tokyo. 

Stephen Grenville's post on Asia's infrastructure deficit raises the question of how Australia's economic relations with Asia might evolve over the next few decades. 

An enormous infrastructure boom is getting underway in Asia. The prospects are that, over the next forty or fifty years, a huge amount of infrastructure is going to be built across Asia. How is it possible to be so confident that this will occur? First, the stock of physical capital across developing countries in Asia is still remarkably small. Many developing countries in Asia are in the early stages of a great boom in capital accumulation.

Stephen Grenville's figures on electric power tell the story. The average person in rich OECD countries consumes around 10,000 kWh of electricity per year while the figure in Indonesia is less than 7% of that amount. Reports from the Asian Development Bank list similar ratios for all other main infrastructure sectors – for roads, railways, water and sanitation, and so on. 

Second, all across the region, governments are gearing up for the boom. To be sure, policies are often confused and investors unhappy with unpredictable government decisions. But essentially, governments across developing Asia recognise the need for large investments in infrastructure.

Third, it is already fairly clear that much of the financing for this boom will come from within developing countries in Asia. In this sense, much of the boom is going to be home-made. State-owned enterprises within Asia, using retained profits, will fund some of the boom. Domestic bond markets will fund other parts. China, Japan and Korea will provide a good deal of financial support as well.

Where does Australia stand in all of this? 'Missing in action' seems to be the answer. Australia requires a collective response from its governments (especially state governments), infrastructure firms and banks. Unless something can be done, Australia will miss out on participating in the boom. The dramatic reforms to the Australian tertiary education sector in the mid-1980s point the way.

In the early 1980s, the Australian tertiary sector was a protected part of the economy which had little interest in venturing into international markets. The Jackson Review of the foreign aid program recommended wide reforms in the tertiary education sector which, in the face of opposition from the Commonwealth Education Department, were adopted by Foreign Minister Bill Hayden and Prime Minister Bob Hawke. These reforms 'unlocked' the tertiary education sector and led to a remarkable boom for Australian universities as they ventured into the international market. (Disclosure: I was a member of the Jackson Review which recommended these reforms.)

Similar reforms are needed in other parts of the public sector in Australia – especially among state government agencies (in sectors such as electricity, water, roads, rail, schools, hospitals) which have the technical knowledge and management skills in demand in Asia. If governments in Australia – especially state governments – adopted new policies to encourage agencies in these sectors to compete off-shore in Asia, perhaps Australia could join in the coming boom across the region. 

Photo by Flickr user fullres.