Foundations of the Future

The following sections are included:

• AUTHOR’S BIO
• CONTENTS
• INTRODUCTION — INFRASTRUCTURE: AN ECONOMIC AND STRATEGIC GAME CHANGER

We are in the midst of a global infrastructure war. The conflict has not made headlines, and most people are even unaware that it is happening. Yet the outcome of this battle will go far to determine which nations emerge as winners and which nations turn out to be losers in the battle for strategic and economic supremacy in the future. Unless Western societies wake up to the reality of the infrastructure war — and the fact that they are in danger of losing it — victory will likely go to the emerging nations led by China, where infrastructure is a national priority, and not to developed nations like the United States and Europe, where infrastructure has been given lower priority in recent decades…

The world — and that means advanced and emerging economies alike — needs a huge amount of new infrastructure in everything from transportation linkages, energy systems, and communication networks to basic water supply and drainage if the global economy is to keep moving forward and if social needs are to be provided for. The trouble is that no one seems to know exactly how much infrastructure is needed, where the needs are greatest, and how much it will cost. Moreover, no one is sure about how and by whom the needed infrastructure is going to be paid for. This is a remarkable situation in an age when advanced nations pride themselves on the volumes of “big data” they are able to marshal and their ability to process it at lightning speed…

The failure, so far, of Western nations to launch bold new infrastructure ventures on the scale of China’s Belt and Road Initiative, or even to renew and maintain the existing infrastructure, is not only due to a lack of imagination but also due to the fact that those nations are unable to appreciate the importance of infrastructure. It is worth noting that the economic priorities and financial systems in Western societies have evolved in such a way so as to limit the ability to finance long-term capital investment of both public and private sectors of the economy. The roots of this problem go deep, but they are traceable to the recent evolution of capitalism in Western societies from a system where finance was formerly viewed as a “means to an end” to one where it has become more of an end in itself. Infrastructure has become a casualty of market economies that often appear to reward “financial engineering” more than they do physical engineering and construction…

China has been the first mover in an unfolding infrastructure revolution that has the potential to transform much of the face of the earth. New highway and rail networks are beginning to march across the Eurasian continent and beyond while parallel maritime “roads” link continents together in a global nexus of land and sea communications. These developments open up prospects for expanded commerce and industrial production, boosting economic growth and prosperity in the process. But like all innovations, the infrastructure revolution has the potential for both good and bad outcomes…

Asia is becoming the main theatre of global “infrastructure wars” as leading Asia-Pacific powers — chiefly the United States, China, and Japan plus India and Australia — battle for economic and strategic supremacy in the world’s most populous and potentially most prosperous region. One casualty of this combat (apart from the obvious danger of physical friction developing among regional powers) is that attempts are being made to divide the region into two centres of economic and strategic power — the Asia-Pacific and the Indo-Pacific, with an emerging and thrusting China dominating the first and an essentially defensive United States leading the second, together with Japan and others…

China’s launching of its Belt and Road Initiative (BRI) along with competitive responses in the shape of the Asia–Africa Growth Corridor (AAGC) proposed by Japan and India and the Trilateral Partnership among the United States, Japan, and Australia have provoked comparisons with the “Great Game” played out in the 19th century between the British and Russian empires for political and diplomatic influence in Central Asia. This time, however, the battle is a broader and more complex one. It is a struggle for control of key land and sea routes across half the world and also represents an East–West clash between different economic ideologies…

Much of the world is “in denial” about infrastructure. At the level of governments, business corporations, and individuals, there is an unwillingness to confront the idea that the physical foundations of our society — transport, energy and communications infrastructure — are in danger of subsiding beneath us, undermining economic prosperity and economic growth in the process and risking disasters. Even those who recognise such dangers seem unable to grasp the fact that financial systems in market economies are not structured to provide money for infrastructure investment on the scale required. The money is “there,” but it is in the wrong place or in the wrong hands for infrastructure investment. Fixing this problem is going to require fundamental re-thinking about the way in which savings are collected and channelled into investment…

A perennial problem with infrastructure financing is that projects (those involving road and rail transportation in particular) usually involve very large up-front expenditures running into many billions of dollars while the return on investment may often be insufficient to attract private investment, and even then, returns are typically spread out over a period of many years or even decades. Naoyuki Yoshino, former Dean of the Asian Development Bank Institute in Tokyo, is convinced that he has found a way to overcome this mismatch between risk and reward by capturing the hidden or “spillover” returns that transport infrastructure in particular can generate over time — and returning it to investors in order to raise returns and make infrastructure investment a more attractive proposition (personal communication, 2019)…

The global cost of infrastructure is destined to be huge in the coming years, amounting to scores of trillions of dollars, and adapting infrastructure designs to climate change could cost trillions more. But there is another huge and hidden “tax” on infrastructure costs in the shape of corruption. This again could add further trillions of dollars. Corruption in the way infrastructure contracts are awarded and administered is a major problem, not only in regions such as Africa and Latin America but also in parts of Asia. As U4, the web-based Anti-Corruption Resource Centre for development practitioners says, “corruption in the construction of public infrastructure has particularly serious implications for developing countries” (Wells, 2015)…

Sustainable investment has graduated from being a “niche” concern to a central preoccupation among portfolio investors as environmental damage, social stresses, and governance failures (so-called ESG factors) exact an increasing toll on economies. Nowhere is there a greater need for investments to be made sustainable than in the area of infrastructure. Structures such as highways, railways, energy grids, communications networks, water supply, and sanitation systems need to be proofed against the ravages of climate change and they should wherever possible avoid social disruption and be shielded from corruption and poor governance risks…

Part of the fallout from the current infrastructure wars is an acrimonious debate over the need for so-called quality infrastructure. This issue has aroused such strong emotions as to cause US Vice President Michael Pence to launch a fierce tirade against China; Japan to disparage China and other infrastructure rivals; the World Bank to join other development banks in veiled warnings about the dangers of inferior infrastructure; and the G20 nations to pronounce upon infrastructure quality in official communiqués…

If multilateral development banks (or MDBs as they are often known) did not exist, they would need to be invented. The fact is, of course, that they do exist, but they are not being used fully for one of the primary purposes they were designed for, and that is the provision of infrastructure. There are no fewer than 25 global, regional, or sub-regional MDBs throughout the world plus a couple of 100 smaller national development banks (Prizzon & Engen, 2018). The problem is that, despite being structured specifically as “banks” and not simply as development “agencies,” these unique institutions are expected to deal with myriad issues ranging from health and welfare to education and environmental policies with dozens of other tasks thrown in. They have been relegated to the role of secondary players in infrastructure, whereas they were designed originally to act as principals…

If global economic growth and social welfare are not to suffer in coming years, the problem of how to provide supporting infrastructure in the shape of transport, energy, communications, and other networks must be tackled with much greater vigour and urgency than done at present. Solutions will need to be economically feasible and politically bold as what is required is nothing short of a revolution in perceptions about the importance of infrastructure. A new consensus needs to be forged, in advanced economies especially, on the importance of infrastructure as a key driver of economic growth and as a pillar of social welfare. Achievement of such a consensus would provide the political momentum needed to overcome the many obstacles — ideological and financial — that lie in the path of change and reform…

The following sections are included:

• BIBLIOGRAPHY
• INDEX