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  • Aug 28, 2014
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CommentInsight & Opinion

Asian urbanisation boom puts great demands on infrastructure

Ronald Man says that as millions of people continue to flock to live and work in Asia's cities, and the lure of urban life grows stronger, huge investments will have to made in infrastructure

PUBLISHED : Saturday, 10 August, 2013, 12:00am
UPDATED : Saturday, 10 August, 2013, 2:31am

Asia's great urbanisation wave is changing the face of the continent's cities on an unprecedented scale. Take China - between 2005 and 2010, the country's urban population increased by more than 100 million, around 10 times the number of European settlers who took part in the great wave of immigration to the US between 1820 and 1880.

And China is only halfway through the process of urbanisation. At the same time, that giant human magnet - the attraction of city life - is only going to get stronger throughout the region.

The United Nations estimates that Asia's urban population will increase by 650 million by 2030, led mainly by China, India and Indonesia. We estimate that to meet their needs, US$11.5 trillion will have to be invested in infrastructure over this period, the equivalent of 80 per cent of the region's current annual gross domestic product.

Although Asia's infrastructure has improved since 2007, there is still much more work to be done

A new wind is blowing across the region. In Indonesia, Jakarta - with a population larger than London's - recently started building its first subway system. Thailand unveiled its most ambitious public infrastructure programme ever, including plans to transform the country into a key conduit ahead of the expected launch of an Asean Economic Community in 2015. The Philippines plans to spend a record amount on infrastructure this year after years of sluggish investment. And in Malaysia, Prime Minister Najib Razak is set to speed up infrastructure investment following his recent re-election.

Although by our calculations Asia's infrastructure has improved since 2007, there is still much more work to be done and no time to waste. At its current level of development, the region stands to benefit most from infrastructure investments that are made now.

But there is no "one-size-fits-all" solution and the state of infrastructure in Asian economies reveals a lot about the region's diversity, be it economic, political or cultural.

We identify three groups of economies within Asia. First are what we call the "foundation" economies: the Philippines, Indonesia, Vietnam, Thailand and India. They have the weakest infrastructure in Asia and even immediate improvements in their systems may not have much impact on economic development for several years. Funding represents a big challenge too.

These economies have tried to promote the use of public-private partnerships, but the current rate of infrastructure investment is likely to prove insufficient to accommodate their growing urban populations; these economies may face an urban infrastructure investment shortfall of US$1 trillion over the next two decades.

Second are the "take-off" economies: China, Malaysia and Sri Lanka. The boost to growth in these economies provided by infrastructure is expected to be the greatest in the region, building a strong case for the benefits of governments playing a prominent role in funding such projects.

Both China and Malaysia have experienced the largest increase in the rate at which people have flooded into cities over the past decade, which is consistent with our view that urbanisation will be a powerful driver of infrastructure investment. Sri Lanka, where urbanisation has not risen so fast, should be treated as a special case because of the distortions caused by a protracted civil war that ended only in 2009.

Third are the "flying" economies: Singapore, Hong Kong and South Korea. Their infrastructure systems are well developed, with urbanisation rates already ahead of the US. Consequently, the additional boost to growth from infrastructure may not be as large as in developing economies. We find that the emphasis is on improving the quality of life.

As one of the Asian Tigers and the financial capital of Asia, Hong Kong's infrastructure has matured earlier relative to many of its neighbours. On the surface, this may suggest that there are few opportunities for improving Hong Kong's infrastructure. But while the MTR efficiently carries millions of passengers around the city every day, access to mainland China is still relatively limited.

Hong Kong currently has 10 key infrastructure projects set to be completed over the coming years. Five are about improving connections with mainland China, such as rail and bridges, valued at at least US$13 billion. Successful completion of these projects will allow Hong Kong to tap further into China's long-term growth potential. But for Asia as a whole, bricks, mortar, steel and glass are not enough by themselves.

While infrastructure is important, we recognise the importance of institutions such as the rule of law, functioning markets, a skilled workforce and macroeconomic stability. They help shape how and where infrastructure investment is made and whether it functions properly.

As millions continue to flock to Asia's cities, the process of urbanisation would create strong incentives for officials and politicians to build what is necessary. In turn, infrastructure should drive policy, helping to open new doors of opportunity for many years to come.

Ronald Man is an economist at HSBC Asian Economic Research

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