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Infrastructure – the invisible hand in full view

By Frank-Jürgen Richter

Nikkei Asian Review, August 4, 2014

We all use the infrastructure around us without usually noticing it, just as we ignore our skeleton unless we suffer a strain. Recently in Asia, I have read calls for greater support for local industries to mimic the German Mittelstand model of relying on the health of small and mid-sized companies to grow an economy. These calls are worth heeding, but going local usually demands things that are distant — for raw materials supply and for delivery to markets. It is all about the requisite balance.

Developing nations have increased their investments in road, rail, sea and air facilities, often separating passenger from freight traffic to benefit both modalities. They achieved high growth rates, but many have also been held back by fearful regulators. For instance, China, even with its vast new transport network, has not developed its logistics infrastructure. This is a task demanding a broad education covering the management of transportation, warehousing and the intricate digital and physical integration of long-distance consolidation with flexible short-distance delivery.

China spends 18% of its gross domestic product on logistics, which is double the average level spent in the developed world. The U.S. lifted its productive growth rate some 20 years ago, through its “technological dividend.” But China is far behind — it has relied on buying new capital equipment to raise productivity, yet it has not invested in wide open digitization and web interconnection. It needs to do so as its demographic dividend of surplus labor has ended. Only a quarter of China’s small and mid-sized companies are web-connected, compared with 75% in the U.S. The Chinese government must take a new leap forward and allow full digital access to all to kick-start smart working practices.

For example, after India became connected to undersea communications cables — which have landfalls in Mumbai, Chennai and Kochi — it led to the blossoming of the country’s nascent IT industry. Indian rent-seeking officials could charge a fortune on goods passing along roads and ports, but they never hindered unseen digital traffic. Well-educated Indian returnees and the Indian diaspora developed IT consultancies and back-office skills that they then exported successfully to businesses the world over. Other knowledge-based skills have followed. China says it wishes to become a knowledge-based economy, but to gain a foothold on such ground, it must allow unfettered web access. This will permit companies to advertise globally as well as more effectively source their requirements.

Communicating with Africa
We may be seeing a copy of the Indian Model developing in East Africa. Long ago, only townships were deemed rich enough to support fixed land-line telephony (later giving access to the Internet) as the African countryside was too poor and had sparse potential. This changed when mobile communications became cheap and both towns and people in the countrysides could connect, especially with mobile banking apps. Even so, only 12% of Africa’s trade takes place in the continent. In comparison, 60% of European countries’ trade is with each other.

In Africa now, as it was in India, rent-seekers are missing out on digital trading. But there are technical limits to using mobiles for data handling. We are seeing entrepreneurs laying fiber-optic cables inland up East Africa, from Cape Town to Kenya, enabling reliable fast mass data transfers as well as onward connections to the undersea cables already laid around Africa that then go to the rest of the world. This will open up much trade, which will support a new wave of entrepreneurs and educators. This $650 million project, 75% funded by Africans, will enable more sophisticated banking systems and will support venture capitalists in properly assessing risks to create loans. Then new entrepreneurs will be able to communicate with customers and suppliers worldwide along the new fiber links and raise Africa’s well-being though greater trade.

Western leaders agonize about falling growth rates. They do not have enough cash to spend on better formative education, on upgrading old systems or on redeveloping physical infrastructure. It is a fallacy to believe we can all live in knowledge-based societies — everyone needs food, clothing and the means to live. Integrated supplies are needed worldwide. Conversely, leaders in developing nations agonize about their internal development and how to lift their citizens quickly to the levels they aspire to. All these needs could dovetail well together. But they do not. Which is why guidance is needed.

A bank for all
Until recently, nations relied on the World Bank for loans and the IMF for economic oversight. Many have criticized the structures, actions and advice of these two institutions. Now we have a third player — the BRICS Bank. This institution created by Brazil, Russia, India, China and South Africa has a simple one nation, one vote system. It also has the adequate start-up capital to begin major funding programs. And, while it is true that China has been offering loans for years to India, Africa, Brazil and other nations, the new bank suggests a new way that is based on this system of five equal shareholders. There ought to be more transparency — and surely the rest of the world cannot complain about it having an uneven playing field.

We will need time to see how this simple governance at this bank will pan out. The World Bank and IMF are quite venerable institutions that incorporate all nations, but they are governed predominantly by developed nations, and this has created tension. As Asia is becoming more dominant in global affairs, perhaps it is time to show a fairer way forward. If the BRICS Bank can hire good managers, and if it can work independently of political pressures, I believe it will be able to offer good support to all entrepreneurs. In this sense, emergent Asian values promoted by the Indian and Chinese shareholders ought to show the world how to be less greedy. And they might be able to persuade both the old-developed and the still-developing nations about a fair way forward. We must hope.

Frank-Jürgen Richter is founder and chairman of Horasis, a global visions community.