What the Asian Infrastructure Development Bank means for Asia and the world

Almost exactly a year ago, just prior to the Asia Pacific Economic Co-operation (APEC) hosted in Bali in October 2013, President Xi Jinping announced the proposal for the establishment of the Asian Infrastructure Investment Bank (AIIB). This was a major announcement which was unforeseen and unexpected particularly as no clear plans were outlined at the time.

Since the announcement however, Chinese officials have been very busy in encouraging other fellow Asian partners to be the initial founding partners of the AIIB.

To date, the Chinese Ministry of Finance has convinced over 22 Asian partners including the likes of Singapore and Bangladesh to confirm their participation as founding partners and contribute to the initial funding capital.

Other major partners such India, Qatar and Saudi Arabia have been very bullish about the prospects and the promise of the AIIB and have made very positive overtures publicly about their participation as founding members. Other South East Asia partners such as Thailand and Malaysia remain positive and other major partners such as South Korea and Australia are still studying the Chinese proposals.


The Asian Investment Infrastructure Bank

The role and rationale for the AIIB

The mandate of the AIIB, as a multilateral development institution, is to support the financing of infrastructure developments across Asia that supports economic growth and activity nationally and regionally.

Traditionally Asian nations have turned to the Asian Development Bank (ADB), the International Monetary Fund (IMF)  and the World Bank for financial support. However, the level of financial assistance, particularly from the World Bank and the IMF have dropped since the 2008 financial crisis.

The ADB is also being increasingly viewed as a bureaucratic entity which takes almost seven years to launch a project or initiative (from proposal to the approval of funding) which leads to significant delays due to red-tape.

These conditions do not support the urgent need for infrastructure investment by a number of Asian economies. The ADB estimates that Asia needs about US$8 trillion of physical infrastructure investment between 2012 and 2020. The OECD estimates that globally over US$50 trillion of infrastructure investment is required over the next two decades to support sustained economic activity.

The AIIB is expected to have an initial capital of between US$50 billion to US$100 billion with China contributing to half that amount. This will immediately create an entity that is stronger than the Asian Development Bank (which has a current capitalisation of about US$78 billion) and will be around half of the World Bank’s current capitalisation of between US$180 billion to US$200 billion.


Implications and impact for major Asian partners

The creation of the AIIB has a number of major implications for Asian economies. Growth prospects With depressed growth prospects – strong investment in infrastructure projects will support the creation of demand and improve production and consumption. The enhanced infrastructure will also support greater trade and economic expansion.

This is certainly the case for India which forecasted a need for approximately US$1 trillion to meet infrastructure requirements under its 12th five-year plan (from 2012 to 2017) but is struggling to meet the investment target. Participation in the AIIB will allow for India to raise greater capital and visibility for some of her public-private infrastructure initiatives. The rest of the South Asian subcontinent, including Sri Lanka, Bangladesh, Nepal and Pakistan have all either signed up with the AIIB or shown strong interest in the initiative. If India chooses to remain on the side lines, her influence across South Asia will further diminish. The AIIB will be a strong platform for India to take on a regional leadership role and be seen to be a partner for the region’s growth and success.

The AIIB will also certainly support a number of smaller Asian economies which have been unable to meet the stringent requirements or payment terms set out by the likes of the Asian Development Bank or the World Bank. This includes the likes of Nepal, Cambodia and Laos.

From a political perspective, the impact for Japan as a result of these developments is significant. The Asian Development Bank has traditionally been led by Japan (who along with the US share the majority voting rights in the ADB) which previously allowed Japan to exert her political and economic influence across Asia. The AIIB will certainly curtail Japan’s political influence across Asia and also strengthen China’s hand in the on-going disputes ranging from the South China Sea territorial issues to legacy World War II disputes.

South Korea on the other hand is trying to navigate its participation in the AIIB tenderly. On one side, Seoul has to please her largest trading partner, China, whom she is working closely with towards greater economic success. On the other side, Seoul’s traditional security partner, the US, remains a critical partner in South Korea’s regional defence strategy.

ASEAN (Association of Southeast Asian Nations) has certainly shown significant support for the AIIB. Indeed Singapore was one of the early founding members of the AIIB as they have a clear stated policy of working with China from the inside rather than remaining out on the side lines looking in. Other major ASEAN economies such as Thailand, Malaysia and Indonesia are likely to sign up to the AIIB to exert greater influence in the way the bank is run and managed which will in turn support their own investment and growth plans. However, there will be concerns, particularly from Philippines and Vietnam, which in recent times have had strong and sharp exchanges with China over the South China Sea islands. Their concern will be that should China take a greater role in economic influencing and funding, it will strengthen China’s hand and erode Vietnam and Philippines’ support in their respective claims in the South China Sea.

Asia has always traditionally had strong savings, currently estimated to be worth over US$3.99 trillion. This supply of savings can meet some of the immediate infrastructure requirements across Asia but there is a mismatch in channelling these savings towards the financing of the infrastructure projects. The AIIB can help resolve this funding gap moving forward.


Problems with Uncle Sam?

The US government has not hidden their opposition to the establishment of the AIIB.

Their biggest concerns are around how China will use the AIIB to further project her economic and political dominance across the region. It also gives greater clout to other major Asian partners such as South Korea and India whilst diminishing the influence of the United States’ traditional Asian partner, Japan (who leads the ADB as highlighted above). This does alter the geopolitical realities in the region and softens the US hegemony in the region.

Some of the other concerns highlighted by the US government is that the new bank will not have adequate and robust safeguards in areas such as environmental protection, human rights and a transparent procurement process which will undermine the need for good governance across the region. Indeed, if the AIIB fails to have strong safeguards, it will exacerbate the challenges of corruption, lack of accountability and proper due diligence which have remained endemic problems across Asia (and also around the world). However, it is likely that the AIIB will operate to very high and rigorous global standards when assessing and evaluating projects.

However, it must be noted that China has made it clear from the outset, and also recently at the Boao Forum for Asia, that they welcome the participation of the US and other European Union partners in the AIIB. This will provide an opportunity for non-Asian partners to support the bank and ensure that AIIB’s governance and strategy is in line with global standards.

The US should use this as an opportunity to partake in the region’s continued growth and stability. US participation in the AIIB (which will be subject to lengthy Congressional debates) will certainly do more to support US foreign policy of a safer and prosperous world rather than the current position of dissuading potential partners from participating in the AIIB.


The future

The AIIB will need to create strong and close collaborative partnerships with the likes of the World Bank and the ADB so that they are not working to cross purposes. Encouragingly, the World Bank have announced their wish to work closely with the AIIB when they launched the Global Infrastructure Fund (GIF) earlier in October 2014. Similarly, the ADB have also announced their intentions to work closely with the AIIB.

The AIIB will also need to create a viable and sustainable business model which channels funding appropriately towards infrastructure investment.

Recently, the BRICS Bank or the New Development Bank was set up by Brazil, Russia, India, China and South Africa. The BRICS Bank is headquartered in Shanghai and the Presidency is maintained by India for the initial five years. However, the funding from this BRICS bank is only available to the BRICS nations and not to the rest of Asia. The AIIB helps to alleviate this issue.

The AIIB can potentially create a platform that generates economic ties and greater unity across Asia. It provides a strong and credible opportunity for major Asian rivals to become partners towards growth and development. Initiatives such as these will help to provide resolution to tricky issues that always emerge between partners and friends.



Indonesia’s Economy – Opportunities and Challenges – notes from a lecture by Bapak Gita Wirjawan, Minister for Trade, Indonesia

ImageS Rajaratnam School of International Studies (RSIS) Distinguished Public Lecture by Bapak Gita Wirjawan, (GW) Minister of Trade, The Republic of Indonesia. (2nd September 2013, Pan Pacific Singapore) on “Indonesia’s Economy: Future Challenges and Opportunities.”

I had the pleasure of attending the distinguished public lecture by Pak Gita last week and I wanted to share some salient points from the discussions


Key highlights and introduction

  • July results for trade is a continuation of the trends observed in June – and are actually worse. (There was a US$2.3 billion trade deficit in July 2013 alone – cumulative deficit of US$6 billion for the whole of 2013). (Click here to see news on the latest trade deficit)
  • Continued outflow of capital resulting in a downward pressure on the currency.
  • The ongoing slowdown in Europe and uncertainty in the US/Middle-east is also having knock-on effects on Indonesia.
  • We are witnesseing a “recalibration of the global economic outlook.”
  • However, Indonesia has seen significant progress made under the Susilo Bambang Yudhoyono (SBY) presidency – Under Sukarno’s era, the GDP per capita was around US$500 per  capita – this went up to US$1,200 under the Suharto era. However the Asian Financial Crisis in 1997-1998 had a catastrophic impact on Indonesia, where the GDP per capital plummeted to US$600 per capita. Indonesia also very narrowly avoided the Balkanisation of the country during that period.
  • After the political reforms post-Suharto, GDP climbed steadily to US$1,100 under the Megawati presidency and today (2013), the GBP per capita has just about exceeded US$5,000 per capita under the SBY presidency. This has also resulted in the increased purchasing power of Indonesia leading to heightened domestic consumption, particularly from a growing middle class.


Can Indonesia emerge from the middle-income trap?

  • Indonesia’s improved its policy and position in the fiscal space.
  • However in the social space, the gini coefficient (one indicator of income inequality) has risen, which implies a widening income gap and disparity. This remains a critical issue which the government needs to resolve.
  • Furthermore, there is still an over-reliance on the commodities sector which is prone to very violent swings and shocks.
  • Infrastructure development remains a challenge for the country.
  • The needs to be further work done in the educational space as well.


Education and the economy

  • In 15 years, there will be 150 million Indonesians under the age of 30.
  • There remains an urgent need to sharpen the educational infrastructure.
  • As GW says, “It is important that we need a good runway, not just to land, but to also support us in taking off.”
  • Between 2012-2022 – it is estimated that Indonesia’s accumulated GDP be will be over US$60 trillion – on a cumulative basis.
  • There needs to be a supply side narrative to realise this estimated accumulated GDP and that remains the challenge.
  • The SBY government leaves a sustained economic trajectory for Indonesia.


The woe of the number of taxpayers (or lack thereof!)

  • For an economy in the top 20 largest economies grouping – the G20 – there are fewer than 20 million tax payers! (comparatively?)


Indonesia and her geopolitical relevance

  • GW highlighted the example of how South Korea has used its soft power effectively (from Gangnam style to Samsung products) to drive international trade and economic growth. What can Indonesia do to achieve a similar impact?
  • GW also highlighted that Indonesia has the ability to develop a high degree of political relevance because:
    • Indonesia has the potential to serve as the ‘middle power’ to narrow the gap between the Middle-East and the West
    • Indonesia can also narrow and bridge the gap between China and the US (a slightly debatable claim?!)
    • However, Indonesia needs sustained political order in order to develop and create this geopolitical relevance.
      • Indonesia must engage in Democracy 2.0 – the next iteration of her democratic freedoms enjoyed post-Suharto.
      • Improve her manufacturing and technological sector (invest in high-quality and high-yield technology and sectors).
      • Without Democracy 2.0 – it is highly unlikely that Indonesia will sustain her political and economic reforms and progress. Areas such as corruption must be tackled with and though there has been some good initial progress, this must remain sustained for there to be tangible returns and a progressive shift.

Indonesia as the ‘middle power’

  • Indonesia believes in regional cohesion and solidatiry.
  • ASEAN is a great example of multilateralism – socio-political, cultural and economic solidarity have helped ASEAN overcome initial challenges and be a more cohesive and effective regional bloc.


The future of Indonesia

  • Indonesia must continue her path of bundling pluralism and democracy.
  • Economic growth must be achieved hand in hand with economic equity – otherwise the unbalanced growth will have severe social impacts and fractures.
  • Without this economic equity – all of the work being undertaken now will be an exercise in failure.
  • This will take time to achieve.
  • Indonesians have now come much closer together than ever before (Indonesia has the second highest Facebook usage and the third most users on Twitter).
  • Indonesia and Indonesians must have the ability to say and proclaim that they have the wherewithal to move on with the necessary reforms and changes required for Indonesia’s sustained progress.


Economic updates from Myanmar: Brief impressions


Always good to be back in Yangon. So many developments and changes in such a short span of time. I always enjoy coming to Myanmar. I am always treated to the very best of Burmese hospitality and the resilience and entrepreneurial qualities of the Myanmarese continue leaving a deep impression on me.

A few observations from Myanmar on the economic front:

  • Hotels – When I first used to come to Myanmar – I was paying about US$70 for a good room at well-known hotels like the Traders, Chatrium or Park Royal. Room rates now start at US$200 for any of these hotels! And they are all running at above 95% occupancy rates!


  • Traffic – The cost of car ownership has gone down dramatically. In the past, to purchase a car required a permit which cost an exorbitant amount (for instance, it used to cost about US$350,000 to buy a Toyota Land Cruiser). However the permit system has changed and now you can purchase any cars manufactured from 2007 onwards. The cost of a Toyota Land Cruiser is now about US$25,000. This has led to newer cars on the roads, but more pertinently, the number of the cars have increased dramatically with no corresponding increase in the roads and traffic infrastructure, leading to snarling traffic jams which were previously unheard of before.


  • Capital market development – It is expected that Myanmar will have a stock exchange by 2015. This development is being supported by the Tokyo Stock Exchange and Daiwa Securities Group. This will lead to significant demand for qualified professionals in the finance sector to support the stock exchange and capital market development. Myanmar previously set up a Myanmar Securities Exchange – back in 1996 but trading volumes were extremely low and there was little or no technical or IT infrastructure available for an efficient and effective functioning capital market. However this new development will be significant given the resource and technical assistance provided by the Japanese. With development and effective governance, we can expect the Myanmar Stock Exchange to rival Malaysia’s BURSA, Indonesia’s IDX and Singapore’s exchange by 2030.


  • Currency exchange rate – Up until last year, the Myanmar Central Bank had fixed the exchange rate at 6 kyats to the US Dollar. However, the black market rate at the time was about 700 to 800 kyats to the dollar. The Myanmar Central Bank has now implemented a managed floating system – where the official rate is around 850 kyats to the dollar. This has been a signficant development in helping with the modernisation of the Burmese economy and one that will support further investment into the country.


  • Adoption of International Financial Reporting Standards – Myanmar has now formally adopted IFRS and have converted them in their entirety to the Myanmar Financial Reporting Standards. This has been instrumental in providing greater clarity and transparency to financial statements being prepared in the country. This will drive further investment into the country as investors have a better view of the financial positions and performance of the firms they are investing in or keen on acquiring.


  • Passing of the Investment Law – Myanmar also passed the Foreign Investment Law in November 2012. Some provisions in the law allow for overseas firms to fully own ventures and offers tax breaks and lengthy land leases, amongst other things. However, the bye-laws and regulations to support the Foreign Investment Law have not yet been passed and are still being deliberated by the Myanmar Parliament. However, under the law, details of bye-laws and regulations should come out within 3 months of the law being passed in Parliament so we should expect further developments by March 2013.


  • Tax reforms – The government has also announced a slew of tax law and regulatory changes. There is a plan to widen the tax base but also to make it easier for local residents to calculate the tax. The tax-exempt status will also change for citizens at the lower end of the income spectrum. A progressive tax system is in place and is likely to continue.


  • Increased foreign investment and donor funding – Myanmar has also benefited from the increased inward investment into the country from multinational firms. Of the accounting firms, PwC, EY and KPMG all have presence now in Myanmar. Coca-Cola has entered into a JV agreement with a local partner. Other MNCs are also increasing their branding and presence in the country. The Asian Development Bank (ADB) and the World Bank (WB) have also approved loans and grants to support Myanmar’s continued economic and social development.


  • ASEAN Economic Community (AEC) – There is also a strong support by the Myanmar government and businesses to support the AEC 2015 vision of greater economic integration by all of the members of ASEAN. This requires further development in terms of capacity and capability – and one that will benefit a broad section of the Myanmarese.


Exciting times for Myanmar. However, the key thing to address will be to ensure that the economic progress is one that benefits a broad base of the Myanmar population and not one that only serves to widen the income gap between the top earners and the rest of the country. Ignoring the potential consequences of this will only set back Myanmar’s development down the road. It will also be important to ensure that there is continued focus on education and social development. Environmental sustainability also remains crucial. It is easy to ignore the impact of industrial and economic development on the natural environemnt but doing so will again lead to severe consequences for Myanmar in the long run.

However, that said, I am confident that in the years to come, Myanmar will again take leadership within South East Asia both economically and politically like they did back in the day up to the 1960s!

Myanmar: After the elections – where to next? Some suggestions

After peaceful and fair parliamentary by-elections, the people of Myanmar can look forward to even greater optimism.

Myanmar is a country of immense potential and there is plenty of scope for development and enhancement of the quality of life there. A few interesting facts about Myanmar:

  • It is the 40th largest country in the world, the second largest country in Southeast Asia:
  • and 24th most populous country with over 58.8 million people;
  • Under British administration it was the second wealthiest country in South East Asia;
  • The current capital of Myanmar is now Naypyidaw (“City of Kings” in Burmese) which was chosen as the new capital in 2006. The previous capital used to be Yangon, which is still the commercial hub of the country;
  • It is a hugely vibrant country with a significant level of multi-culturalism and tolerance. Indeed it is not uncommon to see mosques, churches and Hindu temples dotted around the main cities in a largely Buddhist nation.

I have proposed below a number of suggestions as to what Myanmar should consider as the country grows. These thoughts should by no means be viewed as expert opinion but rather as those made by a layman with a deep interest and affection for Myanmar and its people.

Infrastructure improvements

There is an urgent need for Myanmar to improve the following:

Telecommunications & IT infrastructure – Internet access remains expensive and patchy. This is a result of very few operators in the telco space and there should be an active process of inviting regional/international telco partners into the fold and help drive down costs of Internet access. There should also be tie-ups with international partners to allow for an upgrading of the current telecommunication infrastructure. The Myanmar Ministry of Communications, Posts and Telegraphs needs to start working with foreign partners to help support the upgrading efforts.

Roads/railway – With greater economic growth, we will see greater rural-urban migration, which will increase the burden on roads/highways and railways in the cities especially Yangon. Yangon’s traffic network as it stands is just sufficient – but with any further increase in the city’s population, there is a real risk that we will find gridlocked roads that’s commonplace in Jakarta and Bangkok. There must be a realization that there is a severe business and economic cost to poorly managed roads – a point not lost on Jakarta/Bangkok’s city planners. Yangon however – if it chooses to be proactive – can mitigate future problems and issues in a more efficient manner.

Natural disaster early warning systems – The government should also seek aid support (both financially and technically) to help develop and establish early warning systems for cyclones and other natural disasters that afflict Myanmar. This will help minimize casualties and mitigate damages. An early warning system, cyclone shelters, coordinated response systems, integrated medical and emergency protocols, etc will all help with recovery efforts subsequently.

Healthcare – There should be an effort to upgrade medical and healthcare facilities. The current facilities are outdated and with the medical teams normally being overworked and underpaid. The health of the people has to be paramount and there has to be good state hospitals. The easy alternative is to simply let private hospitals operate in the country but this normally tends to create a 2-tier healthcare system – one for those who can afford it (normally a minority) and those who cannot (the majority) and this only exacerbates the problems of social inequality.

Banking sector reforms (including currency exchange)

Banking system

Myanmarese banking systems need to be plugged in with regional partner banks. There should be greater facilitation of international banking norms like Automated Teller Machines (ATMs), international banking transfers, trade financing (such as the use of LCs, DPs, DAs, etc), credit cards, etc.

Credit card acceptance in Myanmar is extremely low – and this hurts locals as well as tourists and businessmen. It also affects the hospitality industry. Plenty of tourists go into Myanmar without realizing that the 99% of the economy is a cash economy which prevents tourists from spending what they would have planned in advance.

Lack of international banking transfers also means that profit repatriation is affected for international investors. This has to be managed as well.

Currency exchange regulations

It is good to note that the Myanmar government has allowed for managed floating of the kyat. However it is important to note that there is still significant dollarization within the economy. Myanmar should avoid the path taken by Vietnam which allowed for the US Dollar to be used as a currency of choice within the country – which effectively meant that the Vietnamese lost all control of their monetary policies as they had no control over the USD. The Myanmar government should restrict the use of the USD extensively within the economy and there should be a push to use kyats by all key sectors of the economy. This will help support the use of the kyat as well as ensure greater monetary policy control subsequently. If the Myanmarese do not control this problem early, it will become too big to solve – see Vietnam experiences.


There should be an extensive review of current tertiary education institutions. There should be greater quality control and better alignment to international best practices. Myanmar’s key universities should invest in (and seek support for investment) their teaching infrastructure and lecturers. There should also be a regional broad-based support of Myanmar’s universities through partnerships with other leading institutions within ASEAN. Exchange programmes, best-practices sharing and scholarships should be implemented with reputable partners. There should also be a review of curriculum (at all levels), textbooks and teaching material (many of which are obsolete), teachers’ competency frameworks and teachers/lecturers’ remuneration.

There should also be additional focus on the development of competencies of Myanmerese youngsters in these areas:

  • Software programming
  • Accountancy & Finance
  • Medicine
  • Engineering
  • Architecture

The above are all areas which Myanmarese have traditionally excelled in and there is a natural gravitation of the talented youngsters towards these subject areas. The government should support the aspiration of the youngsters by ensuring they develop robust and viable capacities and capabilities in these areas.

Public sector / civil service salary review

As the country grows economically and with increasing incomes and greater investments by multinational firms, there remains a real risk that corruption will rear its ugly head. Rampant corruption has been the bane of many a rapidly emerging economy and it becomes a real business cost for the country subsequently. One way of curbing this is to ensure that the members of the civil service have salaries that are consistent with the private sector. Yes, it will be an extremely costly affair, but rather than as a cost, it should be viewed as investment to protecting the country’s future.

A better benchmarked salary will also mean that the civil service and public sector will attract a better quality of individuals with a real commitment to the country’s cause which will help in the country’s development.

This should be a matter which the government addresses sooner rather than later (when it may be too late – the Indian experience is a sorry tale in this regard).

Reinventing the economy

Free-trade zones / Special Economic Zones / Preferred Trading Nations agreements

Myanmar should establish formal country economic partnerships with India, China, the UK and ASEAN. This could be in the form of preferred trading nations agreements, free trade agreements and also in the form of special economic zones whereby the investing nation will get tax breaks and incentives to set up operations in Myanmar. Therefore, we could have an Indian special economic zone (SEZ), a Chinese SEZ, an ASEAN SEZ (where all interested ASEAN member states can invest freely and enjoy liberal benefits). This means that Myanmar also diversifies its economic dependency across a whole host of countries and not remain entirely under the influence of just one major economic partner. This will result in severe risks further down the road.

Professio-nationalisation of key industries and sectors

The country should also consider professionalizing and nationalizing key industries in areas such as mining, energy, infrastructure and transportation. Currently they are either nationalized (but lack professionalism) or have not yet been nationalized at all. Vital industries should be protected by the government. Perhaps one other model is to allow for joint ventures with foreign companies in areas where the government does not have the skill sets. For instance, in Brunei, Shell has a 50-50 venture with the Brunei government (a JV entity known as Brunei Shell Petroleum or BSP) which ensures that Brunei enjoys the technical and managerial expertise of Shell but also ensuring that the returns are shared with the government and ultimately the people.

Supporting small and medium sized enterprises

The government should also provide incentives and support structures for small and medium sized enterprises (SMEs) as they tend to account for the bulk of employment and GDP of any country. Supporting SMEs will also spur greater entrepreneurship, innovation and growth that is led from the bottom-up and which will ensure better distribution of economic resources amongst people.

Conservation & commitment to sustainable growth

In the midst of all these developments, Myanmar however, should not lose sight of the fact that it is a large country with significant environmental beauty and value which must be preserved. Economic progress must not come at all costs and therefore endangering the environment. There must be an overriding commitment to conversation and sustainability. There is no point if the country grows but finds itself polluted and dying from the inside. To this day, I find it absurd that nations spend significant percentages of their GDP of defence spending and yet neglect to look after their environment and allow it to be robbed, pillaged, polluted and destroyed. Effectively, guns are being bought to secure the country from external forces while the country dies from the inside. Myanmar has a real opportunity to ensure this is not the case from a very early stage.