Infrastructure Investment in the MENASA Region is Key to Inclusive Development – a DIFC Economic Note

• Infrastructure investment needed across MENASA to sustain growing populations and economic growth
• GCC and India investing heavily in infrastructure which is stimulating their economies and encouraging private investment and foreign direct investments
• Rest of MENASA’s existing infrastructure is highly stressed
• Role of private sector needs to be enhanced through privatisation and public-private partnerships (PPP)
• DIFC has a key role to play in financing infrastructure across the region and in developing deep and liquid local currency debt markets to improve access to finance

Significant social and economic benefits will be long lasting only if infrastructure projects are scrutinized through a rigorous cost-benefit analysis, according to an economic note published today by the Dubai International Financial Centre (DIFC), the financial and business hub connecting the regional emerging markets and the world.

Dr. Nasser Saidi, Chief Economist and Head of External Relations of DIFC, launched the Centre’s Economic Note 15: Infrastructure as an Engine of Growth in Middle East, North Africa and South Asia (MENASA) region. The paper examines the role of infrastructure in the growth outlook of the wider region that is poised to benefit from the integration of its national economies, demographic trends, human capital investment, and a wealth of energy resources.

Dr. Saidi highlighted the importance of infrastructure by saying “Countries that do not invest in or maintain their infrastructure are neglecting their future as well as their present, because investments constitute the fundamental driver of the economic cycle.”

According to the note, the MENASA region is experiencing a secular wave of transformation with two epicentres, India and the GCC. In the GCC, the main driver is an energy commodity windfall that for the first time in history is not merely amassed in offshore assets, but is increasingly deployed domestically to transform the Arabian Peninsula into an advanced XXI century knowledge based economy. The International Monetary Fund has recently raised its 2011 projection for GCC growth to 7.8 per cent from 5.2 per cent due to high oil prices which would boost the GCC’s current account surplus growth by 124 per cent. On the other hand, the main drivers in India are an expanding labour force and the long lasting impact of reforms enacted in the 1990s by Dr. Singh, India’s current PM, which are expected to solidify and extend this transformation process.

The DIFC Economics Department believes two factors will be key to the future of the region: demographics and urbanisation. With fertility rates still well above 2.2, the MENASA region will enjoy the “goldilocks” of an expanding labour force, while massive internal migration will feed a powerful process of urbanisation. These secular waves require a massive commitment to build indispensable infrastructure to sustain the increased population and economic growth. In the two epicentres this need is well understood by policy makers, but a fundamental difference is noticeable. While in the GCC infrastructure projects are anticipating the demand and actually stimulating it (the “build it and they will come” phenomenon), in the rest of MENASA the existing infrastructure is heavily stressed  due to poor maintenance, underinvestment and intensive usage.

Dr. Saidi described infrastructure investment as a virtuous circle “Investment in infrastructure leads to higher productivity growth and improved competitiveness. This in turn translates into higher incomes and higher government revenues which subsequently lead to more public investment in a mutually reinforcing pattern. The success stories of China over the past two decades and the GCC since the turn of the century can be attributed as much to effective public investment as to export driven policies. In the process, other positive spill-overs are felt in the form of learning-by-doing effects, efficiency gains in companies, human capital improvement, research and development in construction techniques, technology transfers as well as process innovation.”

The expansion in trade and the reshaping of the financial architecture adds fuel to the demographics engine. Income generated through processing imported intermediate goods and raw materials into final goods for export is a common step in the journey to improve living conditions and sustained development. Transport costs play a pivotal role in countries integrating into global supply chains and/or where factors of production are far apart. Further economic integration alongside successful trade and production networks in the region demands far superior transport facilities and logistics services.

Dr Saidi pointed out that in times where the policy agenda is dictated by crisis management and economic emergency, the role of economists is to remind that the central effect of infrastructure is not the short term stimulus to growth. “Well developed infrastructure is a long lasting contributor to a transformation of economies and societies, to the upward shift in productivity and in productivity growth. Infrastructure investment can be the key to inclusive development, bringing together economic geography and social geography by transforming regions that are less developed”, he said. The current developments termed the “Arab Spring” highlight the need for massive investment in infrastructure to achieve more inclusive growth and job creation.

The MENASA region, especially India and the GCC countries, have been investing heavily in infrastructure development. India has planned infrastructure development for 2008-2012 valued close to USD 500 billion, while the value of projects planned or under way in the GCC is close to USD 2.9 trillion, as of April 2011.

However, governments’ role as the largest provider of infrastructure financing in the region needs to be redefined given the crisis and resultant fiscal constraints. Dr Saidi argued that the role of private sector needs to be enhanced through privatisation and Public-Private Partnerships (PPPs). “We need an investment of between $75 and $100 billion a year in infrastructure to sustain the region’s growth rates and to boost its economic competitiveness. While, there are some PPP schemes in the region, we require special PPP laws to mitigate the risks and changes to tendering policies and processes to further develop this participation and attract private sector funds,” he added.

There is also a need to develop deep and liquid local currency debt markets to improve access to finance. Dr Saidi emphasised the role DIFC plays in this regard, saying that “DIFC has the financial platform and the players to develop the financing solutions required to support governments and the private sector in meeting infrastructure demands of this growing and increasingly urbanised population.”