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How Local Governments in China can Utilize New Infrastructure Policy to Promote Development

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Authors: Chan Kung and Wei Hongxu*

In an effort to promote economic recovery, the central government, local governments, and enterprises have placed high expectations on the investment of new infrastructure, hoping it would promote the development of the digital economy, so as to enhance the internal driving force of economic development. Especially when the scale of local special bonds is expected to be increased and again issued ahead of schedule, many local governments hope to seize the opportunity of digital economy development and increase investment in new infrastructure areas to drive regional economic development. Unlike the conventional economy and conventional infrastructure investment, the new infrastructure is not a simple way to boost investment, but rather to help the conventional industries realize digital and intelligent transformation as soon as possible, and to create new consumption, new manufacturing, and new services. While the new infrastructure investment brings a new economic model, it is different from the past in terms of content, mode, and financing channels. It requires local governments to make corresponding changes with market-oriented thinking.

New infrastructure investment is not only the demand side of local users, but also the supply side of technology investment. From the perspective of the scope of new infrastructure, new infrastructure projects include 5G base stations, ultra-high voltage (UHV) electricity, industrial Internet, intercity high-speed railway, intercity rail transit, new energy vehicle charging piles, artificial intelligence, and Big Data centers. At present, rail transit and new energy infrastructure are not much different from conventional infrastructure investment. The degree of local participation of UHV electricity is limited, while the investment in other aspects, such as 5G base stations and Big Data centers, is relatively mature in technology and has good market supply capacity. In other aspects, it is more necessary to start from the aspects of technology research and industrial cultivation, and to invest in projects that encourage innovation and industrial park construction. Therefore, this requires not only clear investment objectives on the demand side, but also needs to expand the supply side such as technology research and application at the same time, which undoubtedly increases the complexity of new infrastructure investment.

At the same time, the sources and financing channels of new infrastructure investment still need to be explored. Recently, local governments in China have begun planning to finance new infrastructure projects through issuing special bonds, and many local governments have put new infrastructure projects on their agenda. Some market analysts believe that at present, 5G is still mainly invested in base stations. Generally, telecommunications companies such as China Unicom and Mobile Communications can invest on their own without issuing special bonds, thereby the special bonds can be invested in projects related to data centers. However, such projects are only available in first-tier cities, and there are not many such projects in second-tier, third-tier, fourth-tier, and fifth-tier cities. New infrastructure projects should be more market-driven and local governments should avoid excessive involvement via direct investment in industrial projects. Local governments also need to promote the public-private partnership (PPP) model and introduce more social capital to improve efficiency and broaden financing sources.

Even for new infrastructure projects funded by special bonds, attention should be paid to the financing capacity of the projects to avoid adding to the financial burden. There are two main ideas for the new infrastructure special bond declaration projects in many provinces. One is to build a digital information application platform at the county and district level based on the resources of the provincial and municipal cloud platforms. The second is to promote the optimization and upgrading of conventional infrastructure projects with the theme of digital and wisdom. Some local finance people worry that many of these projects are packaged around the concept of “new infrastructure” and are mostly non-yielding or low-yielding projects that may require the government to cover future bond payments. Therefore, the special bond for new infrastructure construction should be invested in public welfare projects that can generate income, rather than public welfare projects that do not.

At the same time, there are new requirements for investment entities in new infrastructure investment. Some financial institutions said that after the issuance of new infrastructure special bonds, most of them will eventually be invested in local urban projects. However, local urban projects were good at conventional infrastructure construction, unfamiliar with new infrastructure construction, and lacks experience in new infrastructure project operation. If we speed up the construction of new infrastructure projects without considering the actual situation, it will easily lead to the mismatch between the capacity and the project requirements, and drag on the development of local governments and enterprises. In particular, unlike conventional investment in forming fixed assets, a considerable part of new infrastructure investment in research, personnel training, and other forms of intangible assets will be formed. The conventional urban investment model does not have the ability to use and dispose of these assets. At the same time, the large amount of hardware equipment invested in the new infrastructure is different from the conventional “iron and steel foundation”. Its wear and tear, operation, and upgrading all require continuous follow-up investment, which cannot be “invested all at once.” These are also not available in some conventional urban investment enterprises. If the local government cultivates and supports relevant enterprises by means of industrial investment, it needs more consideration in terms of income distribution and asset management. Such investment cannot be simply measured by the unit of land and capital, but more in the form of equity investment such as industrial funds and venture capital. In this respect, the local government needs to have the investment entities and relevant personnel with the ability to invest in relevant industries.

Different from the past, local governments need to play their roles in market construction and maintenance, investment entities, and end-users in promoting new infrastructure investment and the development of the digital economy. In the cultivation of the digital market, market demand, and the maintenance of the market order, local governments should play the role as a supervisor, take the development of the market as the guide, and develop the local digital market. In terms of investment, it is necessary to start with basic research and development and personnel training, promote market-oriented investment and technological innovation to enhance the competitiveness of the digital industry. In terms of end-users, it is necessary to integrate their own digital resources, establish a public digital space, and expand digital demand with the digital transformation of public services and government affairs as the direction. These three new roles are the basic problems to be solved in the process of promoting new infrastructure.

While much attention has been paid to new infrastructure, the reality is that, in terms of overall size, it needs to be recognized that infrastructure investment is still dominated by conventional infrastructure projects, with new infrastructure as defined by the market accounting for less than 15%. ANBOUND is not a proponent of separating infrastructure from the old and the new, so one cannot fully “bet” on new infrastructure to revive the post-pandemic economy. From the perspective of economic development trends and current reality, the role of new infrastructure is to promote the coordinated and integrated development of digital technology to industry and regional economy. Therefore, local governments need to make good use of fiscal expansion policies and financing tools to build new infrastructure, rather than investing for investment’s sake, they need to pay attention to the trend of economic digitization and promote the market efficiency and the expansion of market space.

Final analysis conclusion:

Promoting economic recovery and the development of the digital economy with new infrastructure are the keys to current macro policies. In this regard, local governments need to pay attention to the differences between the new infrastructure and the conventional infrastructure model, and they need to make corresponding adjustments in the investment model and development thinking so as to give full play to the efficiency of the digital economy.

*Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound

Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.

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Afghan crisis: Changing geo-economics of the neighbourhood

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The Taliban takeover of Afghanistan has caused a rapid reshuffle in the geo-economics of South, Central and West Asia. While the impact on the Afghan economy has been profound, triggering inflation and cash shortage, it’s bearing on Afghanistan’s near neighbourhood has wider far-reaching consequences. The US spent almost $24 billion on the economic development of Afghanistan over the course of 20 years. This together with other international aid has helped the country to more than double its per capita GDP from $900 in 2002 to $2,100 in 2020. As a major regional player, India had invested around $3 billion in numerous developmental projects spanning across all the 34 provinces of Afghanistan. Indian presence was respected and valued by the ousted Afghan dispensation. With the US, India and many other countries deciding to close their embassies in Afghanistan and the US deciding to freeze Afghanistan’s foreign reserves amounting to $9.5 billion, the economy of the country has hit a grinding halt. IMF too has declared that Kabul won’t be able to access the $370 million funding which was agreed on earlier. The emerging circumstances are ripe for China and Pakistan to cut inroads into the war-torn country as the rest of the world watches mutely.

Beijing’s major gain would be the availability of Afghanistan as a regional connector in its ambitious Belt and Road Initiative (BRI) linking the economies of Central Asia, Iran and Pakistan. Afghanistan is already a member of the BRI with the first Memorandum of Understanding signed in 2016. Only limited projects were conducted in Afghanistan under the initiative till now due to security concerns, geographic conditions and the government’s affinity towards India. Chinese officials have repeatedly expressed interest in Afghanistan joining the CPEC (China Pakistan Economic Corridor), a signature undertaking of the BRI. CPEC is a $62 billion project which would link Gwadar port in Pakistan’s Baluchistan province to China’s western Xinjiang region. The plan includes power plants, an oil pipeline, roads and railways that improves trade and connectivity in the region.

China also eyes at an estimated $1 trillion mineral deposits in Afghanistan, which includes huge reserves of lithium, a key component for electric vehicles. This mineral wealth is largely untapped due lack of proper networks and unstable security conditions long-prevalent in the country. Chinese State Councillor and Foreign Minister Wang Yi hosted Taliban representatives in late June in Tianjin to discuss reconciliation and reconstruction process in Afghanistan. Taliban reciprocated by inviting China to “play a bigger role in future reconstruction and economic development” of the country. After the fall of Kabul, China has kept its embassy open and declared it was ready for friendly relations with the Taliban. It had also announced that it would send $31 million worth of food and health supplies to Afghanistan to tide over the ongoing humanitarian crisis. Pakistan, a close ally of China, has on its part has sent supplies such as cooking oil and medicines to the Afghan authorities. Pakistan having strong historical ties with the Taliban will possibly play a crucial role in furthering Chinese ambitions..

The immediate economic fallout of the crisis for Iran is its reduced access to hard currency from Afghanistan. After the imposition of US sanctions, Afghanistan had been an important source of dollars for Iran. Reports suggest that hard currency worth $5million was being transferred to Iran daily before the Taliban takeover. Now the US has put a freeze on nearly $9.5 billion in assets belonging to Afghan Central Bank and stopped shipment of cash to the country. The shortage of hard currency is likely to affect the exchange rates in Iran subsequently building up inflationary pressure. Over the years, Afghanistan had emerged as a major destination for Iran’s non-oil exports amounting to $2billion a year. A prolonged crisis would curb demand in Afghanistan including that of Iranian goods with a likely reduction in the trade volume between the two countries. In effect, Iran would find itself increasingly isolated from foreign governments and international financial flows.

India had been the wariest regional spectator watching its $3 billion investment in Afghanistan go up in smoke. Long-standing hostility with Pakistan has prevented land-based Indian trade with Afghanistan and the Central Asian Republic’s (CAR’s). Push by India and other stakeholders for setting a common agenda for alternate connectivity appears susceptible at the moment. India has been working with Iran to develop Chabahar port in the Arabian sea and transport goods shipped from India to Afghanistan and Central Asia through the proposed Chabahar-Zahedan-Mashhad railway line. India is also working with Russia on the International North-South Transport Corridor (INSTC), a 7,200 km long multi-mode network of ship, rail and road routes for freight movement, whereby Indian goods are received at Iranian ports of Bandar Abbas and Chabahar, moves northward via rail and road through Iran and Azerbaijan and meets the Trans-Siberian rail network that will allow access to the European markets. According to the latest reports, the Taliban declined to join talks with India, Iran and Uzbekistan on Chabahar port and North-South Transport Corridor, which has cast shadow on the Indian interests in the region. India’s trade with Afghanistan had steadily increased to reach the US $1.5 billion in 2019–2020. An unfriendly administration and demand constraints may slow down the trade between the two countries.

With the US withdrawal, the CARs would find their strategic and economic autonomy curtailed and more drawn into the regional power struggle between China and Russia. While China has many infrastructure projects in Central Asia to its credit, Russia is trying to woo Central Asian countries into the Russia-led Eurasian Economic Union (EEU), though so far it was able to rope in only Kazakhstan and Kyrgyzstan. CARs would need better connectivity through Afghanistan and Iran to diversify their trade relations with Indo-Pacific nations and to have better leverage to bargain with Russia and China. Uzbekistan, the most fervent of the CARs to demand increased connectivity with South Asia, expressed its interest in joining the Chabahar project in 2020, which was duly welcomed by India. The new developments in Afghanistan would force these countries to remodel their strategies to suit the changed geopolitical realities.

The fact that Iran is getting closer to China by signing a 25-Year Comprehensive Strategic Partnership cooperation agreement in 2020 adds yet another dimension to the whole picture. India’s hesitancy to recognize or engage with the Taliban makes it unpredictable what the future holds for India-Afghan relations.

The hasty US exit has caused rapid reorientation in the geopolitical and geo-economic status-quo of the region. Most countries were unprepared to handle the swiftness of the Taliban takeover and were scrambling for options to deal with the chaos. The lone exception was China which held talks with the Taliban as early as July, 28 weeks before the fall of Kabul, to discuss the reconstruction of the war-torn country. Chinese Foreign Minister Wang Yi also took a high-profile tour to Central Asia in mid-July which extensively discussed the emerging situation in Afghanistan with Central Asian leaders. Since the West has passed the buck, it’s up to the regional players to restore the economic stability in Afghanistan and ensure safe transit routes through the country. Any instability in Afghanistan is likely to have harrowing repercussions in the neighbourhood, as well.

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Turkish Economy as the Reset Button of Turkish Politics

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Democracy has a robust relationship with economic growth.  Barrington Moore can be seen as one of the leading scholars focusing on the relationship between political development and economic structure with his book titled “Social Origins of Dictatorship and Democracy” first published in 1966. According to Moore, there are three routes from agrarianism to the modern industrial world. In the capitalist democratic route, exemplified by England, France, and the United States, the peasantry was politically impotent or had been eradicated all together, and a strong bourgeoisie was present, and the aristocracy allied itself with the bourgeoisie or failed to oppose democratizing steps. In Moore’s book, you can find out why some countries have developed as democracies and others as dictatorships.

It can be argued that economic development facilitates democratization. Following this argument, this article is an attempt to address the Turkish case with the most recent discussions going on in the country. One of the most powerful instruments used by the political opposition today is the rhetoric of “economic crisis” that has also been supported by public opinion polls and data. For instance, the leader of İYİ Party Meral Akşener has organized lots of visits to different regions of Turkey and has been posting videos on her social media account showing the complaints mostly centering around unemployment and high inflation. According to Akşener, “Turkey’s economic woes – with inflation above 15%, high unemployment and a gaping current account deficit – left no alternative to high rates.”

Another political opposition leader, Ahmet Davutoğlu raised voice of criticism via his social media account, saying “As if monthly prices hikes on natural gas were not enough, they have introduced 15% increase on electricity costs. It is as if the government vowed to do what it can to take whatever the citizens have.”

A recent poll reveals that about 65 percent think the economic crisis and unemployment problem are Turkey’s most urgent problems. Literature on the relationship between democracy and economic well-being shows that a democratic regime becomes more fragile in countries where per capita income stagnates or declines. It is known that democracies are more powerful among the economically developed countries.

The International Center for Peace and Development summarizes the social origins of democracy in global scale as the following:

“Over the past two centuries, the rise of constitutional forms of government has been closely associated with peace, social stability and rapid socio-economic development. Democratic countries have been more successful in living peacefully with their neighbors, educating their citizens, liberating human energy and initiative for constructive purposes in society, economic growth and wealth generation.”

Turkey’s economic problems have been on the agenda for a long time. Unlike what has been claimed by the Minister of Interior Affairs Süleyman Soylu a few months ago, Turkish economy has not reached to the level which would make United States and Germany to become jealous of Turkey. Soylu had said, “You will see, as of July, our economy will take such a leap and growth in July that Germany, France, England, Italy and especially the USA, which meddles in everything, will crack and explode.”

To make a long story short, it can be said that the coronavirus pandemic has exerted a major pressure on the already fragile economy of Turkey and this leads to further frustration among the Turkish electorate. The next elections will not only determine who will shape the economic structure but will also show to what level Turkish citizens have become unhappy about the ongoing “democratic politics.” In other words, it can be said that, Turkish economy can be seen as the reset button of Turkish politics for the upcoming elections.

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Economy

Finding Fulcrum to Move the World Economics

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Domenico Fetti / Wikimedia Commons

Where hidden is the fulcrum to bring about new global-age thinking and escape current mysterious economic models that primarily support super elitism, super-richness, super tax-free heavens and super crypto nirvanas; global populace only drifts today as disconnected wanderers at the bottom carrying flags of ‘hate-media’ only creating tribal herds slowly pushed towards populism. Suppose, if we accept the current indices already labeled as success as the best of show of hands, the game is already lost where winners already left the table. Finding a new fulcrum to move the world economies on a better trajectory where human productivity measured for grassroots prosperity is a critically important but a deeply silent global challenge. Here are some bold suggestions

ONE- Global Measurement: World connectivity is invisible, grossly misunderstood, miscalculated and underestimated of its hidden powers; spreading silently like an invisible net, a “new math” becomes the possible fulcrum for the new business world economy; behold the ocean of emerging global talents from new economies, mobilizing new levels of productivity, performance and forcing global shifts of economic powers. Observe the future of borderless skills, boundary less commerce and trans-global public opinion, triangulation of such will simply crush old thinking.

Archimedes yelled, “…give me a lever long enough and a fulcrum on which to place it, and I shall move the world…”

After all, half of the world during the last decade, missed the entrepreneurial mindset, understoodonly as underdog players of the economy, the founders, job-creators and risk-taker entrepreneurs of small medium businesses of the world, pushed aside while kneeling to big business staged as institutionalized ritual. Although big businesses are always very big, nevertheless, small businesses and now globally accepted, as many times larger. Study deeply, why suddenly now the small medium business economy, during the last budgetary cycles across the world, has now become the lone solution to save dwindling economies. Big business as usual will take care of itself, but national economies already on brink left alone now need small business bases and hard-core raw entrepreneurialism as post-pandemic recovery agendas.

TWO – Ground Realities:  National leadership is now economic leadership, understanding, creating and managing, super-hyper-digital-platform-economies a new political art and mobilization of small midsize business a new science: The prerequisites to understand the “new math” is the study of “population-rich-nations and knowledge rich nations” on Google and figure out how and why can a national economy apply such new math. 

Today a USD $1000 investment in technology buys digital solutions, which were million dollars, a decade ago.Today,a $1000 investment buys on global-age upskilling on export expansion that were million dollars a decade ago.  Today, a $1000 investment on virtual-events buys what took a year and cost a million dollars a decade ago. Today, any micro-small-medium-enterprise capable of remote working models can save 80% of office and bureaucratic costs and suddenly operate like a mini-multi-national with little or no additional costs.

Apply this math to population rich nations and their current creation of some 500 million new entrepreneurial businesses across Asia will bring chills across the world to the thousands of government departments, chambers of commerce and trade associations as they compare their own progress. Now relate this to the economic positioning of ‘knowledge rich nations’ and explore how they not only crushed their own SME bases, destroyed the middle class but also their expensive business education system only produced armies of resumes promoting job-seekers but not the mighty job-creators. Study why entrepreneurialism is neither academic-born nor academic centric, it is after all most successful legendary founders that created earth shattering organizations were only dropouts.  Now shaking all these ingredients well in the economic test tube wait and let all this ferment to see what really happens.

Now picking up any nation, selecting any region and any high potential vertical market; searching any meaningful economic development agenda and status of special skills required to serve such challenges, paint new challenges. Interconnect the dots on skills, limits on national/global exposure and required expertise on vertical sectors, digitization and global-age market reach. Measuring the time and cost to bring them at par, measuring the opportunity loss over decades for any neglect. Combining all to squeeze out a positive transformative dialogue and assemble all vested parties under one umbrella.

Not to be confused with academic courses on fixing Paper-Mache economies and broken paper work trails, chambers primarily focused on conflict resolutions, compliance regulations, and trade groups on policy matters.  Mobilization of small medium business economy is a tactical battlefield of advancements of an enterprise, as meritocracy is the nightmarish challenges for over 100 plus nations where majority high potential sectors are at standstill on such affairs. Surprisingly, such advancements are mostly not new funding hungry but mobilization starved. Economic leadership teams of today, unless skilled on intertwining super-hyper-digital-platform-economic agendas with local midsize businesses and creating innovative excellence to stand up to global competitiveness becomes only a burden to growth.

The magnifying glass of mind will find the fulcrum: High potential vertical sectors and special regions are primarily wide-open lands full of resources and full of talented peoples; mobilization of such combinations offering extraordinary power play, now catapulted due to technologies. However, to enter such arenas calls for regimented exploring of the limits of digitization, as Digital-Divides are Mental Divides, only deeper understanding and skills on how to boost entrepreneurialism and attract hidden talents of local citizenry will add power. Of course, knowing in advance, what has already failed so many times before will only avoid using a rubber hose as a lever, again.  

The new world economic order: There is no such thing as big and small as it is only strong and weak, there is no such thing as rich and poor it is only smart and stupid. There is no such thing as past and future is only what is in front now and what is there to act but if and or when. How do you translate this in a post pandemic recovery mode? Observe how strong, smart moving now are advancing and leaving weak, stupid dreaming of if and when in the dust behind.

The conclusion: At the risk of never getting a Nobel Prize on Economics, here is this stark claim; any economy not driven solely based on measuring “real value creation” but primarily based on “real value manipulation” is nothing but a public fraud. This mathematically proven, possibly a new Fulcrum to move the world economy, in need of truth

The rest is easy  

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