A Hundred-Year Stagnation? For Who?

The creation of the Asian Infrastructure Investment Bank (AIIB) is a necessary objective. Anyone who travels in the Far East finds confirmation of the desperate lack of efficient networks. With the exception of Japan and other developed economies, countries see their ambitions reduced by chronic underdevelopment.

How can we forcefully industrialize agrarian countries if the goods produced are not transported on paved roads, via trucks, for eventual export? Is it reasonable to use polluting energies to then spend the earnings cleaning the air and water after only a few years?

Two years ago, McKinsey published a report on Asia’s infrastructure necessities, and it was a milestone for analysts, engineers and governments. The needs and opportunities are impressive. Even in the depths of crisis, Asian countries seem inclined not to bend from the desire to grow. They can count on internal resources, acquired know-how and international cooperation.

And they are wheedling this more than in the past. Administrative rigidities have been softened – a frequent vehicle for not-so-transparent awards – and, in general, there is a climate of greater cooperation with multinationals.

The numbers are striking. The report says more than US$ 8 billion will be invested in Asian infrastructure over 10 years. The fraction reserved for foreign companies is incredibly tempting: US$ 1 billion. Clearly, infrastructure is considered an absolute priority: energy and transportation are not similar to any other exchanged good.

In Boston and Washington where I live and work, the intellectual debate goes beyond these sums. Perhaps US$ 8 billion over 10 years is not impressive on the other side of the world and cannot revise the pessimistic predictions of a “hundred-year stagnation.”

The quote belongs to Larry Summers, Harvard professor and Treasury Secretary under Bill Clinton, and director of the National Economic Council under Barack Obama. His prestige makes his predictions even more alarming. We’re probably heading toward a hundred-year stagnation, where the progresses of the past will be memories.

The very concept of growth is called into question. It’s not necessary and perhaps no longer achievable. We habitually read about economic concepts in the news: liquidity traps, recession and reluctance to invest. Summers argues that deflation cannot be cured with monetary maneuvers. No interest rate will be sufficiently low to stimulate investments.

The predictions are arresting, with the knowledge that prices will be lower with every passing day. The recovery of the last few years was faint (nonexistent in Europe), uncertain, fragile, not homogenous and short-lived.

Paul Krugman confirmed Summers’ analyses and pushes them toward political aspects. Governments, he says, should be more audacious and forget the inflationist phobias of monetarist schools of thought, otherwise Summers’ predictions will become a tragic, fateful reality.

The Nobel laureate writes: “In this situation, the normal laws of economics don’t apply; virtue becomes vice, prudence transforms into folly.” Therefore, we need to defeat savings with any type of spending. Summers and Krugman regretfully recognize that pre-crisis growth was due, more than anything, to bubbles that then burst. Now it’s too late, and the economy’s tailspin leaves little hope.

The two economic gurus’ arguments are beyond reproach. Their theoretical approach is solid. But are the consequences of their analyses acceptable in developing Asia? Can governments resign themselves to stagnation? Can citizens tolerate centuries more of privations because there are not enough finances for development?

McKinsey reminds us that wealth created overseas also creates income for multinationals. GDP created in Asia needs resources, and it’s not a given that they need to come from China necessarily. If stagnation is a real threat in the West, Asia does not automatically have to follow the same path.

Actually, a security valve capable of compensating for growth differences and breathing oxygen into the asphyxiating economy could be built. However, all of this entails a new definition of international assets that need courage and forward thinking.

As long as traditional institutions like the World Bank and Asian Development Bank finance Asian infrastructure, we will likely witness a slow decline. If, instead, the G8’s offices accept the birth of new players like the AIIB, China’s role will be less marginal and Asia’s future more promising.

Alberto Forchielli is the managing partner of Mandarin Capital Partners