Thank you. Thank you for having me back.
The Asian Infrastructure Investment Bank is a Chinese-founded alternative to the U.S.-led World Bank. It's far from clear why Canada wants to help pivot the world economy away from the U.S. to China. Nor is it clear that there is shortage of capital in Asia that Canada needs to help finance, especially at a time when plans are being made for a new infrastructure bank to help make up for our own infrastructure deficit.
While Asia's infrastructure needs are massive, so is their available pool of capital, as reflected in their large trade surpluses. Many Southeast Asian nations have savings and investments rates of over 30% or 40% of the GDP. Their priority should be finding a mechanism ensuring that capital is deployed where it is needed the most.
It is well known that it is not the amount of investment that drives long-term growth, but the efficiency of investment. Many Asian countries like Thailand, Malaysia, Indonesia and Taiwan had high rates of investment leading up to the Asian crisis of 1997. But these investments, often state-directed as part of their industrial policy, did not pay off.
Canada's enthusiasm to have a place at the table when the AIIB chooses investment bodes ill for investment being driven by market considerations alone. Canada and other late joiners to the AIIB appear motivated to get a share of the contracts for infrastructure work in the region. This suggests that a certain cronyism is anticipated in the process of awarding contracts, with local citizens in Asia ultimately paying more for investments they may not value highly.
What's the reason for Asia's emphasis on infrastructure? Well, good infrastructure is certainly necessary for sustained growth. Maintaining growth beyond the early developmental phase requires an ability to move into consumer products with the flexibility and ability to adapt to rapidly changing consumer tastes. Japan and South Korea have auto and electronic companies that have demonstrated that capacity. China and other Southeast Asian countries have not. It is not clear that more investment in infrastructure would help make that leap.
Canada's contribution to the AIIB also appears premised on the idea that China inevitably will be one of the world's dominant economic powers. This is far from a sure thing. Before the global financial crisis of 2008, its rapid growth was built on exports. However, since 2009, it has relied more on domestic demand for the growth, much of it fuelled by debt. This is not a sustainable foundation for growth.
In The Rise and Fall of Nations, Morgan Stanley's chief global strategist, Ruchir Sharma, observed that nations posting increases of over 50 percentage points in their debt to GDP ratios inevitably experienced a prolonged period of slow growth, if not financial crises. China's debt to GDP ratio has almost doubled from 150% in 2007 to 282%. Canada has nearly kept pace with an increase from 250% to 350%. He predicts that China will face poor growth prospects over the coming years as a result of its recent debt binge, as well as steep population decline.
Projecting that China will sustain rapid economic growth seems to echo claims by experts in the 1970s that the Soviet Union would surpass the United States. Then, in the 1980s, there were claims that Japan was poised to become the world's dominant superpower. Finally, there were forecasts in the 1990s that the European Union would dominate. All of these predictions were wrong.
There are other reasons to be wary of increasing our reliance in China as the emerging power in Asia. It's policies are often the exact opposite of what economists usually advocate for in achieving economic growth. Rather than encouraging liberty and the free flow of thought with innovation protected by property rights, China controls its own Internet and social media, steals intellectual property, initiates cyber-attacks on nations and companies around the world, makes unsupported territorial claims in the South China Sea, engages in human rights violations, has rampant corruption, and increasingly pursues a cult of personality instead of fostering democracy. Even more than infrastructure or investment, growth in emerging market economies beyond the middle-income range requires good institutions, something China sorely lacks. It is not clear that the AIIB will help or retard the development of good institutions.
It briefly became fashionable among the Davos elite to speak of the new Beijing consensus on state-directed economic growth as the successor to the IMF's so-called Washington consensus. Belief in the Beijing consensus peaked in 2014 just when the AIIB was being launched in Beijing. Confidence in the Beijing consensus was soon undercut by the sharp drop in growth in emerging market economies in 2015, when slumping commodity prices and a strong U.S. dollar revealed that this model of growth was ultimately another illusion underpinned by debt, the most precarious source of growth.
Even the Chinese seem to be losing faith, judging by the increasing amount of capital that local investors are moving out of China—$1.7 trillion in 2015 and 2016—leading China to impose capital controls this year. Such capital flight by local investors also preceded the Asian financial crisis in 1997. The steady outflow of capital from China, including an unknown amount into Canada's housing market, reflects that China's own leaders are skeptical about the sustainability of economic growth and political stability.
It is worth recalling that the growth breakthrough in many emerging markets in recent decades was not remotely the result of investments made over time by multilateral institutions such as the World Bank. It reflected countries adopting capitalism—tentatively at first, in China—around 1978, then in eastern Europe after 1989, and then increasingly around the world, as nations realized that it was institutions and not government-directed investments that fuelled economic growth.
Thank you.