How Southeast Asia Will Benefit from the G7’s Infrastructure and Investment Drive

On 26 June 2022, United States President Joseph Biden launched the Partnership for Global Infrastructure and Investment (PGII) amidst a busy agenda at the Group of Seven (G7) summit in Germany. While the US stumped up only US$200 billion of the US$600 billion over five years that PGII would provide in confirmed funding, it was clear that the country is the programme’s principal driver. Coming soon after the launch of the Indo-Pacific Economic Framework (IPEF) at the Quadrilateral Security Dialogue (Quad) summit in Tokyo just a month earlier, it was another piece of the US’s economic response in its growing strategic competition with China.

Since then, much ink has been spilt in assessing the PGII’s merits, with most of it being critical and along the lines that it is paltry in scale and too late in the game when compared to China’s Belt and Road Initiative (BRI) that was launched almost a decade earlier in 2013. While such commentaries may be analytically sound, they are addressing the wrong question as they focus on how the two rival programmes compare against each other. The right question should really be what does it offer receiving countries and how should they respond to it? This article argues that the PGII does offer potential benefits to Southeast Asia and, as such, they should welcome it.

At its most basic, economics tells us that competition among sellers in any market will usually lead to better outcomes for customers. This holds true for PGII’s entry into the market for infrastructure investments too. When the BRI was first launched, it offered an alternative to the other sources of infrastructure investments and loans that were available then from the private sector or multilateral banks like the World Bank and Asian Development Bank. Building upon the ongoing globalisation drives of Chinese companies, the BRI drew an enthusiastic response from both investing Chinese corporations and receiving countries, including those in Southeast Asia. With terms that were initially less onerous than other sources and criteria that were more flexible, large BRI projects sprang up quickly in many places, especially in the transportation, logistics and property sectors. By virtue of its entry, the PGII too will give existing players a run for their money, especially in its stated priority sectors of clean energy, communications, gender and health. In the process, it will widen the options and strengthen the bargaining positions of receiving countries.

The PGII and its predecessor efforts like the Build Back Better World initiative have therefore emphasised sound practices and high standards as part of their differentiating factors. In response, Chinese companies have also upped their game, resulting in improved practices being applied to later BRI projects. The big winners in this are the countries receiving the investments.

This point is further reinforced by the fact that there are so many infrastructural needs in Southeast Asia that there is ample demand for all players. Even China acknowledged this when its Ministry of Foreign Affairs spokesperson Zhao Lijian said a day after the PGII launch that China welcomed any initiative to promote global construction of infrastructure provided “one initiative is not meant to replace another”. Some estimates put the infrastructure needs of Asian developing countries at US$1.7 trillion per year, well beyond what any of the existing sources are able to provide.  

Another way competition by the PGII can help is in promoting good investment and lending practices. G7 countries have been critical of some of the early BRI projects because of their lack of transparency, high interest rates and lack of sound criteria, among other things. The PGII and its predecessor efforts like the Build Back Better World initiative have therefore emphasised sound practices and high standards as part of their differentiating factors. In response, Chinese companies have also upped their game, resulting in improved practices being applied to later BRI projects. The big winners in this are the countries receiving the investments.

Southeast Asian countries would also find several interesting projects among those released last month as part of the PGII announcement, if they were to be replicated in the region. Renewable energy projects like the US$2 billion solar energy project in Angola and the advanced nuclear design project for a small modular reactor in Romania, as well as healthcare projects like the early-stage development for an industrial-scale multi-vaccine manufacturing facility in Senegal are the types of projects Southeast Asia would love to have in the region. In addition, digital economy development projects like the programme to mobilise US$335 million in investment capital for internet service providers and fintech companies in Africa, Asia and Latin America, and communications infrastructure projects like the Southeast Asia-Middle East-Western Europe submarine cable would also be desirable for the region. For now, most of the projects in the PGII list are found in Africa, reflecting the focus and efforts of many US government agencies in the past. If the US can gear up quickly in the region with similar projects, it would likely be well received.

Another feature of the PGII that Southeast Asian countries will find attractive is the inclusion of “soft infrastructure” — for example, setting up institutional, policy and regulatory frameworks and building human capacity for services delivery — as an integral part of its programme. In its early days, BRI had focussed almost exclusively on hard infrastructure projects in part because this was also an outlet for the excess industrial capacity of Chinese companies. Although BRI activities have since broadened in recent years, G7 countries are better positioned to provide “soft infrastructure” support because of their advanced human capital and educational services sectors. This is something regional countries can take advantage of as they seek to develop their economies holistically.

Since the launch of BRI, the publicity generated by its projects have inadvertently obscured one fact worth recalling: foreign direct investment in Southeast Asia is actually dominated by G7 countries like US and Japan (and the European Union, a non-enumerated G7 member) rather than China. In the latest official ASEAN statistics, China only ranks as the fourth biggest FDI source by country, while the US and Japan (and the European Union as a region) are bigger sources of FDI. China is still a relative newcomer to investing in the region whereas G7 countries have been doing so for decades. Thus, in investment, the US and its partners are actually playing to their strengths. With the PGII building on a solid foundation, it would be foolish to write it off prematurely.

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