G20 Executive Talk Series

September 2016

Inclusive Growth

Authored by: Victor K Fung

Physical and Digital Connections:
Accelerating Inclusive Growth and Prosperity in Asia

Another Asian miracle is in the making, which will build on the region’s economic links, by creating both physical connectivity and digital connectivity within Asia and between the region and the rest of the world.

Much has been written about how a fortunate combination of open economic policies and access to international markets enabled global supply chains to take root in Asia, delivering jobs, growth and development. These economic links helped to create the Asian economic miracle that has lifted much of the region out of poverty, cemented its place in global production, and given rise to the Asian middle class that will be measured in the billions. Today, global brands and retailers are actively preparing for this wave of new consumption: whether it is Amazon in India or Macy’s in China, retailers recognize that Asia is the world’s next consumer power.

I believe that another Asian miracle is in the making, which will build on the region’s economic links, by creating both physical connectivity and digital connectivity within Asia and between the region and the rest of the world. These physical and digital links will become powerful accelerators of growth and prosperity in Asia, while benefitting many beyond it.

Let me start with physical links. As Asia began to industrialize and trade with the rest of the world, its growth was constantly conditioned by its physical infrastructure. Those countries which invested in physical infrastructure, such as China and Japan, reaped the lion’s share of global and regional trade; meanwhile capable businesses surrounded by poor physical infrastructure, were handicapped in their ability to attract foreign investors and buyers, no matter how good their products or how low their wages. Today, China continues to hold great appeal to foreign buyers and manufacturers, who say that the country’s continually improving infrastructure – which gives producers speed and access to raw materials and markets—helps to offset the effect of rising wages.

Today, increased prosperity, population growth and urbanization are creating new sets of infrastructure needs, on top of those demanded by industrialization. The Asian Development Bank has estimated that Asia needs $8 trillion in new infrastructure from now until 2020, creating a funding gap of several trillion dollars. Into this picture step the Asian Infrastructure Investment Bank and China’s Belt and Road Initiative. The AIIB, with an initial capitalization of $100 billion, and the Silk Road Fund with an additional $40 billion, will help to kick start some of the fund flows.

They are backed by the much larger Belt and Road Initiative, which will connect markets in an “economic cooperation area” that stretches from the Western Pacific to the Baltic Sea. According to the Fung Business Intelligence, these 65 countries jointly account for 62.3% of the world’s population, 30.0% of its GDP, and 24.0% of global household consumption.

As economies become more solidly connected, one can see the rise of integrated production and consumption networks within the Belt and Road region, thereby giving strong support to the growth of the middle class, perhaps beyond what most experts have predicted.

The Internet has already established itself as a key tool for modern life: it has facilitated management, research, education, entertainment, and exchange, first over desktops, and now increasingly through mobile.

This middle class is certainly anticipated for its consumption, but it is also likely to become well known for its connectivity. Today’s millennials are already the most connected of any generation before them. By 2020, Ericsson, predicts that Asia will add more than 1.7 billion new smartphone connections, with over 57% of Asians connecting to the Internet by their mobiles. Cisco predicts that mobile data traffic will grow at 58% CAGR from now until 2019.

The Internet has already established itself as a key tool for modern life: it has facilitated management, research, education, entertainment, and exchange, first over desktops, and now increasingly through mobile. In many developing countries smartphone penetration will soon surpass 50% of the population, bringing more factory workers, farmers, and laborers online. As this happens, the Internet could become the great equalizer as well, opening up opportunities to the poor that would be otherwise out of reach.

There are already several famous case studies about farmers, with access to real-time market data on commodities via their mobile phones, who were able to negotiate much better deals with local distributors. In the same vein, it takes years to improve primary and secondary education, and even then, decisions at the national level may not have their intended effects locally. We should be asking ourselves how we might use the Internet to supplement the education available in village schools.

Several years ago, World Bank’s Growth Commission, headed by Nobel economics laureate Michael Spence studied a number of high growth economies and noted that none had sustained high growth over an extended period without investments into education, infrastructure, and health. The commission concluded that although high growth is not an aim in itself, it is a “necessary, if not sufficient, condition for broader development, enlarging the scope for individuals to be productive and creative.”

Within such a framework, the Belt and Road Initiative takes on a new light. For sure it will be a driver of growth, bringing much of the developing world into expanded networks of trade, production and consumption. But together with the rapid rise in mobile connectivity, it also has the potential to bring the emerging markets into the information revolution at the same time. Importantly, these connectivities have the potential to distribute opportunities more evenly than ever before – both within countries and between countries – creating truly inclusive growth.

Indeed, with much of the world searching for new drivers of growth, and at the same time with sustainability and social concerns higher than ever on the global agenda, a new growth paradigm has never been more sorely needed. If connectivity, symbolized by the Belt and Road and the rise of mobile, can drive growth while opening up opportunities for people, that would be both an Asian miracle, as well as a global one.

Dr. Victor K. Fung is Group Chairman of the Fung Group, a Hong Kong-based multinational which comprises major subsidiaries in trading, logistics, distribution and retailing. They include publicly-listed Li & Fung Limited, Global Brands Group Holding Limited, Convenience Retail Asia Limited and Trinity Limited, and the Chairman of the Advisory Board of the Asia Global Institute at the University of Hong Kong, a new

multi-disciplinary think-tank co-established with the Fung Global Institute. He was also Chairman of the Paris-based International Chamber of Commerce from 2008 to 2010.

Dr. Fung is an independent non-executive Director of Chow Tai Fook Jewellery Group Limited (Hong Kong), and Koc Holding A.S. (Turkey). He is also Chairman of the Asia Advisory Board of Prudential Financial, Inc (USA). Dr. Fung holds a number of civic and professional appointments. He is a member of the Chinese People’s Political Consultative Conference, an economic advisor to the People’s Government of Nanjing, a member of the Economic Development Commission of the Hong Kong Government, and the Chairman of the Steering Committee on the Hong Kong Scholarship for Excellence Scheme.

Born and raised in Hong Kong, Dr. Fung holds Bachelor and Master Degrees in Electrical Engineering from Massachusetts Institute of Technology, and a Doctorate in Business Economics from Harvard University. He was a professor at Harvard Business School for four years before returning to Hong Kong in 1976.

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