David Daokui Li: Lessons from China for Investing in Digital Infrastructure
On May 31, 2023, David Daokui Li attended a High-Level Seminar for the New Development Bank's (NDB) 8th Annual Meeting under the theme of "Resource Mobilization for Connectivity in the Digital Era" where he delivered a keynote address. After remarking on the unique features that distinguish digital infrastructure from other forms of infrastructure, he introduced some of the key lessons learned from China's own recent experience with developing its digital economy, including putting forward his own proposal for investing in digital infrastructure among NDB and BRICS member countries.
The following is an edited transcript of the speech (for the video presentation, click here).
David Daokui Li, the Mansfield Freeman Chair Professor of Economics and Director of the Academic Center for Chinese Economic Practice and Thinking (ACCEPT) at Tsinghua University, delivers a keynote speech at a High-Level Seminar convened for the New Development Bank's 8th Annual Meeting. Prof. Li previously served as the Director General and first Chief Economist at the Shanghai-based mulitilateral development bank. (Photo Credit: New Development Bank)
Today, let me be very focused on one topic. My previous two speakers all talked about very important general principles to which I all agree. But let me add one specific idea. The topic is "Investing in Digital Infrastructure: Lessons from China and for the NDB," including an action plan for NDB. The NDB and digital infrastructure investment are of course very important topics, and I believe that the NDB is well positioned to be a pioneer in investing in digital infrastructure in emerging market economies. And also, there are important lessons from China to be carefully studied since we are based in China and also China has been a leader in very quickly building its infrastructure for the digital economy.
And what is digital infrastructure? Of course, it's very simple and everyone knows. It's the physical and software-based infrastructure necessary to deliver digital goods, products, and services. Examples include data centers, fiber infrastructure, mobile phone base stations and others. And for me there are two very unique features of digital infrastructure that make it totally different from traditional infrastructure.
First, they have a much higher degree of positive externalities for the rest of the sectors in the economy. In the economy, with well-functioning digital infrastructure many good things will follow. So in this regard, it is more important for us to have an earlier start in building this infrastructure than highways and even airports.
Second, digital infrastructure has a much faster pace of depreciation. So you've got to keep on investing. I have done some studying on this issue and, for example, 5G stations usually has 7 to 10 years in terms of its depreciation span; meanwhile, highways and rapid rail typically can last 20 years or 23 years without much depreciation. So we have to keep on investing in digital infrastructure to keep pace with the development of technology.
How has China been doing? Very simply, China has been making tremendous progress. Today, China has been ranked No. 17 in its "digital competitiveness" by the Swiss institution IMD. And the US is No. 2, Singapore is No. 5, and Hong Kong SAR is No. 9. For me, I think this ranking of No. 17 perhaps underrates Chinese progress in infrastructure in terms of the digital economy. Also, during the past 20 years China has increased its coverage of fixed, land-based broadband subscriptions. China's ratio of fixed broadband subscriptions is now double the world average at around 38 percent. So 38 percent of households and firms are using land-based broadband connectivity infrastructure.
The key issue is what are the lessons from China? What are the things China has been doing right so far? Well, this is a big topic. Let me be very brief. I think there are three things China has been doing very well so far.
Number one is top-down planning. Early on it has had top-down planning. Since as early as 1997, China has been planning its digital infrastructure. And China's planning for digital infrastructure is separate from the five-year plan. Every five years China has a five-year plan and digital infrastructure is separate from that. It has been given higher priority than all of the other sectors.
The second lesson is for China's government to enable the market rather than to replace the market. In other words, China's government has been acting as an initiator for digital investment companies. Of all the major digital infrastructure companies, almost all of them, with very few exceptions, are now listed on the stock market. They're all listed companies on the stock market, meaning that China's government has been able to leverage private capital in the capital market to invest in digital infrastructure. Leading examples are China Mobile and China Tower.
And also in this regard, China is very different from the US and Europe. For instance, not charging fees for frequency, which the US has been doing. The US has been relying on auctions to let mobile service companies pay for the frequency; but China doesn't charge for this. Instead, the Chinese government finds various ways to help and even subsidizing the infrastructure for the investors of digital companies. Now, how has the Chinese government been able to get its money back? After all, in public finance there is no free lunch. The trick is the following. That is, what I call an inverted pyramid, the inverse of the pyramid structure. On top of the pyramid are a large number of companies which utilize the digital infrastructure. They are companies like Alibaba, JD.com, and Meituan, the latter of which many of our colleagues rely upon for their lunch and dinner deliveries. They use the digital infrastructure while the government collects taxes from these companies and gets their money back. We have officials here from the Ministry of Finance, they know this all very well. They collect tax from the digital companies that rely upon digital infrastructure. In the middle of the pyramid are the four mobile phone operators or telecom operators. They are all listed on the stock market. Over the past 20 plus years, essentially each year they make money. Essentially, with very few exceptions, all these mobile phone operators make money. Because they have money, therefore they can keep on investing to improve services. And they are also paying tax. At the very bottom there is only one company. This company is called China Tower. China Tower is a company specializing in building mobile phone stations—the 5G, 4G stations all over China. And they collect fees from the mobile phone operators, which is how they get their money back. China Tower is also a listed company on the stock market in Hong Kong. Today, the company is still profitable. This is the structure and this is the secret behind lessons from China. So all in all, the lesson is for the government to enable the market rather than replacing the market and then, in the process, the government also gets tax revenue. So it's a win-win arrangement.
We can summarize this as "government and economics." It's an emerging field of economic studies, of which I am a Co-President of a society called SAGE, the Society for the Analysis of Government and Economics. Eric Berkelof, the Chief Economist of AIIB, is a member of our Academic Committee. Thank you Eric. We have been working on this for five years. And we also have a journal published in English: the Journal of Government and Economics. So we are working hard within the discipline of economics based on lessons from China and also other parts of the world and trying to understand how the government can play an active role in supporting economic development.
The key insight is to properly incentivize the government. The key to incentivizing the government is to make sure that the government can get healthy revenues from their supporting economic activities. The government itself needs incentives. That's the key insight.
In coming back to the NDB, what can NDB do? In the spirit of innovation and in the spirit of being provocative, let me put forward a plan for the NDB in support of digital infrastructure. This is a thought-provoking idea and we are trying to be provocative by doing some brainstorming.
First, I propose that the NDB raise special pools of funds. You can raise two or three pools of funds in different currencies, respectively. Whether in RMB, in Brazilian real, in Russian ruble, use separate funds. Second, you work out special policies with the sovereign governments regarding digital infrastructure, making special policies and giving tax breaks to the lowest tier of digital infrastructure investors. And third, you invest in companies already listed on the stock market or you issue shares on the relevant stock markets in the same currency. For example, you issue shares in Brazil. The currency is the real, then you issue shares in Sao Paulo. So you get the revenue and expenses both in the same currency. You solve the problem of mismatches between currencies. And then, very importantly, the NDB would recruit, train and then dispatch NDB experts to join the board of directors for these listed companies to monitor their operations. So, this is one proposal. I hope this proposal can provide thought-provoking ideas that can help us to start a discussion in how to be innovative in kickstarting digital infrastructure.
To summarize in three points: Digital infrastructure is not only important, but also unique. It's unique in comparison with other infrastructure. Second, lessons from China have to be carefully studied. The key spirit of the lessons from China is the government incentivizing the market and enabling the market, with the government itself getting positive feedback and positive incentives from supporting the market.
The third point is that NDB can be innovative, and it should be innovative, and it will become an innovative leader among MDBs in supporting digital infrastructure.
Thank you very much!
