THE start of the Olympics in London means the next few weeks will be a testing time. I do not just mean for the athletes, who will obviously be straining might and muscle to go faster, higher, stronger. I also mean for London's infrastructure, which will have to cope with an additional six million visitors over the summer according to some experts.
The organizers are confident London can cope with the influx, though many long term residents who have spent years traveling around the city are not so sure. Saudis may be accustomed to such large numbers — after all, six million is roughly the number of foreign pilgrims who will visit the Kingdom this year to perform Umrah — but for London this is something of a step into the unknown.
One byproduct of the 2012 Olympics, which required billions of pounds to be spent on the regeneration of east London, is a renewed debate on infrastructure investment — spending on the facilities which are essential for a city's economy to function, everything from roads, railways and airports to electricity grids and water supplies.
It is not always a glamorous topic, to be sure, but if a government does not get infrastructure right, the consequences can be disastrous, economically and socially. Solid infrastructure can act like a magnet for further investment. Just look at Switzerland, where the trains always run on time: Geneva and Zurich suck in rich, internationally mobile, entrepreneurial migrants from around the world and the Swiss economy benefits greatly. By contrast, I regularly speak to investors who focus on Brazil and they talk about the 'Brazil cost', the hidden expense of doing business in a country with poor infrastructure.
Planners in the Middle East and North Africa appear to be taking note. Bank of America Merrill Lynch released an eye-catching report on the future of MENA infrastructure last week, suggesting that the region would witness over $ 4 trillion of investment in infrastructure and construction leading up to 2020. That spending, a truly colossal figure, will be led by Saudi Arabia, which is hardly a surprise given that nearly 70 percent of the population is under 30 years old. In the coming years, many thousands of young Saudis will require the houses and amenities a modern lifestyle requires. The recent approval of the mortgage law should also help investment in this area.
As the bank's report hinted, there is an element of catch-up here: Part of the structural shift to raise the productivity of the non-oil sector necessarily involves infrastructure investment. Put another way, you cannot create a desert version of Silicon Valley just outside Riyadh unless you have already built the specialist universities to train the experts who will work there. And they will need houses nearby, the houses will need power and water, and so on.
Using international comparisons as a guide, it remains unsurprising that experts judge Saudi Arabia will lead the way in regional spending. The Kingdom has one key economic characteristic in common with the highly developed 'tiger' economies of the Far East: A high savings rate; that is, a high level of savings as a proportion of national income. In fact, according to World Bank data, Saudi Arabia has one of the highest savings rates in the world. Economies that save tend to be economies that invest. South Korea and Singapore have high savings rates — roughly the same level as Saudi Arabia — and not
surprisingly benefit from world famous infrastructure. Changi airport in Singapore, for example, is repeatedly voted the best airport in the world. Impoverished Greece, which is constantly flirting with state bankruptcy, has one of the lowest savings rates. Greece's construction industry has been in recession now for six straight years and sadly shows no signs of recovery.
Of course, economies with substantial oil exports tend to have high savings rates, but there is something else at play here. High savings rates can also be a marker of confidence in the future of an economy and a government's willingness to invest in that future. Countries that have particularly low savings rates are often in or have recently experienced distress. Examples include Iceland, a major loser in the 2008 financial crisis, and Bosnia, which is still recovering from the Balkan wars of the 1990s. Latin America has historically suffered from hyper-inflation, which is hardly conducive to long term planning.
Any government which announces a landmark investment in a mega-project which may take years to complete is a confident government sure of its own future.
This brings us full circle back to the situation Europe finds itself in today. A debate is raging in European capitals about how to ignite growth in the midst of the never-ending financial crisis. Some economists say cut government spending and the private sector will step in and new activity will boost growth. Others say no, cutting government expenditure will undermine what little growth there is.
This second group often highlight the particular importance of spending on infrastructure and its role in boosting employment and its broader long term economic benefits. The debate in Europe is not settled and it remains to be seen who will be proven right. What is clear though is that the international business community will always prefer to do business in countries which have invested in their own infrastructure. London and hundreds of Olympic athletes are being tested right now. One day it will be the MENA region's turn. With $4 trillion of spending on the way, the region will hopefully win gold.
n John Burman, Ph.D., is managing director of an investment advisory firm based in London
