The reason for this exponential pace is the learning curve effect through transfer of knowledge. Late industrialising countries can utilise scientific developments which have taken place earlier to jump start development. They have the luxury to choose the latest proven technologies appropriate for their development rather than depending on serendipitous advances. They also benefit from the knowledge and experience amassed by the industrialised countries. Technical manpower can be bought along with machines and used both for production and education of the local population.

However, it is not only scientific advancements which can be used as a spring board for industrialisation. In the modern economy, both science and finance play an equally important role. The best example of this is ironically from pre-industrial revolution days. The Dutch smashed the British in the second Anglo-Dutch war (1665-67) despite the superiority of the British navy at the start of the war and Britain being a larger and more populous country. This was because they could afford to build bigger and better ships faster than the British, who were financially stretched.

The Dutch in the mid seventeenth century had a developed capital market used by the government to finance its activities. Anyone with savings could buy government bonds, thus making for a broad investor base and giving them an ability to raise money quickly. Charles II like other European sovereigns still depended on tariffs and short-term borrowing from the rich to finance his government. Tariffs apart from being hard to enforce created cash-flow problems and personal short-term loans were a costly source of finance. It was only after the British adopted Dutch financial genius, were they able create an empire on which the sun never set.

Developing countries can utilise the global financial market in their quest for growth. One of the primary needs for developing countries is to finance Gross Capital Formation, that is, the money to build infrastructure and buy state-of-the-art machines. For free-market economies, the latter is usually taken care of by private enterprise leaving the government to concentrate on the former.

Typically developing country governments issue long-term bonds to finance infrastructure development. The amount raised is mainly dependent on domestic savings. Foreigners, institutions or otherwise, are reluctant to buy ‘emerging’ market bonds because of their low credit rating unless the government pays a prohibitively high interest. This cuts off developing countries’ access to the vast pool of global capital. It also leads to slower development since the same domestic savings are tapped to meet budget deficits due to general and welfare spending. This is a failure to exploit the global capital market properly. Governments need to employ the same innovative financial engineering that has taken modern financial markets far beyond the layperson’s bonds and shares. This is best illustrated with an example of constructing a highway.

A major highway (e.g. a section of the Golden Quadrilateral) not only facilitates commerce but also leads to second-round benefits as establishments and shops spring around the highway to cater to increased traffic and urban centers expand along the highway. These benefits are known and surpass the cost of construction. Despite this, financing highways is difficult because cash intensive construction places immediate costs against distant benefits; a risk private enterprise is hesitant to take up. A feasible solution to this problem is one which can match cash flows and efficiently split and transfer risk to investors according to their risk taking appetite. A relatively easy job for the double-PhDs who slice-and-dice risk everyday as a job in investment banks across the globe.

Assume it takes five years to construct the entire stretch of highway during which there are no returns. After the highway is operational, the only cost incurred is for maintenance and returns can be obtained through toll charged and sale or lease of surrounding real estate.

The government can set-up a dedicated company for the construction of the highway (a Special Purpose Vehicle or SPV in financial jargon) with a management credible for global investors. It can then transfer real-estate to the company in return for equity capital, an equal amount of which should also be offered to the global investor base. Therefore the cash to finance construction comes entirely from investors. To interest them, some financial engineering will have to be done to mitigate the two main risks – government interference and capital loss.

To guard against Arjun Singhs in the ministry of transport either the government equity shares should carry no voting rights or restricted voting rights. This does not hurt the government in any way since private enterprise will keep the company dynamic and the resultant profits will flow into government coffers through dividends.

The second risk can be mitigated through adding a put option on the shares such that the investors have an option to sell back shares after five years at the original purchase price plus cumulative nominal interest. In case the option is exercised, the outflows will be met through the sale of real estate. This puts collateral behind the shares and reduces risk, lowering the nominal interest which has to be promised. Effectively, construction is financed by the sale of real estate after it has gone up in value. However, investors are unlikely to exercise the option thus preventing a fire sale. After construction the SPV would be in possession of large swathes of real estate which will appreciate in value as development takes place along the highway. It can realise higher returns if it sells gradually or leases. Other investors would want to be part of this lucrative business and wish to buy shares, presenting an opportunity to the initial investors to cash out through the secondary market.

After construction is complete, cash would be needed for maintenance and development of surrounding real estate. One of the ways this can be achieved is through securitising the toll and lease cash flows. The SPV can issue two bonds with differing risk whose payments are backed by the cash inflows. The less risky bond’s returns will be affected only after a default on the riskier bond, thus providing a safety cushion to investors. The less risky bond can be sold to global investors while the riskier bond is bought by the government or investors with a higher risk appetite (e.g. hedge funds).

The total cost to government for the construction in terms of hard cash is only the cost of the riskier bond, assuming it cannot be sold off. Therefore, infrastructure financed through domestic saving can be reduced to a fraction of the total cost implying more simultaneous projects can be started. Infrastructure development will not only improve economic efficiency but also increase economic potential.