Infrastructure investments: Roads to the bright economic future

Matloob Ilahi

According to a new study by the McKinsey Global Institute, investments in a better infrastructure has fallen in 10 major economies, despite a desperate need for it, since the financial crisis of 2008-2009. Today, worldwide spending on the infrastructure (transportation, telecom, energy and water) projects are around $2.5 trillion a year (the same report claims). Gaps are widening as the world needs around $3.3 trillion infrastructure investments annually through 2030 to support projected economic growth. Throughout the world, economists are in the opinion that infrastructure – such as energy, transport, communication, health, education and water supply – has a direct effect on economic growth which leads to higher economic output. They express the same opinion that the infrastructure investments are the most effective way to utilise public resources to support economic activity. According to the World Bank estimates, a 10% increase in infrastructure assets leads to 1% increase in GDP. Enhanced quantity and improved quality of infrastructure results in increased productivity of human and physical capital and hence growth, for example, improving roads can: (1) improve education and market for farmers output and cost reduction; (2) facilitate private investments; and (3) improve jobs and income levels for many. The productivity of an economy is highly influenced by infrastructure investments, not only does it provide a basis for long-term sustainable economic growth, but it also leads to job creation. Mega infrastructure projects lead to the development of new industries, markets and communities and infrastructure related industries gain new expertise and knowledge through innovation that can be exported. One of the key drivers behind China’s spectacular economic performance is the fact that China has invested heavily on developing world-class infrastructure, though many projects failed. Overloaded infrastructure facilities lead to waste and constraints and add a penalty on the growth in terms of high cost to the economy. For example, a poor transportation network (such as highways, rail roads, ports and airports) would cause an additional cost of 10-20%. Besides developing new projects, there is increasing need than ever to exploit existing infrastructure resources efficiently and create synergies. Absence of appropriate infrastructure such as water, energy, housing, health and community services would lead to people anger and frustration that would attract further issues in the society.

Multiplier Effect

According to Mark Zundi, the chief economist at Moody’s economy.com, every dollar spent on infrastructure has a multiplier effect of $1.59, when public infrastructure pulls in private investment. In addition to this, there are general benefits to the business such as reduced transportation and communication cost, convenience in doing business, better service provision and good feeling by the public. Prudently selected and well-planned infrastructure projects generate benefits that last for decades, representing best utilisation of public money.

Developing countries

Dealing with inefficient and underperforming infrastructure is increasingly becoming a challenge for policy makers in developing and emerging nations. Quality infrastructure is much needed in developing countries and it works as a multiplier, resulting in economic gains as well as enabling governments to achieve social goals. Poor decision-making in infrastructure investments would make the country unattractive for investment but it also promotes inefficiencies and wastage. These would cause frustration among lenders and other stakeholders as effectiveness of a project can be evaluated by considering the downstream outcomes and impact. Governments in many developing countries use feeble systems and ambiguous policies and strategies, influenced by the personal interest of decision makers, lack of clear goals and appropriate regulations not in place to guide policy makers and project developers, slow responding, complex and counter productive culture lead to hampering infrastructure development. Today, everywhere people are talking about growth but growth itself without job creation would be difficult to sustain and cannot be called inclusive growth. Many developing countries are facing the daunting challenges of both job creation and development of basic building blocks such as provision of education, housing, clean water, energy, transport, sanitation and health. Settling down these issues would be followed by the development of financial and human capital. Only then can sustainable and inclusive growth be achieved. There is a need for long-term thinking but many governments in developing countries often focus on the short term, fixing their eyes on the next election cycle and avoid long term needs of the economy. Government officials want infrastructure investment to pay off fast, they are interested to know what can be done quickly on temporary basis, to show visible progress. But these actions would fail to address the broader challenges prevailing in a society. Social media is enabling people to communicate and transfer information promptly, regarding their needs and provision of service by the authorities, putting pressure on the governments to deliver value, increasing expectations to quick-fixing problems adding further pressure on governments to respond. Future oriented and carefully selected Infrastructure investments determine economic performance of a nation. High economic performance is the result of multiplier effect that leads to high output and growth opportunities for people that result in social stability and higher tax revenues. Over time, infrastructure investment pays for itself.

Some facts... About 2.6 billion people in the developing world lack access to electricity Nearly 800 million people worldwide lack access to water About 2.5 billion people lack access to basic sanitation 1-1.5 billion people do not have access to reliable phone services