IS INFRASTRUCTURE INVESTMENT THE ANSWER TO SLUGGISH ECONOMIC GROWTH?

At no time has there been a bigger promise of higher infrastructure investment in Asia, with the Asian Infrastructure Investment Bank and New Development Bank joining the World Bank and ADB in multilateral development financing. By one estimate, Asia requires $8 trillion of infrastructure investment during 2010-2020.

The crucial question is whether the push for more infrastructure will raise economic growth and people’s well-being. It could – but only if the focus is on quality and impact and not on the quantity and volume of investment.

Economic policymakers assume that infrastructure—energy, transport, communication, irrigation, water supply—propels economic output. The direct effect is raising the productivity of land, labor, and other physical capital. For example, a steady supply of electricity reduces disruptions and time wasted at the work place. It complements the contributions of education, health, marketing, and finance.

The immediate effect of new infrastructure can be substantial, either by increasing output or stimulating new investment in machinery and equipment. When electricity supply disruptions are eliminated or available hours increased, as seen in Bangladesh or the Philippines, farmers and firms respond with greater supply.

It matters how infrastructure projects are financed. When they are funded through public borrowing, we need to also account for the effect of debt servicing on other investment. For example, use of the capital budget or government borrowing for power and transport could reduce the amount of resources available for funding other government spending, and sometimes leads to macroeconomic instability. Shifting investments from the government’s books to the private sector is not necessarily the answer, as the experience of public-private partnerships and private infrastructure is decidedly mixed.

Unstable policy environments and weak governance affect returns, especially as the gestation of infrastructure is long. A liberal and predictable business environment is beneficial for reaping investment returns. Studies have shown the links between the success of projects and the clarity and predictability of the climate for investments and good governance. ADB’s infrastructure projects, especially in energy, have done relatively well in both the public and private sectors, but a factor explaining the large differences across countries is the nature of the regulatory environment.

Multilateral development banks play a unique role by responding quickly to financing needs with maximum due diligence. But their role goes much further: it is to go beyond what market forces can achieve on their own. They must help countries foster high-quality infrastructure, especially in terms of inclusion and sustainability.

Source:

https://www.brookings.edu/blog/future-development/2016/04/05/is-infrastructure-investment-the-answer-to-sluggish-economic-growth/