Development of infrastructure – Study Material


Development of infrastructure – Study Material 

Infrastructure-based economic development also called infrastructure-driven development combines key policy characteristics inherited from the Rooseveltian progressivist tradition and Neo-Keynesian economics in the United States, France’s Gaullist and Neo-Colbertist centralized economic planning, Scandinavian social democracy as well as Singaporean and Chinese state capitalism : it holds that a substantial proportion of a nation’s resources must be systematically directed towards long term assets such as transportation, energy and social infrastructure (schools, universities, hospitals…) in the name of long term economic efficiency (stimulating growth in economically lagging regions and fostering technological innovation) and social equity (providing free education and affordable healthcare). While the benefits of infrastructure-based development can be debated, the analysis of US economic history shows that at least under some scenarios infrastructure-based investment contributes to economic growth, both nationally and locally, and can be profitable, as measured by higher rates of return.

Aschauer’s and Other Academic Approaches  :

  • According to a study by D.A. Aschauer, there is a positive and statistically significant correlation between investment in infrastructureand economic performance. Furthermore, the infrastructure investment not only increases the quality of life, but, based on the time series evidence for the post-World War II period in the United States, infrastructure also has positive impact on both labor and multifactor productivity. The multifactor productivity can be defined as the variable in the output function not directly caused by the inputs, private and public capital. Thus, the impact of infrastructure investment on multi factor productivity is important because the higher multi factor productivity implies higher economic output and hence higher growth.
  • In addition to Aschauer’s work, Munnell’s paper supports the point that infrastructure investment improves productivity. Munell demonstrates that the decrease in multifactor productivity growth during the 1970s and 1980s relative to the 1950s and 1960s is due to the decrease of public capital stock rather than the decline in technological progress. By showing that public capital plays an important role in private sector production, Munnell helps Aschauer establish that infrastructure investment was a key factor to “the robust performance of the economy in the ‘golden age’ of the 1950s and 1960s.
  • However, infrastructure has positive impact not just on the national level. By implementing the cross-sectional studyof communities in one state, Janet Rives and Michael Heaney confirm “the links identified in national level studies between infrastructure and economic development” are also present locally. Because infrastructure enters the production function and increases the value of urban land by attracting more firms and house construction, the core infrastructure also has a positive effect on economic development locally.

The China Way :

An  Alternative Development Path

Some European and Asian economists suggest that “infrastructure-savvy economies”  such as Norway, Singapore and China have partially rejected the underlying Neoclassical “financial orthodoxy” that used to characterize the ‘Washington Consensus’ and initiated instead a pragmatist development path of their own based on sustained, large-scale, government-funded investments in strategic infrastructure projects: “Successful countries such as Singapore, Indonesia and South Korea still remember the harsh adjustment mechanisms imposed abruptly upon them by the IMF and World Bank during the 1997-1998 ‘Asian Crisis’ What they have achieved in the past 10 years is all the more remarkable: they have quietly abandoned the “Washington consensus” by investing massively in infrastructure projects this pragmatic approach proved to be very successful.

Asian Infrastructure Investment Bank and ‘One Belt, One Road’

The Beijing-based Asian Infrastructure Investment Bank (AIIB) established in July 2015 and corollary One Belt, One Road Chinese-led initiative demonstrate the PRC government’s capacity to garner the financial and political resources needed to “export” their economic development model, notably by persuading neighboring Asian nations to join AIIB as founding members : “as Asia (excluding China) will need up to $900bn in infrastructure investments annually in the next 10 years (which means there’s a 50% shortfall in infra spending in the continent), many Asia heads of state gladly expressed their interest to join this new international financial institution focusing solely on ‘real assets’ and infrastructure-driven economic growth.

Recent Developments in North America and the EU

  • In the West, the notion of pension fund investment in infrastructure has emerged primarily in Australia and Canada in the 1990s notably in Ontario and Quebec and has attracted the interest of policy makers in sophisticated jurisdictions such as California, New York, the Netherlands, Denmark and the UK.
  • In the wake of the Great Recession that started after 2007, liberal and Neo-Keynesian economists in the United States have developed renewed arguments in favor of “Rooseveltian” economic policies removed from the ‘Neoclassical’ orthodoxy of the past 30 years- notably a degree of federal stimulus spending across public infrastructures and social services that would “benefit the nation as a whole and put America back on the path to long term growth”.

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