Thursday, 30 January 2014

Insights from Asia: More infrastructure for everyone

Infrastructure is like eating vegetables – more is always better (with one exception) 

Infrastructure was on the mind of Your Neighbourhood Economist during a recent trip around Asia.  Roads
in Cambodia were so bumpy that it was often difficult to think about anything else.  Investing in infrastructure is a no brainer for developing countries – it helps the economy run more smoothly by lowering the costs of doing business as well as helping to create jobs.  The same logic also applies to richer countries although it is tougher to decide where to spend any available funds.

Infrastructure – what is it and why is it good?

Infrastructure is easy to spot but hard to define.  Essentially, it is the facilities that are necessary for an economy to function.  Companies need electricity to power their factories and offices, roads to be able to move goods around, and phones and the Internet to communicate with others.  The concept of infrastructure could also be stretched to include the courts and laws which govern business, hospitals to heal sick workers, schools to produce the necessary skills in the workforce, and police to reduce the effects of crime.  However, let’s stick to the basic definition to keep things simple.

A lack of proper infrastructure can get in the way of doing business.  Clogged up roads or an intermittent power supply will create delays which put operations behind schedule.  The extra costs of power generators or the time taken in transporting goods will eat into profits.  A patchy phone or Internet network will hamper access to information needed for key decisions.

Shortfalls in infrastructure are more obvious in developing countries as by definition major parts are still being built.  Construction typically struggles to keep up with rapid growth in economic activity.  The large number of new cars on the road in Phnom Penh was a surprise but the amount of work being done on the roads was not.

In order to generate higher levels of wealth (which will typically mean more new cars), a developing economy needs people to move from working on the land to engaging in more economically productive activities in the cities.  Insufficient infrastructure is an obstacle that can inhibit economic expansion and trap a country at a lower level of income.

Tough decisions lead to neglect of infrastructure

The potential benefits from infrastructure also extend to richer countries.  More developed economies typically already have considerable infrastructure but this requires maintenance as well as extra spending due to shifting economic conditions.   It is far trickier for governments in developed countries to figure out what new infrastructure is worthwhile.  That spending on faster internet connectivity will be beneficial is a given, but it may be less obvious where to allocate the budget for, say, transport infrastructure.

Whether to invest in more roads, better railways, or bigger airports depends on predicting the lifestyles people will adopt in the future.  Ideally, the private sector would take on this burden but the copious amounts of cash along with the risks involved in major construction projects and the long-term scale of such operations are too much for businesses to handle.  Consequently, it is left to governments to determine the best courses of action.

This often results in tough infrastructure decisions being kicked down the road. Despite large budget deficits, the case for ending the neglect of infrastructure seems stronger than ever (following this link for the exception) due to high unemployment and the fact there are few engines of economic growth.  Just like your mother would tell you to eat your veggies, more infrastructure would be good for our economic health.

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