Physical infrastructure and electronic and other processes are essential for value-creation, particularly in the intangible economy.
People can’t create value unless they can interact and the greater interaction, the greater the value-creation.
Roads, railways, metros, seaports and airports are among the important things people use for interaction for business and social reasons. The more efficient these critical pieces of infrastructure are, the greater the potential for value-creation. Electricity and water are also essential for value-creation. Productive economies always have the capacity to produce sustainably and efficiently the power and water its people need.
Countries suffering from high levels of poverty and unemployment, in contrast, always lack sufficient basic physical infrastructure. And one of the tragedies of the extent to which the Washington Consensus captured the World Bank and other development agencies is that they focused too much time and energy on imposing fiscal and monetary rules on developing countries and not enough on building essential infrastructure.
The present writer was impressed during a recent visit to Zambia, a longstanding recipient of IMF and World Bank advice. It has applied fiscal and monetary rules, but lacks decent infrastructure. The result is a low-wage and low-productivity economy.
Delivering infrastructure is axiomatically the responsibility of government, but the Washington Consensus encouraged governments to experiment with private finance initiatives that gave the impression the state no long had to worry about this issue. The private sector, it wrongly appeared, could do it instead.
The results are now in and they are obvious: across the world, while governments tinkered with PFI, infrastructure simply didn’t get built. Corrupt and inefficient governments are worse than no government, but some infrastructure is better than none.
The priority should be equipping governments to procure and operate good quality infrastructure, not stripping them of the power to do so by fiscal rules.
This issue has become more interesting following the election of Jeremy Corbyn as leader of the main opposition Labour Party. He is suggesting the idea of creating a National Investment Bank to invest in infrastructure. But the more important challenge is for the government to develop the capacity to procure it and operate it efficiently.
This idea is being promoted by the IMF in an initiative launched this summer. It’s calling for the establishment of project management units with the capacity to build essential infrastructure. Financing it should be a secondary issue. Converting money into productive infrastructure is identical to the way any investor builds a balance sheet. And infrastructure not only generates income directly through fares and fees paid by users. It also creates value, employment and income for the economy as a whole.
Having a separate balance sheet for government infrastructure investment may be one way of dealing with the challenge and focusing attention on the necessity of efficiency in public sector capital investment. It may be a way government can promote investment in the infrastructure high-income service economies need.