A new report by the IMF says that there is growing concern that low levels of infrastructure investment are hindering economic growth.
“In many emerging market economies, infrastructure bottlenecks are not just a medium-term worry but have been flagged as a constraint even on near-term growth,” the report says. “In low-income countries, deficiencies in the availability of infrastructure remain glaring and are often cited as an impediment to long-term development.”
The report says that public infrastructure investment lifts growth and that the time is right for it to be increased. That will accelerate growth in the short-term and expand the supply-side capacity of economies.
This conclusion is in line with decades of conventional economic thinking. But it fails to provide an adequate intellectual framework to support investment in infrastructure in an era where services dominate.
The problems include:
- Definition. What is infrastructure? “Infrastructure refers to the basic structures that facilitate and support economic activity,” the IMF says. For the purposes of its analysis, the IMF focusses on “core” infrastructure: transport, power generation and other utilities and communications. This definition is inherently arbitrary and there is no theory to distinguish “core” infrastructure from other forms of infrastructure, including hospitals and schools. It also excludes intangible infrastructure: laws and regulations, the business context and social practices. These will often have as big an impact on economic output as physical infrastructure. There are many examples of brilliant pieces of core infrastructure that have failed to promote economic output because of the lack of law and the impact of local business and social practices that make the optimal use of physical infrastructure impossible.
- Measurement. This is equally challenging. The analysis is based on data measuring the real public capital stock and the level of real public investment. The first is inherently arbitrary since most governments keep practically no reliable information about the value of existing infrastructure. Many governments fail to store centralised information about their physical assets. The reported present value of an infrastructure asset is rarely the result of a coherent process. The level of public investment is often more accurately measured, but arbitrary accounting practices that confuse current payments and long-term assets are pervasive. Public investment often involves a large element of current payments in the form of wages and transfers. Finally, the efficiency of the conversion of public spending into productive physical assets is rarely effectively monitored. Across the world, infrastructure projects are often finished late. They normally cost more than budgeted and are often incomplete. And they often fall-short of the design vision.
- The relationship between infrastructure investment and output. The IMF says infrastructure facilitates and supports economic activity. This is an imprecise and unscientific way of defining the relationship between infrastructure investment and output. All economic models fail to capture accurately the relationship between economic variables. The imprecision is almost hopelessly extensive when it comes to quantifying the economic impact of infrastructure investment on long-term growth.
- Quantity versus quality. The report uses physical data to quantify key infrastructure factors: kilowatts of electricity production, length of roads and the number of phone lines. This is unhelpful in determining the value-creation such assets promote and how efficiently value-creation is stimulated.
Conventional economic theory and conventional economics in practice, therefore, are bound to fail to provide useful information about the role of infrastructure in an economy, how much investment there should be in it and the extent to which government resources should be used in creating it.
Making decisions about infrastructure investment generally and large-scale investment in particular is one of the most challenging issues facing governments. The critique that has been summarised would seem to condemn economics’ capacity to guide decision-making about infrastructure investment.
This issue is going to become more pressing with the passage of time. The world’s population is forecast to grow by almost 2bn to 9bn between now and 2050. The population of cities, which are completely dependent upon “core” infrastructure, is forecast to double in the same period to more than 7m.
Economics2030 provides an alternative intellectual framework.
It begins by arguing that value-creation is exclusively the product of constructive interaction at the level of the individual.
Infrastructure is not the source of value-creation. It supports and facilitates it. But deficiencies of infrastructure will hinder value-creation.
Economics2030 acknowledges that infrastructure is indefinable. It comprises physical infrastructure, including hospitals and schools as well as roads and power stations, plus intangible infrastructure: laws and rules plus customs and practices. For this reason, Economics2030 uses the term processes to encompass all its elements.
Its efficiency can only be evaluated by closely understanding the value-creating interactions taking place within the community and communities that the processes are supporting. These too are intangible and inherently non-quantifiable. But they are not incomprehensible to those involved with them.
Those best equipped to define process and infrastructure needs are those involved in the value-creating interactions the processes and infrastructure support. Decision-making about infrastructure should, therefore, be decentralised and driven by the intuitively-defined aspirations of the communities where value is created.
Conventional techniques for quantifying needs will fail to capture more than a fraction of the information needed to make optimal decisions about infrastructure investment.
Processes, including physical infrastructure, should be as freely available as possible. That means that conventional internal rate of return analysis won’t work since this is based on a quantified projection of flows of income and social returns.
An alternative method to support decision-making is required.
Infrastructure should also be provided at the lowest possible cost. This conflicts with the principles of private-public partnerships which provide for profits to be paid to owners and service providers. Processes should be provided on a non-profit or low-profit basis. Applying rates of return derived from financial and other markets will inevitably lead to underinvestment in essential infrastructure and to lower value-creation, growth and employment.
The IMF report provides evidence that this is what has happened on a global basis in recent decades.
These conclusions provide no simple solutions for those making decisions about investment in infrastructure.
But they should encourage a fresh approach to the public investment challenge that the world faces, and one that will become more intense in the years to come.
Click here for a fuller exploration of the role of infrastructure and public investment in economies where services are dominant.