The Economy: How can Infrastructural Development contribute towards Economic Development?

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This article is inspired by a powerful presentation made by retired politician and prominent Attorney, Nigel Hughes, where he urged the media to ignite discussions in order to facilitate real talk in oil and gas. The Attorney’s presentation was quite meritorious and as such, this article seeks to focus on one aspect of the broad oil and gas discussions in that, how can infrastructural development contribute towards economic development – a discussion that seeks to go beyond the usual rhetoric of building a road connecting Brazil and Guyana and so forth.

More infrastructure does not necessarily mean more growth, because other constraints may also be binding. Poor infrastructure performance tends to affect competitiveness, slowing achievements in health and education and disproportionately harming the poor.

For the success of a modern economy to thrive, energy, water, transport, digital communications, waste disposal networks, and facilities are critical elements to begin with. Empirical evidences have shown that well-designed infrastructure investments have long-term economic benefits such as, increasing economic growth, productivity and land values, while providing significant positive spillovers. Notwithstanding, it is of critical importance to invest wisely such that, over-investment can potentially lead to projects that are inefficiently large, and therefore have low marginal returns.

The distinctions between infrastructural investment and other types of investment are its high risk, long term, capital intensive nature, reflected in the creation of long-lived assets with high sunk costs. “The resulting gulf between marginal and average costs creates a time – inconsistency problem as investors always face the problem that they will be ‘held up’.” (Centre for Economic Performance). As such, this requires suitable government intervention, which, in turn, exposes infrastructure investment to an additional layer of risks and decision making biases – which is sometimes the root cause of underinvestment.

Examples of these other types of risks inherent in perhaps most developing countries if not all countries are:

  • Political risks – reflecting the inability of the political system to deliver cross-party consensus around strategic plans for infrastructure and stable policy frameworks to support their implementation;
  • Analytical risks – reflecting the dual relationship between the prevailing political ideology and economic mainstream;
  • Unbiased project appraisal – reflecting the deficit in project evaluation grounded in sound and independent expert analysis and comprehensive assessment of policy alternatives;
  • Limitations of the planning system and compensation mechanisms – reflecting a current planning system that does not properly share the asymmetric benefits of development; and
  • Public accounting distortions – reflecting practises that fail to incorporate the value of the public sector debt.

Both theoretical and empirical evidences thus point to the existence of a robust positive relationship between infrastructure and economic development. In particular, it appears that:

  1. Aggregate infrastructure stock and investment drive economic output;
  2. The driving relationship between economic output and infrastructure varies significantly across different types of physical infrastructure; and
  3. Infrastructure impacts on output both directly and indirectly, via increased private sector investment, improved productivity and rising exports.

Readers might recall that earlier this year, February to be precise, this author had done an article on Sovereign Wealth Fund versus Infrastructure Development. In that article, reference was made to Dubai wherein Dubai’s Gross Domestic Product (GDP) is not driven by oil per se – in fact, about 95 percent of Dubai’s GDP is not oil based. Dubai had discovered that it had limited oil and gas reserves (1/20th of the reserves of Abu Dhabi) and was thus determined to build up an economy that could survive the end of the oil boom. To this end, Dubai invested massively in infrastructure development. With the creation of ports, Dubai established itself as a hub of trade by sea and a center of tourism and business travel by air. See full article here: https://newsroom.gy/2018/02/24/the-economy-sovereign-wealth-fund-vs-infrastructure-development/.

 

Another good example would be to look at the history of China’s economic Development. Prior to 1979, China maintained a centrally planned or command economy. To support rapid industrialization, the central government undertook large-scale investments in physical and human capital during the 1960s and 1970s. As a result, by 1978, nearly three-fourths of industrial production was produced by centrally controlled, state-owned enterprises, according to centrally planned output. While most of its historic economic policies created distortions in the economy in these periods, the Chinese Infrastructural development from in these earlier years – historically, underpin, in a critical manner, the dominant and powerful economic success of that country today.

That said, there is a notion in economics that says – if you have the facilities people will use it. If Guyana did not make the bold move to invest in facilities such as the Marriot Hotel, today there is a high influx of foreigners in the country and the presence of one of the largest multi-national companies in Guyana – ExxonMobil, Guyana would have been at a disadvantage. It is for these strategic reasons that the owner (s) of Pegasus hotel will be investing a massive US$100 million to expand and modernize the Pegasus hotel because come 2020, for at least the next 10 – 20 years, there will be a heavy inflow of foreigners and investment in these type of facilities are necessary which are directly linked to the broader economic development of Guyana. The national stadium is another example, if we didn’t have the stadium it would have been unlikely for Guyana to host international cricket games such as the entertaining 20-20 version of the game – CPL. The recently held CPL games in Guyana brought in some US$3.2 million in the Guyanese economy. These are just few practical examples on the need and importance of development in infrastructure that will enable long term economic development of the country.

 

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