Is the Effect of Infrastructure on Economic Growth a New Problem? In a recent article in the Wall Street Journal, Thomas Kopckel and Michael Mandrell suggested that the effects of infrastructure are felt today as much as 50 years later. They examined the case of London, Canada, during the period between World War II and the early 1990s, as an example of what can happen when a city's road network is damaged or neglected. They determined that although economic development benefits from improved infrastructure, the costs are also enormous. The authors call for greater governmental focus on infrastructure and economic development through both public and private means.
Infrastructure booms and busts tend to occur during periods of economic depression. In other words, it's a cycle. In times of economic growth, there tends to be more spending and more investment. Infrastructure in countries like Canada, the U.K., and the U.S. have been the target of politicians and the media for decades. Infrastructure spending is necessary, they argue; without it, countries risk losing potential growth. “A nation that lacks a vital transport system is like a traveler who without a map and guide is in dangerous waters,” they write.
Infrastructure developments have indeed contributed to overall economic growth. Governments often invest in major projects such as bridges, highways, and tunnels. Private entities tend to invest more in productive assets such as factories, equipment, and construction lands. Major banks, investment companies, and insurance companies are all growing substantially. But is this enough?
According to the economists, adequate investments in infrastructure have done little to lift an economy out of recession. Instead, they contend that weak economic fundamentals, combined with high interest rates and unemployment, discourage investment. Growth is still elusive. They add that it is ironic that even when governments invest in infrastructure, many citizens still feel “betrayed.”
Another effect of infrastructure on economic growth is that it can stifle innovations. New ideas may be required to create new jobs and industries. Without the requisite infrastructures, companies find it difficult to seek new employment and to keep up with competition from rivals that have better technology and resources.
Even when growth is pursued, the effects of infrastructure developments tend to affect the long-term viability of the country. Most nations that have undertaken extensive infrastructure development found that their growth did not continue past the third decade. During this period, tax revenues were growing but the government budget was contracting. These variables, along with other factors, have led many nations to experience debt repayment during the ten years after the implementation of extensive public works programs.
In short, public works programs are expensive, but the long-term benefits should outweigh the short-term costs. The effects of infrastructural investments are felt far beyond the immediate community they impact. They impact economic policies that affect the nation as a whole and have implications for future generations as well. Future generations will not be able to enjoy the fruits of a well-planned infrastructure program if future governments do not maintain its upkeep.
As governments continue to implement infrastructure programs, they must realize that the long-term costs will be far greater than the short-term savings. Unless money is available to pay for these programs, some of these projects will face bankruptcy, further damaging the economy. This will have long-term negative consequences on the economy as a whole and will deter future governments from undertaking such large projects. For this reason, economic policies that focus on long-term viability should be adopted instead.
Private sectors can fill many roles in fulfilling the overall goal of developing a more resilient and secure nation. One of these roles should be to build and sustain the modern infrastructure that is necessary for economic competitiveness. Private investors have shown an . . . . . . interest in acquiring and improving existing public works. Such private investment can provide up to 90% of the capital needed for the construction and maintenance of a new and modern infrastructure.
The role of the public sector in this scenario is very limited. In fact, given the state of the nation's finances, the role of the private sector would be more beneficial now than it has ever been before. Private sector investors would want to develop and improve infrastructure in order to retain their competitive edge over other businesses. Infrastructure development projects can create jobs and increase the annual revenue of a country. In addition to that, private sector interest in infrastructure is not dependent on any type of long-term contracts with a country; it is entirely based on the ability of a particular project to provide high returns to the private sector.
The government can play a key role in encouraging private investment in infrastructure by making it easier to obtain tax breaks, subsidies, and leniency when it comes to private infrastructure development. It is also possible that the government may decide to privatize some assets that are currently being used for the purpose of infrastructure. Whatever the case may be, it is very important for the government to play an active role in encouraging private sector investment in order to ensure that the country's economy benefits from such private investment. Such economic policies are needed to ensure a stronger and more stable economy for the future.