The infrastructure boom – Building BRICs of growth

by Dave

The Economist

Compounding this year’s figure, Morgan Stanley predicts that emerging economies will spend $22 trillion (in today’s prices) on infrastructure over the next ten years, of which China will account for 43% (see left-hand chart). China is already spending around 12% of its GDP on infrastructure. Indeed, China has spent more (in real terms) in the past five years than in the whole of the 20th century. Last year Brazil launched a four-year plan to spend $300 billion to modernise its road network, power plants and ports. The Indian government’s latest five-year plan has ambitiously pencilled in nearly $500 billion in infrastructure projects. Russia, the Gulf states and other oil exporters are all pouring part of their higher oil revenues into fixed investment.

Good infrastructure has always played a leading role in economic development, from the roads and aqueducts of ancient Rome to Britain’s railway boom in the mid-19th century. But never before has infrastructure spending been so large as a share of world GDP. This is partly because more countries are now industrialising than ever before, but also because China and others are investing at a much brisker pace than rich economies ever did. Even at the peak of Britain’s railway mania in the 1840s, total infrastructure investment was only around 5% of GDP.

Infrastructure investment can yield big economic gains. Building roads or railways immediately boosts output and jobs, but it also helps to spur future growth—provided the money is spent wisely. Better transport helps farmers to get their produce to cities, and manufacturers to export their goods overseas. Countries with the lowest transport costs tend to be more open to foreign trade and so enjoy faster growth. Clean water and sanitation also raise the quality of human capital, thereby lifting labour productivity. The World Bank estimates that a 1% increase in a country’s infrastructure stock is associated with a 1% increase in the level of GDP. Other studies have concluded that East Asia’s much higher investment in infrastructure explains a large part of its faster growth than Latin America.

A recent report by Goldman Sachs argues that infrastructure spending is not just a cause of economic growth, but a consequence of it. As people get richer and more of them live in towns, the demand for electricity, transport, sanitation and housing increases. This mutually reinforcing relationship leads to higher investment and growth.

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