Infrastructure investment is necessary, but hardly sufficient to enable developing countries to transform their economies to achieve sustainable prosperity, according to this year’s UNCTAD Trade and Development Report: Power, Platforms and the Free Trade Delusion (TDR 2018), released in late September.
For various reasons, infrastructure projects in developing countries are receiving broad endorsement. Multilateral financial institutions – such as the Asia Infrastructure Investment Bank – are scaling up investment, and several international initiatives – such as the Belt and Road Initiative of China – prioritize infrastructure. Yet, such efforts may still not accelerate industrialization.
Nevertheless, most recent discussions still tend to ignore how infrastructure was central to successful industrialization, from eighteenth century Britain to twenty-first century China. The crucial link between infrastructure and industrialization has been largely lost in a discourse focusing on the bankability of projects, viewing infrastructure as a financial asset for international institutional investors.
Infrastructure as business opportunity
UNCTAD’s analysis of over 40 developing countries’ national development plans suggests too much emphasis on infrastructure projects – which appeared in 90 per cent of them – as business opportunities. But, there was too little emphasis on accelerating structural transformation.
Despite infrastructure spending being likened to traditional public goods such as highways, ports and schools, recent policy debate typically denigrates the public sector, instead favouring private finance. The prevailing bankability approach tends to avoid addressing how infrastructure can enhance productivity, structural transformation as well as economic and social change in much of the developing world.
But bankability will not close the financing gaps for infrastructure investment. The total annual financing needs for needed infrastructure were recently estimated at between $4.6 trillion and $7.9 trillion, requiring far more government investment than is currently the case.
Most developing countries must double current infrastructure investment levels of less than 3 per cent of gross domestic product (GDP) to around 6 per cent for significant transformational impact.
Infrastructure investment needs have been estimated at 6.2 per cent against actual spending of 3.2 per cent of the GDP of Latin America and the Caribbean in 2015. Projected needs in Africa are around 5.9 per cent of regional GDP in 2016-2040, more than the current 4.3 per cent. Current and projected investment needs in Asia during 2016-2030 are estimated at around 5 per cent of GDP.
Infrastructure for structural transformation
TDR 2018 advocates putting infrastructure investment at the centre of national developmental strategies with more political will, experimentation and planning discipline. However, projects only aiming to maximize returns on investment rarely serve national development needs.
Albert Hirschman’s discussion of ‘unbalanced growth’ showed that sequencing and experimentation could better balance public infrastructure and private investment, thus breaking vicious circles standing in the way of development.
Although most plans were aligned with broader national strategies, they were not well developed or oriented to longer term strategic goals, with possible challenges and obstacles not well recognized.
The plans rarely specify how infrastructure development would enable industrialization, or identify tools to ensure infrastructure investments accelerate structural transformation, economic diversification and growth.
This ‘disconnect’ is mainly due to ascendant financial interests and related policy advice insisting on engaging the private sector in infrastructure development and planning and transforming Agenda 2030 to achieve the Sustainable Development Goals into lucrative private investment opportunities.
Policymakers are instead urged by UNCTAD to better plan how to accelerate structural transformation. Infrastructure and development are better connected when projects are well designed and integrated into a wider development strategy promoting positive feedback among infrastructure, productivity and growth.
(This article was originally published in Inter Press service (IPS) news on October 9, 2018.)