Infrastructure Economics and Finance

The investment climate is the fundamental socio-economic framework in which firms operate – the macroeconomic and trade policies they face, the labor and financial markets in which they recruit and raise money, the available infrastructure and imposed regulations, as well as all other areas of public policy impacting on private business.

In Thailand, the uncertain political situation since 2006 has negatively affected the country’s economy. The Productivity and Investment Climate Survey, which was fielded in 2007 at a time of great political instability and policy uncertainty, clearly reflected the pessimistic views of business managers. One interesting finding of the recently released Thailand Investment Climate Assessment Update is that instability and economic policy uncertainty became major issues – firms that perceived it a major or severe obstacle doubled from one-third in 2004 to two-thirds in 2007.

Better materials and student participation characterize the READ schools project. (photo by Prateek Tandon)

Mongolia’s extreme climate was brought home to me again last week as I went with our World Bank team on a retreat about an hour and a half out of the capital city Ulaanbaatar. Wednesday afternoon was hot and summery, but on Thursday a cold front brought extreme storms that knocked out power and left a dusting of snow on the hills around UB. The life of the rural population, mostly herders, is inherently vulnerable in this extreme environment. Yet a number of projects supported by the World Bank have reduced this vulnerability somewhat in recent years.

Traveling around the countryside now I am struck by the fact that – for better or worse – my Blackberry keeps me connected most of the time. One of our innovative projects has offered subsidies, which private phone companies have competed for, to expand coverage in the countryside. The economics of cell phones is such that a one-time subsidy to erect towers will enable private companies to offer connectivity on a commercial basis.

Imagine how the new Indonesia would prosper if everyone had affordable health insurance, every child completed secondary education and highways were in place connecting Indonesia’s three biggest cities: Jakarta, Surabaya and Medan.

The good news is that today Indonesia’s main challenge is not to save resources but to spend them wisely. This still remains the case, even in the face of the global financial crisis. Despite its position of relative strength, Indonesia has two main weaknesses: the allocation of funds and the implementation of its budget. Despite some impressive steps to rein in subsidies, significant resources are still being spent on subsidies that benefit the well-off, mainly on fuel, electricity and fertilizers. In 2008, subsidies consumed an estimated 23 percent of total government spending. Indonesia also spends a disproportionately large share on “government apparatus,” at 13 percent of the total budget (see chart 1). Interestingly, this is not due to a bloated central government civil service. Instead, it is driven by regional governments, who spend a staggering 32 percent on themselves.

A few days ago, our country director David Dollar blogged about the two-sided picture we see when we look at China's economic growth. The economy saw very weak export demand, which partly carried over into weak investment in manufacturing and other "market-based" sectors. Continued growth in other parts of the domestic economy was supported by policy stimulus.

China has weathered the crisis better than many other countries because it does not rely on external financing, its banks have been largely unscathed by the international financial turmoil, and it has the fiscal and macroeconomic space to implement forceful stimulus measures. China’s government has made use of this policy space by pursuing pretty forceful fiscal and monetary stimulus. From early November last year onwards, the government's 10-point plan ("RMB 4 trillion package") is being implemented. This plan emphasizes infrastructure and other investment, financed in part by government budget spending, and in part by bank lending. And the government has taken some additional, more consumption-oriented measures.