Ensuring that the world economy and its citizens have sufficient infrastructure—from transport systems to electricity grids and water pipelines—is an increasingly pressing issue. It’s also a subject matter surrounded by misconceptions. Five are worth noting:
1) Lack of investment is not always to blame.
The first is a common assumption that when infrastructure is too inadequate, congested, or old, the culprit is always a lack of investment. The truth is more complex. Globally on average, infrastructure stock --which includes transport (road, rail, ports and airports), power, water and telecommunications--accounts for about 70 percent of a country’s GDP. Brazil, whose infrastructure stock is less than 20 percent of GDP, under-spends chronically compared with its economic size and growth. It seems no coincidence that the country’s airports are 122nd out of 142 in the World Economic Forum’s rankings. Other under-investors include the United Kingdom, Canada, India, and the United States. But other countries over-invest for the size of their economies. China, Poland, Italy, South Africa, and Japan are among them. Japan’s stock of infrastructure is equivalent to nearly 180 percent of its GDP. Over the past 18 years, growth would have “justified” investment of around 3 percent of GDP, but Japan spent 5 percent.
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The new airport in Banda Aceh was as magnificent as the Taj Mahal—bright, with endless marble floors and beautiful domes. You can almost imagine a reflecting pool, maybe a garden…OK, I might be getting a little carried away. But if you had ever travelled through the old airport—something like a Greyhound bus station in a rust-belt city with a runway attached—you’d understand my excitement.
That was more than four years ago. Since then, the entire city has transformed. Just take the roads. I used to bike all over the city, so I know from first-hand experience that many of the roads were in bad shape, with huge potholes and puddles as big as lakes. But now? You might think you were driving in Germany. Every road is perfectly paved, even the narrow, single-lane ones. When it rains, the water just drains away.
Not long ago, I carried a 20-liter bottle of water three blocks to my apartment (there is an artesian well in a nearby park). At first it was easy. I lifted it up onto my shoulders and walked boldly along the street, drawing admiring looks from everyone I passed.
But it didn’t take long for my muscles to feel the burn. Then my back started to ache. By the time I got home, I was wiped out. Never again, I thought.
Over the last decade or so, the World Bank has made considerable investments in carrying out firm-level surveys that can be compared across countries and over time. What have we learned from all of this? Most obviously, we confirmed our suspicions that reforming the business environment, e.g. by reducing the barriers to entry, can boost productivity.
Picking up from yesterday's microfinance discussion, let's have a look at what's happening in Kenya.
Editor's Note: Heinz P. Rudolph is a senior financial sector specialist in the Financial and Private Sector Development Vice Presidency of the World Bank Group.
This is the 12th in a series of policy briefs on the crisis—assessing the policy responses, shedding light on financial reforms currently under debate, and providing insights for emerging-market policy makers.
David Roodman of the Center for Global Development has written an excellent blog on the woes at Grameen Bank, asking whether Grameen has been fueling a microfinance bubble. Many households in Bangladesh are overindulging in microfinance loans: