Investing in infrastructure is still the best bet to spur growth, jobs

Every profession has its fantasy Triple-Win. For a gambler at the horse races, it’s the Trifecta. For musicians, it is a song that breaks hearts, moves feet and sells records. Yet even we geeks have our dreams. In the field of infrastructure, in Latin America and elsewhere, the ultimate triple-win is an investment that

1. spurs economic growth

2. contributes to social well-being, and

3. helps the environment.

“Impossible!” you say. “The laws of nature could not possibly allow for growth that contributes to society’s well-being without taxing our natural endowment.” Is there no way we can unstick ourselves from the Kuznets Curve and uncover investments that spur Green and Inclusive Growth?

To tackle all three sides of the triangle, we probably need more than one blog discussion. Let’s start with the links between infrastructure and growth for this go-round…

To say that infrastructure investment drives growth has become common wisdom over the last decade—built on the research of economists here at the Bank, the OECD and elsewhere. Yet we have to ask: In what kind of growth are we interested? Is all infrastructure investment good for all kinds of growth?

In times of stagnation and high unemployment, governments may turn to public works and infrastructure expenditure to stimulate short-term growth and employment creation. Here’s what the Short-term Growth Investment Menu, in terms of jobs from construction and its inputs (not jobs induced from expenditures), looks like from small to large:

• Because of higher salaries and greater “leakage” or expenditures on imported technology, energy investments tend to produce few local jobs in the short-run—in the hundreds or the thousands for every US$ billion invested in the region’s power plants on average.
   
• Highways and roads produce thousands or even tens of thousands for the same amount—depending on what type of road and how it is built.
   
• Water and sanitation expansion projects may produce 100,000 annualized jobs per billion dollars; and
   
• A rural road maintenance program may generate two to five times as many annualized jobs as that—200,000 to 500,000—because wages are low in the region’s countryside and almost all expenditures go to labor.

The order of that list might not look the same for long-term growth. We know that the connectivity and productivity that come from energy and telecom investments are crucial to long-term growth even if they are not always short-term job drivers. Highway corridors, railroads and ports may not be the medicine for immediate stimulus, but they are crucial to competitiveness and long-term growth, because they facilitate commerce and reduce the costs of trade.

For countries—like Brazil or Mexico--with industrial production, there may be some short-term gains from investment in “long-term” assets such as power plants and rail systems where a big part of the expenditure goes to equipment and technology. This comes from producing the inputs to construction and infrastructure—such as steel, engines, construction equipment, cranes, and turbines. But for those countries further down the labor-capital curve—Bolivia, Honduras, Nicaragua, Paraguay—the menu of priorities for spurring short-term growth will look very different from the menu for long-term growth. Unless countries such as these are running up against a reserve margin, public investment in power plants or treatment plants might be put on hold during a recession (or, better still, solicited from the private sector) while that would be a good time to expand the sewerage network or rehabilitate rural roads.

To generate long-term growth, we also know that the quality of the infrastructure service provided is at least as important as the stock of infrastructure. Bank analysis shows that the growth-investment elasticities for the six Central American countries vary wildly from one to the other. That is, while some countries are able to garner high growth out of infrastructure investments, their neighbors are only generating low levels of growth from their investments. The relationship seems to depend not only on how much is being invested, but on how efficiently the resulting assets are operating. A speculative investment in a port or a highway may create a few jobs in the short term, but it will not generate sustainable economic returns unless it reduces the cost of transporting goods, creating producer and consumer surplus. A new power plant that relieves an energy shortage will release economic activity, but if it also increases dependence on fuel imports and raises average electricity rates, its long-run effects on productivity will be mixed.

So… infrastructure is strongly correlated to growth, but the particular investment will define the brand of growth, short or long. Also, the sustainability of that growth will depend on the quality of the service provided by the investment.

That covers one leg of our Infrastructure Triple-Win: Growth, both short and long. Let’s take a breath. We’ll talk about the human and environmental sides of the Triangle—The “Inclusive” and “Green” parts of Growth—in our next blog.