Infrastructural and Economic Development

Today’s article seeks to expand on the national discourse on how infrastructural development can contribute towards economic development – a discussion that seeks to go beyond the usual rhetoric of building a road connecting Brazil and Guyana, and so forth.
More infrastructure does not necessarily mean more growth, because other constraints may also be binding. Poor infrastructure performance tends to affect competitiveness, slowing achievements in health and education and disproportionately harming the poor.
For the success of a modern economy, energy, water, transport, digital communications, waste disposal networks and facilities are critical elements to begin with. Empirical evidence has shown that well-designed infrastructure investments have long-term economic benefits, such as increasing economic growth, productivity, and land values, while providing significant positive spillovers. Notwithstanding, it is of critical importance to invest wisely, such that over-investment can potentially lead to projects that are inefficiently large, and therefore have low marginal returns.
The distinctions between infrastructural investment and other types of investment are: its high-risk, long-term, capital-intensive nature, reflected in the creation of long-lived assets with high sunk costs. “The resulting gulf between marginal and average costs creates a time-inconsistency problem, as investors always face the problem that they will be ‘held up’.” (Centre for Economic Performance). As such, this requires suitable government intervention, which in turn exposes infrastructure investment to an additional layer of risks and decision-making biases – which is sometimes the root cause of underinvestment.
Examples of these other types of risks inherent in perhaps most developing countries, if not all countries, are:
• Political risks – reflecting the inability of the political system to deliver cross-party consensus around strategic plans for infrastructure, and stable policy frameworks to support their implementation;
• Analytical risks – reflecting the dual relationship between the prevailing political ideology and economic mainstream;
• Unbiased project appraisal – reflecting the deficit in project evaluation grounded in sound and independent expert analysis and comprehensive assessment of policy alternatives;
• Limitations of the planning system and compensation mechanisms – reflecting a current planning system that does not properly share the asymmetric benefits of development; and
• Public accounting distortions – reflecting practices that fail to incorporate the value of the public sector debt.
Both theoretical and empirical evidences thus point to the existence of a robust positive relationship between infrastructure and economic development. In particular, it appears that:
1. Aggregate infrastructure stock and investment drive economic output;
2. The driving relationship between economic output and infrastructure varies significantly across different types of physical infrastructure; and
3. Infrastructure impacts on output, both directly and indirectly, via increased private sector investment, improved productivity, and rising exports.
Dubai’s Gross Domestic Product (GDP), for example, is not driven by oil per se. In fact, about 95 percent of Dubai’s GDP is not oil-based. Dubai had discovered that it had limited oil and gas reserves (1/20th of the reserves of Abu Dhabi) and was thus determined to build up an economy that could survive the end of the oil boom. To this end, Dubai invested massively in infrastructure development. With the creation of ports, Dubai established itself as a hub of trade by sea, and a centre of tourism and business travel by air.
Another good example would be to look at the history of China’s economic development. Prior to 1979, China maintained a centrally planned or command economy. To support rapid industrialization, the central government undertook large-scale investments in physical and human capital during the 1960s and 1970s. As a result, by 1978, nearly three-fourths of industrial production was by way of centrally controlled, state-owned enterprises, according to centrally planned output. While most of its historic economic policies created distortions in the economy in these periods, the Chinese infrastructural development from in these earlier years historically underpin, in a critical manner, the dominant and powerful economic success of that country today.
That said, there is a notion in economics that says, “If you have the facilities, people will use it”. If Guyana did not make the bold move to invest in facilities such as the Marriott Hotel — today there is a high influx of foreigners in the country, and the presence of one of the largest multinational companies in Guyana, ExxonMobil — Guyana would have been at a disadvantage. It is for these strategic reasons that the owner/owners of Pegasus hotel is/are currently investing a massive US$100 million to expand and modernise the Pegasus hotel; because, for at least the next 10–20 years, there will be a heavy inflow of foreigners, and investment in these types of facilities is necessary because they are directly linked to the broader economic development of Guyana.
The National Stadium is another example. If we didn’t have the stadium, Guyana would have been unlikely to host international cricket games such as the entertaining 20-20 version of the game – CPL. The last CPL games in Guyana brought in some US$3.2 million into the Guyanese economy.
These are just a few practical examples of the need and importance of development in infrastructure that would enable long-term economic development of the country.
The recently announced US$1.4 billion housing development investment by a private investor is also timely to cater for the expected influx of expatriates and remigrants over the next five or ten years. This will align perfectly with a well-crafted remigrant policy wherein these types of facilities will be needed for people returning to live in Guyana from First World countries. This is apart from the fact that this is perhaps the largest local private investment of this magnitude, representing about 25% of GDP and almost the full size of the 2019 national budget.

About the Author:JC. Bhagwandin is a macro-finance and research analyst, lecturer and business & financial consultant. The views expressed are exclusively his own, and do not necessarily represent those of this newspaper or the institutions he represents. For comments, send to [email protected]