How does improving basic infrastructure enhance economic growth?

My answer on Quora:

Basic infrastructure enhances economic growth in three broad ways: (1) by supporting the production of goods and services, (2) by connecting people to each other and to those goods and services, and (3) by helping people secure basic needs like food, clean water, housing, health care and quality education (a healthy population is a productive one).

Productivity is the Goal

Satisfying basic infrastructure needs by itself is not enough to sustain durable economic growth. In the short-run, there may be a boost to demand through infrastructure investment, jobs created, and the learning process associated with going through the experience (infrastructure investments require big money, high risk, and strong commitment).

In the longer term, the key is in what a society does with its infrastructure (or “capital stock”)—does it help increase producitivity?

Productivity refers to how well the economy absorbs its resources and uses them to provide quality goods and services. In the end, differences in standards of living across economies comes down to differences in productivity.

For example, although the U.S. has a large capital stock compared to, say, Malawi, the size of its capital stock as a percent of the size of its economy is roughly similar across rich and poor countries. However, differences in productivity are large and explain the majority of the gap in income per person across countries. In particular, differences in productivity can explain over 90 percent of the difference in GDP per capita between US and Malawi, and around 50–60 percent of the gap between the US and other advanced economies (Table 6, page 44).

Hard and Soft Infrastructure

In addition to the size of the ‘capital stock’, the quality of “hard” and “soft” infrastructure can be very different across economies.

Hard infrastructure refers to roads, bridges, railways, airports, electricity, water, telecom, office buildings, homes, factories, etc. Quality in hard infrastructure can refer to technologies embedded in these types of assets or in terms of how well they connect different geographies or different value chains.

Soft infrastructure refers to norms, clear rules of the road, well-defined property rights, transparent governance structures, accountability, etc. In developing economies, improvements in “soft” infrastructure can go a long way in driving productivity growth. A well-known study published in 2009 estimated that productivity in China and India could be improved by up to 60 percent by reforming regulations that distort the allocation of resources (like ineffective regulations and excessive bureaucracy).

Basic Infrastructure in the Digital Age

Technological progress is placing new demands on infrastructure. The explosion of data enabled by the digitization of nearly everything across all sectors—from transportation to health to education to manufacturing—requires an underlying hard infrastructure in telecom, broadband, cloud computing, etc. as well as a soft infrastructure in data rights, privacy, competition policies, cybersecurity norms, etc. Add that to the evolving ways of doing business, changing skill requirements and organization structures for both public and private organizations to succeed in the evolving economy, and it starts to become clear how important the combination of both ‘hard’ and ‘soft’ infrastructure is becoming in the 21st century.

Of course, the starting point is a healthy population, so access to clean water, food security, access to quality health care and other basic services should always be a priority. With technological progress, there are more opportunities to secure this kind of basic infrastructure in sustainable ways.

Climate Change and Basic Infrastructure

Infrastructure plays a central role in our adaptation to and mitigation of climate change—perhaps the single largest threat to humanity. Sustainable infrastructure limits air pollution and the impact on the environment while promoting economic growth and productivity in a way that minimizes our carbon footprint. For more on this, see this report titled Delivering on sustainable infrastructure for better development and better climate by Brookings, the Global Commission on the Economy and Climate, and the Grantham Research Institute at the London School of Economics.




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