The Economics of Infrastructure in a Globalized World: Issues, Lessons and Future Challenges

Timo Henckel and
Timo Henckel Research Fellow, Centre for Applied Macroeconomic Analysis<br>Australian National University
Warwick J. McKibbin
Warwick McKibbin
Warwick J. McKibbin Former expert - Economic Studies, Center on Regulation and Markets, Distinguished Professor of Economics & Public Policy - Crawford School of Public Policy, The Australian National University

June 4, 2010


The massive fiscal stimulus in the wake of the global financial crisis has refocused the international community onto the nature and role of infrastructure spending. Although this type of spending can provide a short-term demand stimulus to an economy, in the medium to longer term it can form a critical part of a successful economic growth strategy. Well designed infrastructure facilitates economies of scale, reduces costs of trade, and is thus central to specialization and the efficient production and consumption of goods and services. It is a vital ingredient to economic growth and development, which is the key to raising living standards.

Although infrastructure is widely recognized as a key ingredient in a country’s economic success, many issues surrounding infrastructure spending are not well understood. In order to better understand these issues, a conference was convened March 2010 in Sydney, Australia, with leading international experts to explore the many aspects of infrastructure. The discussion at the conference was divided into six themes: the returns to infrastructure, the role of the private sector, the evaluation and delivery of infrastructure in practice, the nature of network industries, pricing and regulation, political economy considerations of infrastructure provision, and infrastructure in developing countries.

In particular the conference concentrated on a series of questions:

  1. What is the nature of infrastructure? What are its salient features that distinguish it from other factors of production?
  2. What are the returns to infrastructure investment? How is infrastructure investment evaluated and delivered? How does infrastructure affect an economy’s growth rate?
  3. How should infrastructure be provided? Should it be provided by the government? By the private sector under strict government regulation? By the private sector with little, if any, government regulation?
  4. Should infrastructure provision be affected by the stage of a country’s economic development?

The first issue is pivotal to understanding the subsequent three issues. What are the main characteristics of infrastructure that make it special to a country’s economy? Is it scope, scale or longevity? What is its role as a collective, if not pure, public good? What is the significance of network externalities? Different types of infrastructure—internet, telephone (fixed line and mobile), rail, air, sea and road transport, energy and water—each pose their own challenges.

The second issue is central to boosting overall productivity and to raising living standards. Just how important is infrastructure to the economy? Can this be reliably measured? How are new technologies adopted and how can infrastructure services be made more efficient? How do countries, in practice, evaluate and deliver existing and new infrastructure?

The third issue is central to the policy debate about infrastructure investment, with a long and growing list of open questions: What is the most efficient way to finance infrastructure spending? What are optimal infrastructure pricing, maintenance and investment policies? What have proven to be the respective strengths and weaknesses of the public and private sectors in infrastructure provision and management, and what shapes those strengths and weaknesses? What are the distributional consequences of infrastructure policies? How do political forces impact the efficiency of public sector provision? What framework deals best with monopoly providers of infrastructure?

The final issue relates to developing countries, whose infrastructure is typically less sophisticated and extensive than industrialized countries’ infrastructure and additionally often more poorly managed and less efficiently used. Developing country legal systems are weaker, making regulation and enforcement more difficult. They are fiscally weaker and their borrowing costs higher. Given these challenges, it is natural to envisage a greater private sector role in infrastructure in developing countries, but that too poses complex challenges. What have proven to be the major gains from, and difficulties caused by, the expansion of private sector infrastructure provision in developing countries? What lessons can be drawn for the future, especially for policy and regulatory frameworks?

This paper aims to provide insights into many of these questions, drawing on the contributions of international experts who participated in the two-day conference.