Case study 2.1: Infrastructure and growth
Even in times of austerity, there has been consensus among states and international finance on
the need to sustain or even increase investment in infrastructure (both economic infrastructure
- roads, rail, pipelines, etc. - and social infrastructure such as housing, schools, hospitals) as a
means of laying the foundations for the growth and competitiveness of the EU economy. In
part, such debates are a reflection of the state and financial markets differentiating between
what ‘good’ and what is ‘bad’ public is spending. Such debates are not merely an extension
of the conventional demand management logic of the state seeking to spend its way out of its
difficulties: the political economy of austerity contradicts such measures in any case. The
current debates on promoting infrastructure investment in European states is about the
emergence of infrastructure as an asset class – within the context of competition for
investment funds - and about seeking to establish the means through which global finance
invests in these core assets.
The link between a state’s infrastructure system and a state’s competitiveness and long-term
growth lies mainly in the supply-side of the economy. The effects of infrastructure on growth
are felt through a number of channels, all of which can cause the productive potential of the
economy to increase. First, enhanced infrastructure can stimulate improvements to logistical
systems, thereby aiding efficient movement around and between economies through offering
sufficient capacity to match internal and external flows. Secondly, infrastructure can aid
growth through external effects by enhancing knowledge, by reducing the cost of trade and
by enhancing the economy’s attractiveness as a location for inward investment. Thirdly,
infrastructure can aid the process of growth through dispersing activity throughout a territory
and alleviating bottlenecks and congestion within it. This is a non-exhaustive list of the
positive impact of infrastructure and is in addition to the short term employment effects
generated during the construction phase.
In the WEF’s Global Competitiveness Index, infrastructure is one of the 12 pillars of
competitiveness. Its inclusion in the Index not only reflects how infrastructure is a factor
driving inward investment but also how it drives the processes of time-space and cost-space
compression. The WEF rankings of infrastructure quality reflect a range of variables: namely,
road quality; railroad, port and airport infrastructure; electricity supply and gas pipelines; and
the availability of mobile telephony and fixed telephone lines. According to these criteria, the
states with the best infrastructure are Switzerland, Hong Kong, Finland, the UAE and
Singapore. Twelve European states are in the world’s top 20 but newer EU members rank
poorly with Romania in 88th and Bulgaria in 94th position (out of a total of 148).
However this consensus on the positive impact of infrastructure on growth is undermined in
certain incidences. The first is in cases like as China where there has been a widely
acknowledged over-investment in national infrastructure. In these cases, the economic
benefits of a project are outweighed by the economic and opportunity costs of the project.
However, investment in a national infrastructure system is not solely driven by the needs of
the competition state but also by the needs of the state to develop a system that integrates,
secures and enables control of its territory. Secondly, the political economy of infrastructure
formation can also hinder the realisation of benefits where planning controls, local
stakeholders and local politics can all work with other factors to both inflate costs and erode
the benefits of any given piece of infrastructure.
Case question:
Chose an infrastructure project with which you are familiar and consider its impact on local,
regional and national economies. Does the project have any cross-border implications?