Infrastructure and the Complexity of Economic Development

In the Preface to his recent book on economic sense and nonsense in this “Age of Diminished Expectations”, the MIT economist Paul Krugman wrote:

“Why is economics such a hard subject?

Part of the answer has to do with complexity”.

A number of studies have attempted to utilize production functions to estimate the contribution of infrastructure to economic development. They postulate a relationship of the following type: in which Y stands for output, for the entire economy or for a specific sector, for a given year, L for labor; K for the stock of private capital at the beginning of the year; and J for the stock of public capital, i.e., for infrastructure, also at the beginning of the year.

Recent studies suggest that diminished investment in the quality and quantity of public infrastructure induced the decline in U.S. output growth rates and output per hour (productivity) growth rates. Over the years, during various downturns in the economy, many explanations have been offered for such slowdowns. However, even the best known economists conclude that the sources remain a mystery. While research on this linkage began some years ago, recent national level studies directed attention to the productive effects of public capital and highway infrastructure. In 1989, in light of the post-Interstate era and an increasingly constrained financial environment, the Federal Highway Administration (FHWA) began to reexamine this hypothesis and its implications for national investment through a research agenda on the interrelationship between transportation infrastructure investment and productivity. In this research the FHWA hopes to act as an intelligent consumer of the research findings, while at the same time acting as a program manager, serving to stimulate rigorous research on the issue.

Infrastructure and the effects of changes in its stock and composition on the economy have been the object of study in a large variety of contexts (Rietveld, 1989).

This chapter provides an overview and evaluation of state and local finance in California. This evaluation may be timely, since national and state policy makers have again raised the issue of intergovernmental fiscal reform. Initiatives at the national level include the “New Federalism” of the Nixon and Reagan administrations, as well as more recent proposals by the Clinton administration and the Republican opposition to devolve the welfare function to state governments. The National Council of State Legislators has recommended that state governments reexamine the assignment of fiscal powers between state and local government. At the same time, policy makers in many other nations have expressed interest in governance reform, and particularly in decentralization of fiscal functions.

The services from infrastructure systems have, for historical reasons or as a result of specific local contingencies, been totally state-owned in certain countries, entirely privatized in others, and sometimes provided through a mixture of public, private, and self-help arrangements. Many governments are re-evaluating the manner in which services have been provided in the past, and are searching for ways of increasing the efficiency of service delivery. One of the options considered is privatization, whereby a transfer of ownership of infrastructure assets from the public to the private sector is undertaken as a measure to increase efficiency. Another option is introducing multiplicity in the production of infrastructure services by: introducing competition in and for service production; and devolving responsibilities to regional, state, or local authorities.

There is mounting concern in many countries about the quantity of transport and communications infrastructure available and the usefulness of what is provided after a period of relatively low maintenance expenditures. Specifically, attention has been focused upon the adequacy of the infrastructure to sustain future economic expansion and development. In many ways, however, remarkably little is known about the importance of transport and communications infrastructure provision in the initiation and simulation of economic development. The aim of this essay is to examine a particular, and indeed small, element of the topic. This concerns the extent to which the current pricing of transport and communications infrastructure in most high-income economies is sub-optimal both from an environmental perspective and from the point of view of more narrowly defined economic criteria. A limitation of much of the literature on infrastructure provision is that it assumes, almost automatically, that public provision is a necessary prerequisite for efficient investment and utilisation to be attained. An underlying theme of the argument presented here is that prices can indeed be inappropriate and investment need not be optimal and that this often stems at least as much from failures in the government process as it does from any notion that markets are failing. Indeed, it could well be argued that a rather more limited role for government in infrastructure provision might reduce some of the problems and lead to a more substantive provision of infrastructure.

The concept of order is a powerful and appealing inspiration for the planning and development of urban infrastructure. Those engaged in the planning process derive professional identity and satisfaction from the notion that they are somehow working out or contributing to the realization of order.

In agricultural societies the population tends to concentrate on sites in response to the fertility of land. In postagricultural societies we find new forms of “fertility” differentiation over space. Both within and across urban regions of various sizes one can observe how the competitive advantages differ between locations. We relate such distributions of location advantages to the variation of attributes of each location’s production milieu. In this chapter we present a series of Swedish studies examining how the production milieu influences the performance of manufacturing and service industries, as well as the entire regional economy. This introductory section emphasises how certain persistent observations demand a modification or renewal of economic theory. We also outline the types of models employed in the Swedish analyses of the production milieu during the period 1970–1995.

This chapter summarizes some of the economic benefits from infrastructure in the context of developing countries, and considers the necessary conditions for these benefits to be realized. Infrastructure is defined here as the long-lived engineered structures, equipment, and facilities, and the services they provide, that are used both in economic production and by households. This grouping of “economic” infrastructure comprises public utilities (electric power, piped gas and heating, telecommunications, water supply, liquid and solid waste disposal), public works (major dam and canal works for irrigation, as well as roads), and other transport sectors (railways, urban transport, ports and waterways, and airports).

The first European motorways were realized in countries such as Germany and Italy in the 1920s. In the 1930s these motorways were extended into interregional networks connecting cities at considerable distances. During this period the first orbital motorways were also planned around cities such as Berlin, Munich and London. It took a long time to complete these orbital motorways, and some of them were never completed. As Hall (1990) indicates the major reason for the planning of the European orbital motorways was not just the desire to remove traffic congestion. At that time roads were not yet very congested in Europe. Other motivations for building orbital motorways were the desire to reveal and reinforce the organic spatial structure of cities, and to make monumental artifacts which could serve nationalistic purposes.

Few items are as important for a national or regional economy’s long term viability as the development of its technological potential, and the human capital resources that support it. Infrastructural investment is a decisive factor in the development of that technological potential, given its enormous quantitative and qualitative impacts on the kinds of human and physical capital needed to support invention and innovation. Among the most important investments in the future of any regional or national economy are those which seek to promote a higher level of endogenous technological capabilities, through enhancements of the human and physical capital infrastructure that can lead to the expansion of invention and innovation (Andersson, 1985; Kuhn, 1962; Schmookler, 1966; Rosenberg, 1972; Rubin and Huber, 1986; Ayres, 1988; Davelaar and Nijkamp, 1990; Lee and Reid, 1991; Nelson and Wright, 1992).

Externalities have been thoroughly explored in economic theory; and since the mid sixties, approximately, environmental issues have become increasingly important. Nowadays every decision in the transport field places great weight upon external or environmental effects. But any real economic assessment implies a monetary valuation. To what extent is a monetary valuation meaningful, useful, and implementable as far as the environment is concerned? This is the general subject of this communication, which has four sections.