Impact of infrastructure on economic growth

YOU can tell the integrity of any government and its commitment to development by the quality of the country’s infrastructure. You cannot hide failure.

Countries that are bogged down with corrupt governments have bad quality and dilapidating infrastructure, ostentatious presidential palaces and many white elephants. They have terrible roads, continuous power cuts, erratic and bad quality water supplies and do not look after their environment.

The African Development Bank’s report on Zimbabwe’s infrastructure and growth acknowledged that Zimbabwe’s economic growth and development cannot be achieved without the availability of appropriate economic and social infrastructure. The need to improve the quality of infrastructure services is, therefore, the cornerstone for our future growth.

It is estimated that Zimbabwe will need about US$20 billion to rehabilitate its infrastructure. However, our priority needs to be on improving our institutional arrangements, public resources governance and project management capabilities because this will have a huge impact on the ability to deliver.

According to almost 25 years of academic research on the impact of infrastructure on growth, the reality that infrastructure matters to growth is now acknowledged worldwide but maybe not fully understood.

How much, specifically, and which infrastructure matters when it comes to output levels and their growth in developing economies such as ours is not yet clearly settled.

In general, infrastructure is defined as electricity, gas, telecommunications, transport and water supply, sanitation and sewerage. While there is a reasonable agreement on how much infrastructure matters to growth, there is much less agreement on which infrastructure sub-sector matters the most under which circumstances.

In coming up with our infrastructural development plans, it will, therefore, be important that we seriously consider the best model for our circumstances.

However, there is no doubt that direct investments in infrastructure create new production facilities that stimulate economic activity and growth, reduce trade and transaction costs, thereby improving competitiveness and providing new employment opportunities.

In developing countries such as Zimbabwe, there is no debate on the potential positive impact of infrastructure development on the quality of life and the level of economic activity given our experience since 2000.

This is because we have experienced first-hand, how a dilapidating and underdeveloped public infrastructure leads to less economic output and competiveness which, in turn, destroys jobs and livelihoods while increasing poverty.

This, in turn, leads to decreasing investment in infrastructure development and the vicious cycle continues. We must reverse that.

Deteriorating infrastructure does not attract foreign direct investment, as it increases the cost of doing business. This is proved by the fact that Zimbabwe has attracted very little foreign investments in the last decade compared to our neighbours in the region who are investing billions of dollars in both public and industrial infrastructure.

A clear example of the positive impact on infrastructure development is China, one of the fastest growing economies in the world.

One of the defining features of China’s growth has been investment-led growth supported by domestic savings. China’s impressive growth and increasing competitiveness has been reinforced by massive investments in physical infrastructure and high levels of public capital formation. Zimbabwe must emulate this.

The Transitional Stabilisation Programme (TSP) recognises that functional public infrastructure remains a key enabler to unlocking economic growth potential, increase competiveness and productivity, while equipping public services to meet demand.

It, therefore, prioritises quick-win projects in energy, water and sanitation, information communication technology, housing and transport, with focus on expediting completion of ongoing infrastructure projects.

The TSP also targets increasing the budget on capital expenditures from the current 16% of total budget expenditures to over 25%, beginning from the 2019 and 2020 fiscal budgets.

Key projects which have been detailed under the TSP include increasing power generation capacity at affordable cost, upgrading power transmission, water and sanitation, transport and communication, airport upgrades , rail rehabilitation, upgrading and building new health and education facilities, housing, ICT and irrigation development.

What will be key is an accountable government, which collects and manages resources efficiently. This goes back to ethical and competent political leadership and at state enterprises.

Our taxes must be collected efficiently and fairly while our natural and mining resources must be managed effectively to generate revenue that can be reinvested in the economy and increase its productive capacity.

There must be accountability on how our resources are used and this must be underpinned by dealing ruthlessly with corruption at all levels. Also important is ensuring as much as possible local economic impact and job creation which is inclusive in nature. All infrastructure projects must see our citizens benefitting and must also have positive social impact in the areas where the projects are being done. The 2010 African Development Bank report on Zimbabwe’s infrastructure and growth identified the following problems which need attention:

A sustained deterioration in the quality of infrastructure assets because of inadequate levels of public expenditures for routine and periodic maintenance of the infrastructure networks, especially in power, water and sanitation, and transport;

l Infrastructure services in road transport and communications provided by the private sector are more expensive than in neighbouring countries, reflecting in part the economic costs of the deterioration;

l In sectors, such as, power, rail transport, and fixed line communications, services dominated by inefficient state enterprises, prices have been kept low and, as a result, the economic costs of the deterioration have emerged in the form of large and unsustainable operating losses;

l The deterioration in the physical infrastructure has been accompanied by lack of progress in building institutional capacities for management and regulation of the basic services associated with these networks. This is because of the disjointed approach to regulation and oversight among the ministries responsible for these sectors, compounded by a substantial loss of skills in the public workforce; and

l Institutional and regulatory inadequacies have also resulted in minimal amounts of investment by the private sector in basic infrastructure, despite periodic efforts to attract such investment, for example, in the transport and communications sectors.

In order to implement the above, institutional and regulatory reform will be key. This, according to the bank, includes measures to streamline the regulation of basic infrastructure services, promote private investment in infrastructure assets and services, as well as training and other capacity building measures to expand the skills required within the public sector for continued effective oversight and management of the basic infrastructure of the country. Clarity is also urgently required on Public Private Partnerships (PPPs) and Joint Ventures around infrastructure projects.

According to international research, developing countries such as Zimbabwe should be investing at least 6% of GDP in capital formation. The solutions to our infrastructure problems are more about competent management and leadership.

The capacity to award tenders for projects fairly and in a transparent manner, manage and implement projects effectively at reasonable cost and to deliver on time remain some of our key challenges.

Vince Musewe is an economist. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, president of the Zimbabwe Economics Society. — and cell +263 772 382 852.