Infrastructure plans in developing countries fail to link to integrated economic reforms needed for prosperity – United Nations report

Infrastructure investment is not necessarily helping developing countries transform their economies and achieve sustainable prosperity, states this year’s Trade and Development Report: Power, Platforms and the Free Trade Delusion, released by UNCTAD.

While infrastructure projects in developing countries are back on the agenda, with multilateral financial institutions such as the Asia Infrastructure Investment Bank scaling up investment, and several international initiatives – such as the Belt and Road Initiative of China – putting infrastructure at their centre, the report states that such efforts may not help countries promote much needed industrialization and structural transformation.

An analysis by UNCTAD in the report of over 40 national development plans from developing countries and least developed countries, which examines the extent of this disconnect, suggests that there is too much emphasis on infrastructure as a business opportunity and too little emphasis on its links to structural transformation.

“Infrastructure is not just bricks and mortar, but a bridge to the future,” said Mukhisa Kituyi, Secretary-General of UNCTAD.

Despite infrastructure spending conjuring up images of traditional public goods such as highways, ports and schools, policy debate often denigrates the public sector and lauds the role of private capital and, often opaque, financing techniques. The report states that this is a long way from the narrative that made infrastructure a central building block of successful industrialization episodes, from eighteenth century Great Britain to twenty-first century China.

Not only has this crucial link between infrastructure and industrialization been forsaken in a discourse on the bankability of projects, recasting infrastructure as a financial asset class for international institutional investors has also opened it up to rent-seeking behaviour.

The report states that bankability, ironically, will not close the financing gaps for economic infrastructure investment whose total annual financing needs, according to recent estimates, range between $4.6 trillion and $7.9 trillion at the global level and sectoral level, and require increased public spending.

As important, the bankability approach avoids the key question of how infrastructure can become a force of productivity-enhancing structural transformation and deliver much needed economic and social change in most of the developing world.

In fact, the report states, most developing countries must double current investment levels in infrastructure projects of less than 3 per cent of gross domestic product (GDP) to around 6 per cent, if there is to be any transformational impact.

In Latin America and the Caribbean, infrastructure investment needs have been estimated at 6.2 per cent against actual spending of 3.2 per cent of the region’s GDP in 2015. In Africa, projected needs are estimated to be around 5.9 per cent of the region’s GDP in 2016–2040, as against the current figure of 4.3 per cent. In Asia, both current and projected investment needs in 2016–2030 are estimated at around 5 per cent of GDP.

The report calls for a clearer, bottom-up approach to infrastructure investment that places it at the centre of national developmental strategies. This requires a mixture of political ambition, policy experimentation and planning discipline. However, the report states, bold endeavours with calculated risk-taking and a future outlook are hardly met by projects that aim to generate revenues over their life cycles to ensure only returns on investment.

Recognizing that development planning is a risky business, the report builds on development economist Albert O. Hirschman’s framework on unbalanced growth to show how sequencing and experimentation to establish the right balance between public infrastructure and private investment can help to break interlocking vicious circles of underdevelopment in developing countries and the least developed countries.

The report’s analysis of over 40 national development plans shows that infrastructure appears in 90 per cent of the plans, but without a clear framework to tie it firmly to the central challenge of structural transformation and development.

Although the plans score highly in terms of vision and alignment with broader national strategies, a more detailed reading suggests that visions are not fully developed or oriented toward longer term strategic goals, and the possible challenges and obstacles to development are not well articulated.

The plans also do not specify the channels through which infrastructure development may support a broader development strategy, particularly by supporting industrialization and/or diversification, or systematically identify tools that might be needed to establish the linkages to help channel infrastructure investments into structural transformation-led growth.

This disconnect, the report states, is partly the result of a singular ideological drive to accommodate the private sector in infrastructure planning and partly a reluctance by Governments in developing countries to consider the challenge in a more comprehensive and integrated manner.

The report states that policymakers should place greater emphasis on planning, to enable rapid structural transformation, and that links between infrastructure and transformation are best forged when infrastructure projects are clearly designed and made part of a wider development strategy that recognizes and actively fosters the positive feedback loops between infrastructure, productivity and growth. The role of planning in actively facilitating this process and investing in skills and institutional capabilities can also help to ensure that infrastructure not only builds bridges but that those bridges also deliver on the ambitions of the 2030 Agenda for Sustainable Development.