Academic journal article Chicago Fed Letter

Midwest Infrastructure: Assessing the Contribution of Basic Infrastructure to Economic Growth

Academic journal article Chicago Fed Letter

Midwest Infrastructure: Assessing the Contribution of Basic Infrastructure to Economic Growth

Article excerpt

Chicago Fed Letter

A recent Chicago Fed conference on the basic infrastructure of the Midwest highlighted the need for policymakers to better understand which infrastructure investments provide the greatest economic return. In addition, they need to understand how to price and manage these infrastructure assets to ensure that investments are efficient and productive.

On September 25, 2002, participants from government, academia, and business gathered at the Federal Reserve Bank of Chicago to discuss the role of infrastructure in the growth of the economy. The conference, cosponsored by the National Association of State Budget Officers (NASBO), was designed to assess the condition of the region's infrastructure and to discuss approaches to valuing, maintaining, and investing in these assets. This was the fourth conference in the Chicago Fed's Midwest Infrastructure Program.

In his welcoming remarks, Michael H. Moskow, president and chief executive officer of the Chicago Fed, noted that infrastructure systems, such as roads, water systems, energy, and telecommunications, are key to the economic health of any region. However, many analysts believe we are under-investing in these critical assets. Moskow challenged the conference participants to explore methods for pricing and managing our infrastructure assets to ensure that infrastructure investments are efficient and productive.

Scott Pattison, executive director of the conference cosponsor, NASBO, noted in his opening address that the conference was particularly timely given the extraordinarily difficult budget challenges currently facing the states. With operating budgets being strained, there is a concern that investments in infrastructure may suffer. Pattison said that in this context, it is particularly important that policymakers understand the contribution of infrastructure to their state's economy.

What is the condition of the basic infrastructure of the region?

Rick Mattoon, a senior economist at the Chicago Fed, provided an overview of the condition of the basic infrastructure assets of the five states (Illinois, Indiana, Iowa, Michigan, and Wisconsin) that comprise the Seventh Federal Reserve District. While the condition of roads, water systems, and buildings in the region is not substantially different from that of the rest of the nation, various measures do suggest that the condition of the Midwest's infrastructure assets could be improved upon. For example, Illinois, Iowa, and Wisconsin all reported slightly over 35% of their road pavement as being in either poor or mediocre condition. The national average is 27%. Indiana and Michigan fared only slightly better, reporting scores of 24% and 34%, respectively. One source of relatively good news comes in the form of District capital management practices. A 2001 study by Governing magazine found that District states are making progress on establishing the systems that will help track the condition of their infrastructure and are taking steps to catch up on their maintenance. District scores ranged from a high of A- in Michigan to a low of B- in Indiana.

Infrastructure and development

The conference participants next considered the relationship between infrastructure and economic development. Geoffrey Hewings, director of the Regional Economics Applications Laboratory at the University of Illinois, presented evidence of the changing role (and growing importance) of transportation infrastructure in the Midwest economy. Hewings emphasized that with the fragmentation of production, the various parts of the region have become increasingly interrelated. This changing relationship between producers and suppliers has made transportation infrastructure a critical component in competitiveness. For example, in the Chicago area, the average firm is more dependent on external suppliers and external markets than in the 1970s and 1980s. This has left firms more dependent on inter-regional trade. …

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