Building a Better World: Infrastructure's Role in Economic Growth

By Graefe, Laurel; Alexeenko, Galina | EconSouth, Summer 2008 | Go to article overview

Building a Better World: Infrastructure's Role in Economic Growth


Graefe, Laurel, Alexeenko, Galina, EconSouth


Globalization, population growth, and urbanization are placing considerable strains on infrastructure around the world. Advanced industrial economies like the United States and Western Europe are focusing on repair and replacement of their aging infrastructures. But the developing world faces the more daunting task of creating new transportation, communication, water, and energy networks to foster economic growth, improve public health systems, and reduce poverty.

Infrastructure development is a vital component in encouraging a country's economic growth. Developing infrastructure enhances a country's productivity, consequently making firms more competitive and boosting a region's economy. Not only does infrastructure in itself enhance the efficiency of production, transportation, and communication, but it also helps provide economic incentives to public and private sector participants. The accessibility and quality of infrastructure in a region help shape domestic firms' investment decisions and determines the region's attractiveness to foreign investors.

A bumpy road toward prosperity

This relationship between infrastructure development and economic growth has not gone unnoticed by the world's two most populous countries, China and India, which have a combined population of almost 2.5 billion. The experience of these two rapidly growing nations illustrates how different the paths to growth can be.

For the most part, India has forgone the typical manufacturing export-led path to development and instead focused on its service sector. Although India has been very successful in information technology services and business-processing exports, its inadequate and dilapidated infrastructure has held back growth in the manufacturing sector.

The living standards in China, as measured by GDP per capita, overtook those in India more than 15 years ago. Since that time the Chinese economy has grown nearly twice as fast as India's, and its GDP per capita is now more than double India's. Investment in infrastructure is recognized as one of the main ingredients of China's success.

In her book The Elephant and the Dragon, Robyn Meredith writes that, beginning in the 1980s, China built new coal mines to supply electricity plants. The country developed a modern power grid, nearly quadrupling the capacity of its generators between 1990 and 2003. China is currently building nuclear power plants, hoping to triple the amount of power it generates by 2020.

China's most visible infrastructure investment, however, has been in roads and highways. By 2020 China plans to build 55,000 miles of highways, more than the total length of the U.S. interstate system, which was 46,385 miles in 2004, according to the Federal Highway Administration.

Overall, China's new infrastructure, coupled with probusiness policies and cheap labor, has made the country a very attractive market for foreign direct investment (FDI). According to the Economist Intelligence Unit, by 2011 China will be the third-largest global recipient of FDI, after the United States and the United Kingdom. Better infrastructure is one reason why China attracted nearly four times more FDI in 2006 ($78 billion) as India ($19.7 billion). In 2005 China spent 9 percent of GDP on infrastructure compared to India's 3.6 percent of GDP.

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India's government has recently acknowledged that its growth has been constrained by low levels of infrastructure development, and it is now looking to catch up with China. India's finance minister estimates that the country's inadequate infrastructure has restricted economic growth by 1.5 to 2 percent per year. India's central bank recently reported that "infrastructure bottlenecks are emerging as the single most important constraint on India's economy."

The country's manufacturing sector is held back by relatively inefficient and high-cost infrastructure--roads, railways, airports, ports, and electricity. …

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