The Necessity of Infrastructure Investment for Economic Prosperity

Author: Jahzara Phillip

       Infrastructure investment can be described as capital investments in transportation, utilities, buildings such as hospitals, environmental projects, and other physical assets that are imperative to a nation’s functioning and development. Although they are often expensive and capital-intensive, infrastructure investments are essential to the growth and prosperity of an economy. Infrastructure improvement projects can be financed by the government, the private sector, or public-private partnerships.

       Infrastructure can be categorized as hard or soft. Hard infrastructure is the tangible, physical assembly of structures such as roads, bridges, tunnels, and railways. It is the vast physical networks and systems necessary for a modern, industrialised, and productive country to operate. Soft infrastructure is the services required to maintain the economic, health, and social needs of a population.

       Telecommunications, transportation, and energy and water supply are a few examples of hard infrastructure that affect all persons in a society, from regular citizens to businesses to governments. For the proper functioning of a society, hard infrastructure as well as the resources and assets that utilise them, such as automobiles, buses, and aeroplanes, must be maintained. For example, the generation and storage of energy, as well as the systems that transport it and facilitate its distribution, must be maintained in the energy sector. When it comes to hard infrastructure, different countries may experience different issues. For instance, the absence of roads and other forms of transportation in developing nations may be an expensive obstacle to overcome. However, the problems arising from road infrastructure such as traffic back-ups and noise pollution in residential areas may be seen as a greater concern in developed nations which already have numerous established roads networks.

       Unlike hard infrastructure, soft infrastructure refers to the intangible functions that uphold a nation's health, economic, and social standards, such as laws and regulations, law enforcement, governmental/economic-systems, health services, educational initiatives, and financial services. The main goal of soft infrastructure is to provide and deliver specialised services to a nation’s population, which is dependent on large, developed facilities or institutions.

       “Infrastructure investment has been characterized as the mechanism that delivers the fundamental needs of society: food, water, energy, shelter, governance, etc. Without infrastructure, societies disintegrate and people die.” Adam Smith argued that fixed asset spending was the “third rationale for the state, behind the provision of defence and justice. ” Societies enjoy the use of highway, waterway, air, and rail systems that have allowed the unparalleled mobility of people and goods.

       For further examples, water-borne diseases are virtually non-existent in sufficiently developed countries because of water and wastewater treatment networks and collection systems. In addition, telecommunications and power systems communication and increases in worker productivity, which is imperative to economic growth of modern societies.

       Infrastructure projects stimulate the economy through job creation and can often take many months or years to complete. Thus, many of the workers on such projects receive relatively long-term employment and spend their income locally. Moreover, once completed, citizens benefit from such projects in ways that improve their productivity and efficiency, which can further improve an economy. For example, if citizens have better access to high speed and high-quality public transportation, or more efficient road networks, well-educated and skilled persons that may have been limited from accepting high paying and high skill jobs due to transportation and geographical constraints, would be liberated from such constraints and can contribute more effectively to their society and community. This not only benefits the economy at large, but has a very positive effect on the psychological health of an individual. Infrastructure investment can also be a useful tool for macroeconomic stabilization (ensuring that economic growth is stable and that citizens have access to the resources they need). At the microeconomic level, infrastructure investment can help improve enterprises’ efficiency by reducing their operating costs. A lack of proper quality infrastructure leads to a poor standard of living and low productivity.

       Infrastructure may be owned and managed by governments or by private companies, such as regulated monopolies which are common in the utility industry, who typically generate strong cash flows for essential services. Generally, most roads, major ports and airports, water distribution systems, and sewage networks, are publicly owned, whereas most energy and telecommunications networks are privately owned. Publicly owned infrastructure is typically paid for through taxes, tolls, or metered user fees. Whereas privately owned infrastructure projects are funded typically through the help of government subsidies, private investors, and through user fees which are bestowed onto the consumer. Major investment projects are largely financed by the issuance of long-term bonds. Additionally, National Development Banks (NDBs) are among the key institutions responsible for long-term financing of infrastructure projects in Latin America and the Caribbean.

       Keeping in mind the benefits of infrastructure investment, government institutions, contractors, and other stakeholders should also measure the estimated advantages and possible negatives when developing a new project. Many physical infrastructure projects, especially in developing countries or politically unstable nations, can be seen as just large vanity projects that are only being done to boost the image of the persons in power, and do not actually benefit citizens.

       Furthermore, many hard infrastructure projects, such as the building of highways or bridges, put significant pressure on the environment, such as destroying wetlands, drying river basins, and leaving communities vulnerable to flooding or drought. Therefore, a balance between estimated economic gain and ecological impact should be achieved to fully reap the benefits of infrastructure investments, which can leave our societies more resilient and prosperous.