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Infrastructure-based economic development, also called infrastructure-driven development, combines key policy characteristics inherited from the
Roosevelt Roosevelt may refer to: *Theodore Roosevelt (1858–1919), 26th U.S. president * Franklin D. Roosevelt (1882–1945), 32nd U.S. president Businesses and organisations * Roosevelt Hotel (disambiguation) * Roosevelt & Son, a merchant bank * Rooseve ...
ian progressivist tradition and
neo-Keynesian economics The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a neoclassical economics academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Key ...
in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
, France's
Gaullist Gaullism (french: link=no, Gaullisme) is a French political stance based on the thought and action of World War II French Resistance leader Charles de Gaulle, who would become the founding President of the Fifth French Republic. De Gaulle with ...
and neo- Colbertist centralized economic planning, Scandinavian
social democracy Social democracy is a political, social, and economic philosophy within socialism that supports political and economic democracy. As a policy regime, it is described by academics as advocating economic and social interventions to promote s ...
as well as
Singapore Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, bor ...
an and Chinese
state capitalism State capitalism is an economic system in which the state undertakes business and commercial (i.e. for-profit) economic activity and where the means of production are nationalized as state-owned enterprises (including the processes of capital ...
: it holds that a substantial proportion of a nation’s resources must be systematically directed towards long term assets such as
transportation Transport (in British English), or transportation (in American English), is the intentional movement of humans, animals, and goods from one location to another. Modes of transport include air, land (rail and road), water, cable, pipeline, ...
,
energy In physics, energy (from Ancient Greek: ἐνέργεια, ''enérgeia'', “activity”) is the quantitative property that is transferred to a body or to a physical system, recognizable in the performance of work and in the form of hea ...
and social infrastructure (schools, universities, hospitals…) in the name of long term economic efficiency (stimulating growth in economically lagging regions and fostering technological innovation) and
social equity Social equity is concerned with justice and fairness of social policy. Since the 1960s, the concept of social equity has been used in a variety of institutional contexts, including education and public administration. Overview Definitions of so ...
(providing free education and affordable healthcare). While the benefits of infrastructure-based development can be debated, the analysis of US economic history shows that at least under some scenarios infrastructure-based investment contributes to economic growth, both nationally and locally, and can be profitable, as measured by higher rates of return. The benefits of infrastructure investment are shown both for old-style economies (ports, highways, railroads) as well as for the new age (
high speed rail High-speed rail (HSR) is a type of rail system that runs significantly faster than traditional rail, using an integrated system of specialised rolling stock and dedicated tracks. While there is no single standard that applies worldwide, lines ...
, airports, telecommunications, internet...).


Aschauer's model and other academic approaches

According to a study by D. A. Aschauer,Aschauer, David Alan (1990). “Why is infrastructure important?” Federal Reserve Bank of Boston, New England Economic Review, January/February, pp. 21-48. there is a positive and statistically significant correlation between investment in infrastructure and economic performance. Furthermore, the infrastructure investment not only increases the quality of life, but, based on the time series evidence for the post-World War II period in the United States, infrastructure also has positive impact on both labor and
multifactor productivity In economics, total-factor productivity (TFP), also called multi-factor productivity, is usually measured as the ratio of aggregate output (e.g., GDP) to aggregate inputs. Under some simplifying assumptions about the production technology, growt ...
. The multifactor productivity can be defined as the variable in the output function not directly caused by the inputs, private and public capital. Thus, the impact of infrastructure investment on multifactor productivity is important because the higher multifactor productivity implies higher economic output and hence higher growth. In addition to Aschauer’s work, Munnell’s paperMunnell, Alicia (1990). "Why has Productivity Growth Declined? Productivity and Public Investment.", Federal Reserve Bank of Boston, New England Economic Review, January/February, pp. 3-20. supports the point that infrastructure investment improves productivity. Munell demonstrates that the decrease in multifactor productivity growth during the 1970s and 1980s relative to the 1950s and 1960s is due to the decrease of public capital stock rather than the decline in
technological progress Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, science, ...
. By showing that public capital plays an important role in private sector production, Munnell helps Aschauer establish that infrastructure investment was a key factor to “the robust performance of the economy in the ‘golden age’ of the 1950s and 1960s.” To prove his point, Aschauer builds a model, using the data for the time period from 1953 to 1988, to simulate the effect of higher public investment on the aggregate economy. His simulation shows that, on net, the increased investment in core infrastructure might have greatly improved the performance of the economy. Aschauer uses the
production function In economics, a production function gives the technological relation between quantities of physical inputs and quantities of output of goods. The production function is one of the key concepts of mainstream neoclassical theories, used to define ...
Y= F(K,G,N,Z)=ZK^G^N^, where: * ''Y'' = level of output * ''K'' = private fixed capital * ''G'' = level of government productive services * ''N'' = population or labor force * ''Z'' = index of technological progress * α and β are constants determined by available technology. He estimates the production function relation using the average data from 1965 to 1983 for the 50 states. This enables Aschauer to conclude that the level of per capita output is positively and significantly related to core infrastructure investments, in other words, an increase in the core infrastructure investments leads to an increase in the level of per capita output. However, infrastructure has positive impact not just on the national level. By implementing the
cross-sectional study In medical research, social science, and biology, a cross-sectional study (also known as a cross-sectional analysis, transverse study, prevalence study) is a type of observational study that analyzes data from a population, or a representative su ...
of communities in one state, Janet Rives and Michael Heaney confirm “the links identified in national level studies between infrastructure and economic development”Rives and Heaney (1995). "Infrastructure and Local Economic Development" Journal of Monetary Economics, vol. 25, no. 1, pp. 58-73. are also present locally. Because infrastructure enters the production function and increases the value of urban land by attracting more firms and house construction, the core infrastructure also has a positive effect on economic development locally. According to an overview of multiple studies by Louis Cain,Cain, Louis (1997). “Historical perspective on infrastructure and US economic development” Regional Science and Urban Economics, vol. 27, pp. 117-138. the infrastructure investments have also been profitable. For example, Fogel estimated the private rate of return on the
Union Pacific Railroad The Union Pacific Railroad , legally Union Pacific Railroad Company and often called simply Union Pacific, is a freight-hauling railroad that operates 8,300 locomotives over routes in 23 U.S. states west of Chicago and New Orleans. Union Paci ...
at 11.6%, whereas the social rate that accounts for social benefits, such as improved firm efficiencies and government subsidies, was estimated at 29.9%. In another study, Heckelman and Wallis estimated that the first 500 miles of railroad in a given state led to major increases in property values between 1850 and 1910. They calculated the revenue gain from the land appreciation to be $33,000-$200,000 per mile, while construction costs were $20,000-$40,000 per mile. Hence, on average the revenue from construction of a new railroad outweighed the costs. While initial construction returns were high, the profitability diminished after the first 500 miles. Even though the revenue streams on infrastructure construction investment fall due to diminishing returns,
Edward Gramlich Edward M. Gramlich (June 18, 1939 – September 5, 2007) was an American economist who served as a member of the Federal Reserve Board of Governors from 1997 to 2005. Gramlich was also an acting director of the Congressional Budget Office. G ...
indicates that the rate of return on new construction projects was estimated at 15%. Furthermore, the rate of return on maintenance of current highways was estimated at 35%. It means that even without further new construction, the investment in the maintenance of the core infrastructure is very profitable. Roller and Waverman,Röller and Waverman (2001). “Telecommunications Infrastructure and Economic Development: A Simultaneous Approach” The American Economic Review, vol. 91, no. 4, pp. 909-923. utilizing data for 21
OECD The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
countries, including US, over a 20-year period, from 1970 to 1990, examined the relationship between telecommunications infrastructure investments and economic performance. They used a supply-demand micro-model for telecommunications investments jointly with the macro production equation, accounting for country-specific fixed effects as well as simultaneity. They conclude that there is a causal relationship between telecommunications infrastructure investment and aggregate output. Shane Greenstein and Pablo T. Spiller examined the effects of telecommunication infrastructure on economic performance in the United States. They conclude that infrastructure investment accounts for a significant fraction of the growth in consumer surplus and business revenue in telecommunications services, both of which indicate the growth in economic performance.


The 'China way'


An alternative development path?

Some European and Asian economists suggest that “ infrastructure-savvy economies” such as
Norway Norway, officially the Kingdom of Norway, is a Nordic country in Northern Europe, the mainland territory of which comprises the western and northernmost portion of the Scandinavian Peninsula. The remote Arctic island of Jan Mayen and the ...
,
Singapore Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, bor ...
and China have partially rejected the underlying Neoclassical “financial orthodoxy” that used to characterize the ‘Washington Consensus’ and initiated instead a pragmatist development path of their own based on sustained, large-scale, government-funded investments in strategic infrastructure projects: “Successful countries such as
Singapore Singapore (), officially the Republic of Singapore, is a sovereign island country and city-state in maritime Southeast Asia. It lies about one degree of latitude () north of the equator, off the southern tip of the Malay Peninsula, bor ...
,
Indonesia Indonesia, officially the Republic of Indonesia, is a country in Southeast Asia and Oceania between the Indian and Pacific oceans. It consists of over 17,000 islands, including Sumatra, Java, Sulawesi, and parts of Borneo and New Guine ...
and
South Korea South Korea, officially the Republic of Korea (ROK), is a country in East Asia, constituting the southern part of the Korean Peninsula and sharing a land border with North Korea. Its western border is formed by the Yellow Sea, while its eas ...
still remember the harsh adjustment mechanisms imposed abruptly upon them by the IMF and World Bank during the 1997-1998 ‘Asian Crisis’ ��What they have achieved in the past 10 years is all the more remarkable: they have quietly abandoned the “Washington consensus” by investing massively in infrastructure projects ��this pragmatic approach proved to be very successful.” Research conducted by the World Pensions Council (WPC) suggests that while China invested roughly 9% of its GDP in infrastructure in the 1990s and 2000s, most Western and non-Asian emerging economies invested only 2% to 4% of their GDP in infrastructure assets. This considerable investment gap allowed the Chinese economy to grow at near optimal conditions while many
South American South America is a continent entirely in the Western Hemisphere and mostly in the Southern Hemisphere, with a relatively small portion in the Northern Hemisphere at the northern tip of the continent. It can also be described as the southe ...
, South Asian and
Africa Africa is the world's second-largest and second-most populous continent, after Asia in both cases. At about 30.3 million km2 (11.7 million square miles) including adjacent islands, it covers 6% of Earth's total surface area ...
n economies suffered from various development bottlenecks: poor transportation networks, aging power grids, inadequate school facilities, among other issues.


Asian Infrastructure Investment Bank and 'One Belt, One Road'

The Beijing-based Asian Infrastructure Investment Bank (AIIB) established in July 2015 and corollary
One Belt, One Road The Belt and Road Initiative (BRI, or B&R), formerly known as One Belt One Road ( zh, link=no, 一带一路) or OBOR for short, is a global infrastructure development strategy adopted by the Chinese government in 2013 to invest in nearly 150 ...
Chinese-led initiative demonstrate the PRC government’s capacity to garner the financial and political resources needed to "export" their economic development model, notably by persuading neighboring Asian nations to join AIIB as founding members: “''as Asia (excluding China) will need up to $900bn in infrastructure investments annually in the next 10 years (which means there’s a 50% shortfall in infra spending in the continent), many''
sian Sian or Siyan may refer to: __NOTOC__ People *Siân, a Welsh girl's name; list of people with this name Places *Sian, Iran (disambiguation), various places in Iran *Sian, Russia, a rural locality in Amur Oblast, Russia *Xi'an, China, formerly roman ...
''heads of state'' ��''gladly expressed their interest to join this new international financial institution focusing solely on ‘real assets’ and infrastructure-driven economic growth.''”


Recent developments in North America and the EU

In the West, the notion of
pension fund investment in infrastructure Infrastructure as an asset class Although traditionally the preserve of governments and municipal authorities, infrastructure has recently become an asset class in its own right for private-sector investors, most notably pension funds. Histori ...
has emerged primarily in Australia and
Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
in the 1990s notably in
Ontario Ontario ( ; ) is one of the thirteen provinces and territories of Canada.Ontario is located in the geographic eastern half of Canada, but it has historically and politically been considered to be part of Central Canada. Located in Central C ...
and
Quebec Quebec ( ; )According to the Canadian government, ''Québec'' (with the acute accent) is the official name in Canadian French and ''Quebec'' (without the accent) is the province's official name in Canadian English is one of the thirtee ...
and has attracted the interest of policy makers in sophisticated jurisdictions such as
California California is a state in the Western United States, located along the Pacific Coast. With nearly 39.2million residents across a total area of approximately , it is the most populous U.S. state and the 3rd largest by area. It is also the m ...
, New York, the
Netherlands ) , anthem = ( en, "William of Nassau") , image_map = , map_caption = , subdivision_type = Sovereign state , subdivision_name = Kingdom of the Netherlands , established_title = Before independence , established_date = Spanish Netherl ...
,
Denmark ) , song = ( en, "King Christian stood by the lofty mast") , song_type = National and royal anthem , image_map = EU-Denmark.svg , map_caption = , subdivision_type = Sovereign state , subdivision_name = Kingdom of Denmark , establish ...
and the UK. In the wake of the
Great Recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
that started after 2007, liberal and Neo-Keynesian economists in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
have developed renewed arguments in favor of “
Roosevelt Roosevelt may refer to: *Theodore Roosevelt (1858–1919), 26th U.S. president * Franklin D. Roosevelt (1882–1945), 32nd U.S. president Businesses and organisations * Roosevelt Hotel (disambiguation) * Roosevelt & Son, a merchant bank * Rooseve ...
ian” economic policies removed from the ‘Neoclassical’ orthodoxy of the past 30 years- notably a degree of federal stimulus spending across
public infrastructure Public infrastructure is infrastructure owned or available for use by the public (represented by the government). It is distinguishable from generic or private infrastructure in terms of policy, financing, purpose, etc. Public infrastructure is ...
s and social services that would “benefit the nation as a whole and put America back on the path to long term growth”. Similar ideas have gained traction amongst IMF,
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
and
European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
policy makers in recent years notably in the last months of 2014/early 2015: Annual Meetings of the International Monetary Fund and the World Bank Group (October 2014) and adoption of the €315 bn European Commission Investment Plan for Europe (December 2014).


Kazakhstan's infrastructure development program

The Nurly Zhol plan or 'New Economic Policy', announced on 11 November 2014 during Kazakhstan President’s State of the Nation Address, introduced a number of measures aimed at developing country's infrastructure in order to sustain economic growth. The Nurly Zhol program applies to such sectors of infrastructure as transport and logistic, tourism, housing and communal services, education, support of export, agriculture, etc.


Trump’s 'America First' Infrastructure Plan

In May 2015, one month before launching his presidential campaign, Donald Trump expressed his desire to "fix" America's aging infrastructure. He views the modernization of American infrastructure as an extension of his career as a real estate developer and a concrete item to add to his legacy as President. He also considers infrastructure investments a tool to create jobs and to spur economic growth. A key aspect of this policy is that it relegates primary funding responsibility to local authorities and the private sector. Trump's aim with this funding policy is to realize his promise during the 2016 presidential campaign to bring jobs to rural areas, where employment prospects have been dim, and to transfer wealth from states that tend to vote Democrat to those that helped him win the election. On June 20, 2017, at the SelectUSA Investment Summit in Washington, Treasury Secretary Steven Mnuchin said that financial help from foreign investors will probably be necessary in order for President Trump's $1 trillion infrastructure plan to "upgrade U.S. roads, bridges, airports and other public works", to succeed. Trump's successful presidential bid was to a large extent based on an ‘unorthodox’ economic plank bringing together
supply-side Supply-side economics is a macroeconomic theory that postulates economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade. According to supply-side economics, consumers will benefit fr ...
policies and infrastructure-based development planning: “the deliberate neglect of America’s creaking infrastructure assets (notably public transportation and water sanitation) from the early 1980s on eventually fueled a widespread popular discontent that came back to haunt both Hillary Clinton and the Republican establishment. Donald Trump was quick to seize on the issue to make a broader slap against the laissez-faire complacency of the federal government: ‘when I see the crumbling roads and bridges, or the dilapidated airports or the factories moving overseas to Mexico, or to other countries for that matter, I know these problems can all be fixed’ (June 22, 2016 New York Speech: ‘We Will Build the Greatest Infrastructure on the Planet Earth’).” This unconventional (by American standards) policy mix favoring renewed federal government involvement in infrastructure investment and co-investment across the board (at national, state, municipal and local level) is known as Trumponomics. On January 31, 2019, President Trump issued an executive order encouraging the purchase of U.S.-made construction materials for public infrastructure projects, especially those that need funding from the federal government.Donald J. Trump
Executive Order on Strengthening Buy-American Preferences for Infrastructure Projects
Issued January 31, 2019.
This followed his 2017 "Buy American, Hire American" executive order restricting the hiring of foreign workers and tightening standards for federal acquisitions. As of February 2019, Canadian officials were negotiating an exemption for their country.Trump orders agencies to buy U.S.-made steel, aluminum and cement 'to the greatest extent' possible
''Financial Post''. February 7, 2019. Accessed February 11, 2019.
President Donald Trump's position with regards to energy independence is similar to that of his predecessors dating back to the 1970s. President Barack Obama, his immediate predecessor, lifted a 40-year old ban on oil exports and granted over two dozen liquefied-natural-gas-export licenses. Trump's goal is to achieve "energy dominance," or the maximization of the production of fossil fuels for domestic use and for exports.


Reliance on “infrastructure as an asset class” for private investors

Donald Trump's policies aim at harnessing private capital to leverage government spending on infrastructure at federal, state and local level. This approach relies on the notion of “infrastructure as an asset class” for institutional investors, which was initially developed in Northern Europe, Canada and Australia


Blackstone-Saudi Arabia infrastructure fund

On May 20, 2017, during President Donald Trump's official state visit to Saudi Arabia, he signed a $110 billion arms deal with Saudi Arabia;
Saudi Arabia Saudi Arabia, officially the Kingdom of Saudi Arabia (KSA), is a country in Western Asia. It covers the bulk of the Arabian Peninsula, and has a land area of about , making it the fifth-largest country in Asia, the second-largest in the A ...
and the
United Arab Emirates The United Arab Emirates (UAE; ar, اَلْإِمَارَات الْعَرَبِيَة الْمُتَحِدَة ), or simply the Emirates ( ar, الِْإمَارَات ), is a country in Western Asia ( The Middle East). It is located at t ...
announced they would "donate a combined $100 million to a
World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
fund for women entrepreneurs", a project inspired by
Ivanka Trump Ivana Marie "Ivanka" Trump (; born October 30, 1981) is an American businesswoman and the first daughter of Donald Trump, 45th president of the United States from 2017 to 2021. She was a senior advisor in his administration, and also was the ...
; and Saudi Arabia "joined forces" with
The Blackstone Group Blackstone Inc. is an American alternative investment management company based in New York City. Blackstone's private equity business has been one of the largest investors in leveraged buyouts in the last three decades, while its real estate b ...
, a global
private equity In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...
firm to "build a $40 billion war chest to privatize U.S. infrastructure". Blackstone's CEO is Stephen Schwarzman, leads Trump's business council, "advising him on "policy issues ranging from trade to infrastructure", unveiled a $40 billion fund which will primarily invest in infrastructure in the United States. Blackstone, which has "$360 billion in assets" is entering into infrastructure projects in which "large investors" plant "their money into the cogs of the global economy such as toll roads, airports, public works, buildings, ports, wireless infrastructure, pipelines, and railroads". Saudi Arabia will provide $20 billion from its Private Investment Fund (PIF) towards the Blackstone infrastructure fund. Limited partners will contribute $20 billion. "With debt financing, Blackstone hopes eventually to bring the total to $100 billion" in "total infrastructure investments on a leveraged basis".


Biden's Infrastructure Bill


Unprecedented public funding

The Infrastructure Investment and Jobs Act, also known as the Bipartisan Infrastructure Bill, is a United States federal statute enacted by the 117th United States Congress and signed into law by President Joe Biden on November 15, 2021. It includes approximately $1.2 trillion in new spending, unlocking unprecedented funding for transportation, broadband, and utilities across the United States.


Geoeconomic considerations

Chinese state media, which had largely ignored the preceding policy debates on Capitol Hill, mocked the newly passed infrastructure bill as a "feeble imitation" of their nation's accomplishments: "the Global Times, a newspaper produced by the ruling
Chinese Communist Party The Chinese Communist Party (CCP), officially the Communist Party of China (CPC), is the founding and sole ruling party of the People's Republic of China (PRC). Under the leadership of Mao Zedong, the CCP emerged victorious in the Chinese Civil ...
, criticized the Infrastructure Investment and Jobs Act in an cerbiceditorial." Commenting on the passage of the bill, the Hon. Nick Sherry and other experts from the Singapore Economic Forum have argued that the Infrastructure Bill is a reflection of the bipartisan if belated realisation in America that China is outpacing the United States on infrastructure after four decades of neoliberal neglect:


See also

* Circular economy * New Deal *
Green New Deal Green New Deal (GND) proposals call for public policy to address climate change along with achieving other social aims like job creation and reducing economic inequality. The name refers back to the New Deal, a set of social and economic refo ...
*
Chinese economic reform The Chinese economic reform or reform and opening-up (), known in the West as the opening of China, is the program of economic reforms termed " Socialism with Chinese characteristics" and " socialist market economy" in the People's Republic of ...
* Belt and Road Initiative *
Infrastructure and economics Infrastructure (also known as "capital goods", or "fixed capital") is a platform for governance, commerce, and economic growth and is "a lifeline for modern societies".Esmaeili, Behzad, et al. "Inclusion of an Introduction to Infrastructure Course ...
*
Public infrastructure Public infrastructure is infrastructure owned or available for use by the public (represented by the government). It is distinguishable from generic or private infrastructure in terms of policy, financing, purpose, etc. Public infrastructure is ...
*
Hierarchy theory Hierarchy theory is a means of studying ecological systems in which the relationship between all of the components is of great complexity. Hierarchy theory focuses on levels of organization and issues of scale, with a specific focus on the role of ...
*
Scale (analytical tool) In the study of complex systems and hierarchy theory, the concept of scale refers to the combination of (1) the level of analysis (for example, analyzing the whole or a specific component of the system); and (2) the level of observation (for examp ...


References

{{Reflist Economic development policy Economic ideologies Infrastructure Political ideologies Public policy Social democracy Social inequality Social philosophy