The Role of Infrastructure in Economic Growth, Poverty Reduction, and Regional Integration

Researchers and policy makers have long sought to understand how infrastructure development can stimulate economic growth, reduce poverty, and promote regional integration. Two chapters of the Lincoln Institute book we edited, Infrastructure Economics and Policy: International Perspectives, seek to advance such an understanding in ways that can inform national or regional infrastructure plans. Three other chapters examine the effectiveness of alternative approaches to promoting economic growth through regional integration. 

Infrastructure and Economic Growth 

Chapter 2, written by former Lincoln Institute President Gregory K. Ingram and Zhi Liu, senior fellow and director of the China program at the Lincoln Institute, reviews empirical studies of the relationship between infrastructure and economic growth. They report that the estimated effects of infrastructure investment on economic growth vary significantly among countries and sectors, but are generally positive. These positive effects are larger in developing countries than developed countries, and larger in electricity and telecommunications than in transportation. Studies suggest that the performance or efficiency of infrastructure is a very important determinant of its economic impacts.  

Ingram and Liu also review the empirical analyses of the short-run multiplier effects of infrastructure investment. These analyses find little to no short-term economic impact, even when the long-term economic impacts are clearly positive. The small multipliers are due in part to the substantial time required to undertake and complete construction and in part to the crowding out of private investment by government investment. While the increased public spending for infrastructure investment can help reduce unemployment by creating jobs for low-skilled workers, many of today’s construction workers are in fact highly skilled. These findings suggest that the chance for such spending to boost the economy is very limited, especially in the short run. 

Infrastructure and Poverty Reduction 

In chapter 4, authors Sameh Wahba, Somik Lall, and Hyunji Lee of the World Bank analyze the global evidence and literature on the relationship between infrastructure and poverty. They argue that the poor suffer most from a lack of access to infrastructure networks, since they must spend a disproportionately higher share of their income to secure basic services such as water or electricity from costly tankers, bottles, and batteries. While access is typically higher in urban areas than rural areas, many of the urban areas in developing countries are struggling to keep up with the infrastructure demands of rapid urbanization.  

The global evidence and literature reviewed by the authors also shows that investments and policies that promote equality in access to physical infrastructure tend to reduce income and spatial inequalities. Moreover, the effectiveness of programs targeted on the infrastructure problems of the poor depends greatly on the details of their design. It helps if an improvement to physical infrastructure is coupled with complementary social policies, such as combining slum upgrading with reforms to dysfunctional land markets, pairing isolated rural electricity systems with the expansion of local educational or business opportunities, or matching basic sanitation facilities with public health or basic water programs. Similarly, when a new infrastructure facility or service is established, it is important to include a realistic plan for funding ongoing operations and maintenance. 

Infrastructure and Regional Integration 

In chapter 15, Professor Jose Manuel Vassallo of the Polytechnic University of Madrid examines the effectiveness of European Union infrastructure programs in fostering regional integration. In theory, EU members should have a strong interest in promoting integration, since many have relatively small populations and thus would benefit from the opportunities that integration offers to develop their competitive advantages or exploit economies of scale. Toward that end, in 1992 the EU members agreed to designate a trans-European network of priority transportation projects (TEN-T), which was subsequently divided into a “core” TEN-T network and a larger “comprehensive” TEN-T network. Similar trans-European networks for energy (TEN-E) and communications (eTEN) were also established. 

However, the outcomes of the TEN-T plans are mixed. There is some evidence of increased integration, but progress is disappointingly slow, in part because the EU is essentially a federal system in which the targeted facilities are owned by member states, and their priorities for improvements are not always the same as those of the EU. The EU has had to motivate the states to improve TEN-T facilities by offering special matching grants and other financial support. The need for such financial support has effectively increased the cost of the TEN-T to the EU and made it less likely to complete the core network by the 2030 deadline. 

Japan has been more successful in using infrastructure to promote regional integration. It is the first country to use high-speed passenger rail as a tool to shape regional development. Its rail services are widely admired for their scope, reliability, and safety. In chapter 16, Professor Fumitoshi Mizutani and Professor Miwa Matsuo, both of Kobe University, analyze the factors that have contributed to the railroads’ success. Japan is almost unique in the world in relying on railroad companies that are both privately owned and vertically integrated (meaning the railroad that owns the track also operates almost all the trains that run over it). Their success is also attributed to travelers seeking alternatives to congested airports and heavy volumes of automobile traffic concentrated in a few linear corridors, in addition to their excellence in service and development of innovative business models that exploit economies of scope and internalize externalities. The railroad companies, for example, are permitted to develop ancillary activities, like shopping malls in stations, that reduce their dependence on passenger revenues but also attract more passengers. Unlike the EU, the Japanese government builds and owns its high-speed lines and leases them to operators, with the lease fees based on the expected operating profits from each line. So far, the resources gained by innovation and vertical integration seem to have helped finance the cost of extending high-speed service to less dense corridors and more remote regions. 

China is similar to Japan in its reliance on high-speed rail as an important tool for shaping national development. The two countries differ, however, in that 92 percent of Japan’s population lives in urban areas, compared to 65 percent in China. As urbanization continues, the Chinese government has adopted a strategy to promote the formation and development of 19 enormous city clusters or megalopolises, each comprising several major cities linked with high-speed rail. This strategy can be seen as an effort to create a variety of opportunities to absorb rural migrants and improve urban worker productivity by encouraging various forms of agglomeration economies. If the rail service is sufficiently fast and convenient to encourage commuting among the cluster’s cities, then it will increase the effective size of the labor pool and help workers match their skills with employers. If each major city in the cluster is large enough to support a high degree of specialization, say, in trade, high-tech manufacturing, tourism, or finance, then it can support specialized suppliers as well. 

In chapter 17, Zheng Chang, a researcher with ETH Zurich, uses a case study of the Guangdong–Hong Kong–Macau Greater Bay Area (GBA) to demonstrate how high-speed rail contributes to city cluster formation by strengthening agglomeration economies. His empirical analysis of the GBA suggests that high-speed rail enhances agglomeration effects at the cluster level, but the gain in employment for the larger cities seems to come at the expense of the small ones. It is unclear, however, whether the agglomeration benefits of the city cluster strategy actually outweigh the costs in additional rail services. Gaining a more complete understanding of the effectiveness of the strategy will require further studies using a cost-benefit analysis framework.  

Three Lessons from the Case Studies 

The three case studies from the EU, Japan, and China demonstrate different approaches to and lessons about the use of infrastructure to promote regional integration. First, the EU case suggests that it is hard to achieve central infrastructure goals under a federal system of infrastructure provision, because the priorities of the member states are often different from those of the central government. Second, although Japan is unusual in its reliance on private and vertically integrated railroads, its experience demonstrates that regional plans can be implemented successfully by private providers overseen by the central government. Japanese private passenger railroads were the source of critical innovations that helped keep down the cost of providing an extensive and expanding rail system. Third, agglomeration economies can be harnessed by using infrastructure investments to promote the formation of city clusters, as in the case of China. But this bold strategy can be risky due to the heavy investments needed. The risks can be reduced if the strategy is subject to a rigorous cost-benefit analysis. 

José A. Gómez-Ibáñez is the Derek C. Bok Professor Emeritus of Urban Planning and Public Policy at Harvard University. Zhi Liu is senior fellow and director of China Program at the Lincoln Institute of Land Policy. They are the editors of Infrastructure Economics and Policy: International Perspectives. 

Image: Shinkansen high-speed rail line, Japan. Credit: gérard via Flickr.