Economies cannot develop without good infrastructure. But when it comes to government investment programmes, it is all too easy to waste money. That is the conclusion of a new study from an International Monetary Fund researcher. Without careful analysis and controls, cost-boosting regulations and giveaways will drain value away.
Public investment surges have long been popular among economists, specially those specialising in development. Growth too slow? Build a few ports, rail lines and highways, and GDP growth will start. Not so, suggests the IMF research, which covered large and sustained increases in public investment in 124 low and middle income countries between 1960 and 2011, focusing on 18 episodes in 15 countries.
The study found that large infrastructure surges do increase GDP in the short-term - largely because GDP includes all public spending. But over the longer term, there was on average no increase in output and no increase in productivity. Indeed, in some countries massive infrastructure spending actually seems to have diminished economic welfare.
The main problem is that so much of the spending is wasteful. Governments in poor countries rarely have the competence needed to manage many massive projects at once. They are usually too easily co-opted by rich families, contractors, labour unions and other special interest groups. Also, many leaders prefer prestige projects to more mundane investments which might do more good.
The sad result is too many projects are ill-conceived, much money is siphoned through corruption, and the country ends up with assets it can't use efficiently. Even when the funds for the surges come without effort - aid, cheap loans or resource royalties - the nation loses out.
The IMF research points out that the economies which have sustained strong GDP growth for decades have invested steadily as they developed. But the report offers a glimmer of hope for carefully planned surges. Very poor Ethiopia's infrastructure investment boom between 1999 and 2011 seems to have been beneficial. The government may have been following the study's advice: "Do not behave as in the past."
Public investment surges have long been popular among economists, specially those specialising in development. Growth too slow? Build a few ports, rail lines and highways, and GDP growth will start. Not so, suggests the IMF research, which covered large and sustained increases in public investment in 124 low and middle income countries between 1960 and 2011, focusing on 18 episodes in 15 countries.
The study found that large infrastructure surges do increase GDP in the short-term - largely because GDP includes all public spending. But over the longer term, there was on average no increase in output and no increase in productivity. Indeed, in some countries massive infrastructure spending actually seems to have diminished economic welfare.
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The sad result is too many projects are ill-conceived, much money is siphoned through corruption, and the country ends up with assets it can't use efficiently. Even when the funds for the surges come without effort - aid, cheap loans or resource royalties - the nation loses out.
The IMF research points out that the economies which have sustained strong GDP growth for decades have invested steadily as they developed. But the report offers a glimmer of hope for carefully planned surges. Very poor Ethiopia's infrastructure investment boom between 1999 and 2011 seems to have been beneficial. The government may have been following the study's advice: "Do not behave as in the past."