Obsession with infrastructure

Published April 30, 2021
The writer is an economist and Research Fellow at PIDE.
The writer is an economist and Research Fellow at PIDE.

AT the inauguration of the first motorway in Pakistan, the then prime minister Nawaz Sharif proclaimed a dazzling future, with industrial cities that would sprout all along such motorways. In turn, these were to propel economic activity, create tremendous job opportunities, and lift Pakistan’s economy to lofty heights, finally achieving its dream of becoming an ‘Asian Tiger’.

I recalled this instance while watching Prime Minister Imran Khan bemoan the fact that his government had to pay back Rs3,500 billion on earlier loans, which otherwise his government would have spent on ‘infrastructure’ that could have taken Pakistan’s economy to dizzying heights.

But on-ground facts tell a different story. Even if the government had somehow managed to spend that much, it’s questionable what advantages it could have conferred upon the economy. To begin with, more than two decades after the first motorway, the system is in deficit; it has to be subsidised through public dole to stay put. No industrial city sprang up, let alone propel Pakistan’s economy to dizzying heights.

How, then, must a government look at infrastructure spending? It’s a ‘big-ticket’ item around the globe, and will remain so in the future. The standard assumption is that infrastructure investment would automatically boost the economy, especially in times of an economic slump (like the world including Pakistan is going through right now). But it’s not that straightforward actually. We need to understand the nuances and complexities.

How must a government look at infrastructure spending?

Let’s start by thinking about the vast infrastructure that our governments have erected over time in the power and communications — primarily roads — sector. In national income accounts, a power-sector building, machines, transmission lines and dams would surely push the numbers up. Similar is the case with roads. But that’s only a short-term, one-time boost.

Now let’s take the long-term view. At the moment, Pakistan’s power sector is saddled with a ‘circular debt’ of at least Rs2.5 trillion, aside from other liabilities. Similarly, the NHA, the authority overseeing road and highway construction, is under heavy debt and unlikely to survive without generous public dole. At the same time, road expansion and construction add to the existing congestion and air pollution, creating severe health-related liabilities (note, though, that the financial difficulties in these sectors never affect the perks enjoyed by its employees).

Simply put, the economy and its participants take on a long-term fiscal burden (infrastructure is financed by taxpayer money) for a short-term gain. Sounds counter-intuitive, doesn’t it? It also gives us simple cost-benefit criteria: one has to measure gains against liabilities — present and future — to decide the feasibility of pursuing particular infrastructure projects.

Please also note that in an over-regulated economy like ours, where the government footprint is quite substantial, I’ve only mentioned two sectors. Just imagine the numbers when you start counting and analysing all.

So why is this brick-and-mortar infrastructure costing us so much? And what would a good infrastructure project look like? To answer the first question, consider what two renowned economists, Larry Summers (‘A lesson in infrastructure from the Anderson Bridge fiasco’) and Edward Glaeser (‘If you build it’) have to say. An astonished Summers wonders how a society can regress to the extent that a bridge taking hardly a year to build a century ago now took five times as long just to repair. Similarly, Glaeser questions the belief that more than $1 trillion would automatically bring prosperity. For both of them, excessive regulation, excessive paperwork, NOCs, permits, lots of bureaucracy and a plethora of government agencies ensured that the purported benefits accruing to an economy are doubtful, and that these factors make infrastructure projects unnecessarily and extremely expensive. Bureaucratic set-ups with Byzantine regulations are a common factor in many other findings. For anybody even remotely aware of Pakistani bureaucracy’s workings, this would sound familiar.

To answer the second question, we turn to recent research by Hayakawa, Koster, Tabuchi and Thisse (‘How high-speed rail changes the spatial distribution of economic activity’). Technical details aside, they found that significant economic advantages are conferred by high-speed trains in Japan (an expensive infrastructure endeavour) that the roads cannot confer. That’s because their design ensures sustaining of economic production networks in localities, aiding business-to-business interaction, plus taking advantage of agglomeration economies offered by dense settlements. Hence, an expensive infrastructure investment paid off because it spurred economic activity to the extent that it pays off more than the invested sum.

Let’s then ask the obvious: can infrastructure spending spur Pakistan’s economy? Given the evidence, the answer is a classic two-liner attributed to economists: it depends! A country can invest billions of dollars on brick-and-mortar infrastructure (the ‘hardware’), as in Pakistan’s case, only to find that such ventures create long-term liabilities. Or a country can spend to facilitate ideas that can spur innovation and productivity (‘software’), whose positive spillovers tend to continue over time (ideas like internet, stocks and bonds, printing press, etc.).

Time, then, for Pakistan to shift gear and think differently as it’s in the process of erecting another $62bn brick-and-mortar infrastructure under CPEC. Yet, for anybody who has dealt with government agencies or travelled across Pakistan, they would have surely observed the large amount of infrastructure lying unused, but still regularly gobbling up taxpayer money (airports, railway stations, etc.). The fact is that state-led management of infrastructure has proven to be a great guzzler of financial resources in Pakistan because its designers, approvers and handlers — mainly the bureaucracy) is just not up to the task, and is ill-equipped technically and mentally to pursue such grandiose schemes. The ravages of episodes like Karkay, Reko Diq, etc, and the huge fiscal burden of building and keeping infrastructure intact should diminish any doubts regarding this claim.

We thus need a strategy to reflect where we are lacking and how the economy can transform for good, whether it’s infrastructure or other aspects. And for anyone serious about this transformation, PIDE’s Rapid Growth Strategy points the way.

The writer is an economist and Research Fellow at PIDE.

shahid.mohmand@gmail.com

Published in Dawn, April 30th, 2021

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