Tag Archives: Fiscal Stimulus

Does infrastructure equal jobs? Not Really.

Even though countries invested heavily in infrastructure in the 19th and much of the 20th centuries, studies on the impacts of infrastructure on economic development have been inconclusive at best. Even when development economics began as a separate branch of economics, infrastructure continued to be referred to as a social overhead and often lumped as a source of technological change. Infrastructure continued to be ignored until 1989, when David Aschauer provided empirical analysis to explain the slowdown in US productivity with the slow down in infrastructure investments. Gramlich (1994) described Aschauer as hitting the magic button: “Aschauer’s papers were followed by an unusual amount of attention to infrastructure from politicians and economists.”

Twenty years have passed since Aschauer’s work, but it is still very difficult to establish clear links between infrastructure investments and economic growth or sustained employment. However, this fact has not stopped politicians from continuing to rediscover investments in infrastructure because of the promise of jobs – the firm belief that infrastructure equals jobs.

In January 2009, Christina Romer and Jared Bernstein projected that a $775 billion stimulus package would deliver 3.67 million jobs to America, i.e., a hefty price tag of over $210,000 per job. This number could not be taken seriously since there was a lot of uncertainty surrounding the structure of the stimulus package at that time. The same month, the Political Economy Research Institute and the Alliance for American Manufacturing provided detailed data on jobs likely to be created by investing in infrastructure. According to the study, each billion in infrastructure investment would result in 9,819 to 17,784 jobs, depending on the sub-sectors. This implied a much more modest expenditure of $56,000 to $100,000 for each job-year created. Their recommendation was to invest, on an annual basis, $87-$148 billion for the next five years to rebuild America’s crumbling infrastructure. The American Recovery and Reinvestment Act of 2009 (ARRA) allocated more than $150 billion so that infrastructure investments of this level would create the much-needed jobs for the construction and manufacturing industries.

The latest report of the Council of Economic Advisors (CEA) estimates that overall spending under ARRA has now stabilized at the rate of $85 billion per quarter and in their counter-factual world, the program is on track, generating overall GDP growth at the rate of 1.8% to 3.8%. Nearly two million jobs were saved or created as well in 2009. Several other forecasts had similar results too. In reality however, actual direct jobs created or saved was about 640,000 and only a very small part, just about seven percent in infrastructure sectors.

And this should come as no surprise. The relationship between growth and investment changes with the level of infrastructure. At lower levels of provision, infrastructure investments have strong positive effects on long-term economic growth, employment, market expansion, and competitiveness. The US’s own experience showed that once the inter-state highway network was completed, additional productivity gains from new roads were insignificant. It is perhaps not correct to follow the Chinese or the Indian models of infrastructure development in the US at this stage because overall impacts are so context specific. It is very difficult to see a lack of infrastructure investments as a major source of loss of competitiveness. After all, the US holds second position on global competitiveness and has a very large stock of infrastructure assets.

The time has come to de-link infrastructure investments from the job-creation program, which only leads to inefficiencies and over-provision. A better, more accountable policy framework and basic cost-benefit analysis may help to select the right projects that will generate long-term global benefits. Investing in energy efficient transport may take much longer to plan, but is essential to ensure that the billions spent will not be in vain. A series of disparate shovel-ready projects will meet expenditure targets, but will deliver neither the jobs nor the long-term productivity gains the US needs so badly.

Infrastructure Matters. As a Fiscal Stimulus?

Ask a set of housewives braving summer in Delhi without reliable power or a group of people carting a heavy load of kerosene on their back, walking on narrow mountain lanes for two days to light small lamps in their homes in Nepal. The simple answer is – infrastructure matters. About half of infrastructure generates services that are directly used by people: the other half is used to produce goods and services. A more precise way of stating the obvious is that infrastructure matters for modern life and infrastructure matters to improve production efficiencies in the economy. Infrastructure matters for economic development.

Precisely because of this, the next few years will see a global boom in infrastructure: everywhere governments seem to see infrastructure spending as their way out of the current recession. The US expects to spend $150 billion, China some $585 billion and India close to $500 billion. There is an implicit belief here that some $2 trillion spending on infrastructure will generate high impact in the next 24-60 months because of the underlying positive macroeconomic externalities: Large infrastructure spending will make industries and services more competitive globally in the medium- to long-term and it will create the much needed jobs immediately.

However nobody seems to worry about small details at this stage. Even though there is ample empirical evidence to show that infrastructure bottlenecks affect the growth potential of any region, positive linkages between infrastructure and growth rates are neither certain nor automatic. One must not forget that there are large and often undefined lags. It takes a fairly long time to identify and approve the right type of infrastructure projects. Once done, projects usually take a few years to build, and even when projects are completed, the final growth impacts are realized only in the long term. The previous experience of the great depression confirms this, at least in the US. Though a large part of public expenditure was spent on building highways, parks, water and sewage, schools and public building, creating jobs and building physical assets, it did not immediately lead to economic expansion. According to Michael Bernstein, “New Deal traditionally has been given high marks for its relief policies, and to an extent the same can be said for its reform components. But economic recovery was not one of its accomplishments.”

So why do people support investments in infrastructure without having any idea about linkages with economic growth and development? A simple answer is that what people value are services infrastructure provides, delivered reliably – and that too at a reasonable cost. Most also believe that governments need to ensure that these basic services are made available to citizens. At individual level, infrastructure is seen to be too complicated to worry about: i.e., the common citizen is not going to worry about these details. Politicians everywhere love infrastructure projects (well, almost everywhere) so there are not going to be many questions about these linkages from that quarter. Civil society groups ask these and many other questions, but most go unanswered. There are large lobbies, comprising associations, chambers of commerce, and others who support the infrastructure boom because it is good business. Academics usually debate about these important issues but often messages get lost in long and often frightening models. There is just not enough material available for meaningful public debates: for informed public debates, even less so.

Even if we agree that infrastructure matters for economic growth and development, at this juncture, debates should be about the efficacy of infrastructure spending as a fiscal policy tool. If creating jobs and stimulating aggregate demand is an important and immediate objective today, which infrastructure initiatives are best at delivering these outcomes? One year on, how many new jobs are actually created from these billions? These questions are important in their own right, but they are even more crucial because fast-flowing infrastructure money often end up in political rents, corruption, or at best, in unwanted projects.