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BW Businessworld

Book Extract: Congestion Chaos

Why transportation infrastructure is key to economic growth

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In some African cities, traffic police who engage in petty corruption by routinely stopping motorists to obtain cash from them are known for their ability to come up with endless justifications for doing so. The goal of these rogue cops is not to catch bad drivers who commit traffic violations but to find ways to squeeze money from whomever they stop. After randomly pulling motorists over and checking first that they do not have political connections or are not a high-level authority, they search for an infraction with which to cite the driver—if the driver is unwilling to give them cash. They usually start by requesting the registration and insurance for the vehicle. If this paperwork is in order, they will not hide their discontentment. They then request the driver’s license. Again, they will not conceal their displeasure if the driver is able to provide a valid license. They then must find something else to justify a citation. After they go through a list of other nonmoving violations or infractions (defective or improper vehicle equipment, seat belt or child-restraint safety violation, etc.), their logical next request is to ask to see the pharmacy box. Yes, in many countries motor vehicles on the road are required to have a pharmacy box. No one knows what it must legally contain, and rogue police use its absence as an excuse to issue a traffic ticket.

Some motorists heroically resist complying with such extortion and are well prepared for encounters with the police by keeping a pharmacy box in their car. When confronted with such drivers the disgruntled police ask a final, unanswerable question: “Can you prove that you were driving at the appropriate speed limit when I pulled you over?” adding with a sarcastic smile, “I stopped you because you were driving too fast!”

In such bad-luck situations it is impossible to escape punishment. ...If the motorist wishes to contest a traffic infraction, the police will take away the vehicle’s registration and promise a hearing to be set by the court. The hearings are supposed to take place before a magistrate or judge. Of course, no motorist wants to take the chance of relinquishing important documents to rogue police, so the rational (less risky and frankly less costly) option is to plead guilty to whatever traffic violation the driver is being accused of and then make a deal with the police, often in the form of a couple of dollars paid as a ransom to avoid further harassment.

The discourse on economic development is often reminiscent of this kind of uneven interaction. When asked why only a handful of countries have managed to perform well since the Washington Consensus policies were launched in the 1980s, many experts tend to behave like the rogue police on the streets of Africa. They offer ever-changing explanations that they present as irrefutable truths. Defending their intellectual agenda even in the midst of obvious failure and disappointments, they come up with a litany of reasons for the failure of their prescriptions—typically a wide range of reasons about poor implementation—that policy makers in developing countries cannot dispute. This justification strategy of constantly putting the blame on the recipient allows the proponents of the Washington Consensus to require further compliance by poor countries. Like the helpless motorists on some African streets, policy makers must accept whatever recommendations are imposed on them.

Of course, it would be unfair to characterize the honest but difficult search for answers that motivates most development economists and experts as equivalent to the immoral and illegal behavior of renegade police. But the fundamental tactics often used to justify a predetermined and liturgical discourse and to enforce a priori decisions are similar. They are often based on false diagnostics and rely on rhetorical sophisms. This is why policy makers in low-income countries often confess that they constantly feel pressure from powerful development experts whose opinions carry weight and can determine whether a small economy has access to external funding.

In many such countries, Washington Consensus policies still represent the dominant intellectual framework for policy analysis and justify all prescriptions for reforms… Questions about the sources of low growth, low employment creation, and persistent poverty are given successive answers that are meant only to reflect and validate a predetermined truth. After trying in vain to offer alternative views of the problems of development, government officials find themselves in the same situation as the African motorists. The opportunity cost of asserting different opinions and of taking the chance to pursue different strategies is simply too high. It becomes rational to just go along with the prevailing truth and conventional thinking—and to accommodate policies that have little chance of yielding the expected positive results.

Infrastructure: A Real Constraint but a Convenient Culprit
The most common policy precondition given by many economists for improved economic performance in developing economies is the quantity and quality of infrastructure… It is conventional wisdom that all economies rely heavily on various types of infrastructure and investments to improve conditions and performance and to move people and goods more efficiently and safely to local, domestic, and international markets…

Transportation infrastructure has substantial economic benefits in both the long and the short run. Investments that create, maintain, or expand road and railway networks can improve economic efficiency, productivity, and economic growth. These investments can also support employment in construction and in the production of materials, with the increased spending by the workers hired in these sectors generating positive ripple effects throughout the economy. The short-run effects can vary depending on the state of the economy. At the peak of a business cycle, when the economy is operating at or close to full potential, the benefits of hiring workers for infrastructure projects could be partially offset by the diversion of these workers from other productive activities, and the investment of public funds may “crowd out” some private investment...

But economies around the world are generally operating significantly below their full potential, with underemployment and unemployment still high. In such excess-capacity situations there is little risk that increased spending on construction materials and increased private spending by newly hired workers will divert goods or materials from other uses. In fact, with large amounts of resources sitting idle, the opportunity costs of using them for infrastructure investment are greatly reduced. Therefore the value of making such investments is high at a time when the global economy continues to have substantial underutilized resources, including more than 200 million workers seeking employment.

Yet many developing countries suffer from a large infrastructure deficit, which hampers their growth and ability to trade in the global economy.

Asia still demonstrates a massive gap in infrastructure funding. The situation in Latin America and the Caribbean is no better. César Calderón and Luis Servén (2011) compare the evolution of infrastructure availability, quality, and accessibility across the region with that of other benchmark regions.

They focus on telecommunications, electricity, land transportation, and water and sanitation. Overall they find evidence that an “infrastructure gap” vis-à-vis other industrial and developing regions opened up in the 1980s and 1990s. They also estimate the quantitative growth cost of the region’s infrastructure gap.

Africa’s infrastructure challenges are even more daunting. Compared with other regions, Africa has a low infrastructure stock, particularly in energy and transportation, and the continent has not fully harnessed its information and communication technology potential. Inadequate infrastructure raises the transaction costs of business in most African economies...

Poor infrastructure is indeed a major binding constraint on economic performance, but it is not an insurmountable barrier for launching economic transformation, especially with today’s globalized economies, decentralized global value chains, increasingly freer trade, mobile capital flows, and migration of skilled workers. Economic development and infrastructure building can evolve in parallel and feed each other. No country in human history started its process of economic development with good infrastructure—certainly not Great Britain in the late eighteenth century, the United States in the early nineteenth century, or China in the late twentieth century, where there was only a very small network of highways. Yes, Africa’s infrastructure gap is a major bottleneck to economic growth and welfare. But it is a mistake to expect that economic development can be launched successfully only after that gap is filled—in fact, it may never be filled, even when the continent’s annual GDP per capita reaches $100,000.

…Asia’s overall national infrastructure investment needs are estimated to amount to $8 trillion over the 2010–2020 period, or $730 billion per year—68 percent of which is for new carpacity and 32 percent for maintaining and replacing existing infrastructure (ADB/ADBI 2009; The Global Competitiveness Report 2011–2012).

These are staggering numbers. India’s infrastructure needs for the next decade are estimated to vary between $1 trillion and $2 trillion. Africa’s infrastructure gap is estimated to amount to $93 billion per year…

By approaching economic growth as a linear and teleological process in which all infrastructure constraints must be addressed before positive dynamics can take place, proponents of the Washington Consensus have generally recommended policy reforms that amount to privatizing the infrastructure sector and devoting more public and private money to it… Such recommendations, which involve untargeted policies and broad reform programs that are often politically difficult to implement, may or may not yield positive results.

The inadequacy of the broad infrastructure policies recommended to developing countries mirrors the unrealistic and daunting reform programs prescribed in the Washington Consensus framework. No country with limited financial and administrative resources should be expected to seriously adhere to the long list of reforms identified as conditions for generating economic growth. Each reform may or may not make sense individually.

Without prioritization, these dozens (if not hundreds) of difficult policy prescriptions are politically unfeasible and certainly do not reflect the real, binding constraints in potentially competitive industries.

This is why successful developing countries typically do not blindly follow them. The puzzling inconsistencies in the Doing Business rankings are evidence that the recommended reforms are problematic. Several of the top-performing countries in the world for the past twenty years are consistently ranked quite low when it comes to the ease of doing business: Brazil is 132nd, Vietnam 98th, and China 91st, behind such star economies as Kazakhstan, Azerbaijan, Tunisia, Belarus, and Vanuatu.