• Home
• NZ Economic Development
• Infrastructure Development
• Infrastructure Stocktake
• Linkages
• Executive Summary

• Infrastructure Development

• Infrastructure Stocktake

• Infrastructure Audit
• Sustainable Development
• Linkages
• A Policy Framework
• Stocktake Reportback
• Media Statements

The purpose of this note is to highlight what is understood (and what is not understood) about the linkage between infrastructure and economic growth and the implications about this for the management of infrastructure services in New Zealand. It is intended to provide a "high level" view of the subject, and does not attempt to explain any of the theoretical underpinnings of the debate. The focus is largely on exploring World Bank and OECD publications around the subject area. In addition, there is a brief discussion of the Infometrics report, Generating Growth: Infrastructure (2003), in terms of the implications for infrastructure management in New Zealand.

The definition of infrastructure adopted for this paper is consistent with the focus of the "infrastructure stocktake" currently being undertaken by the Ministry of Economic Development and the New Zealand Government, covering the (services provided by the) physical networks associated with energy (gas, thermal, and water-based), water supply, transport, telecommunications, sanitation and waste facilities, and flood protection and drainage.

While we can conclude that there is a definite link between infrastructure investment and economic growth, particularly in the longer-term,¹ it has not been confirmed that the link is a causal one (in either direction). Instead, physical infrastructure and the services provided can be regarded as form of "complementary capital" that requires the existence of available productive capital (whether physical or human) for investment (and innovation) in order to realise the economic growth potential. Thus, it should be understood that infrastructure investment on its own could not create economic potential, only develop it where appropriate conditions exist.

Inadequate supply of infrastructure or unreliability in services may inhibit the investment of productive capital or restrict/reduce output.

The macroeconomic evidence of a link between infrastructure and economic growth is not in itself helpful to policy development for a variety of reasons as, for example, the nature and type of infrastructure involved, the financial arrangements for the investment, organisational / institutional arrangements, the nature of private capital available, and so on, will influence the action(s) to be taken. However, the available literature does provide limited guidance for facilitating the ability of infrastructure services to enhance economic growth through increased (private sector) productivity:

• Ensure that the macroeconomic policy climate is conducive to efficient resource allocation Such macroeconomic policies include price stability / inflation control, structure of tax system, facilitation of international trade and growth, pro-competitive regulations, facilitating the entry of innovative firms, facilitating the skilling and education of the existing and potential workforce, encouraging R&D investment, and removing barriers to network access
• Improve the efficient use of infrastructure services through demand management and the implementation of user charges reflecting supply & demand conditions and non-market externalities. Additional infrastructure capacity may not address productivity if existing infrastructure is not effectively utilised. Efficient infrastructure use and management has the possibility of greatly affecting economic productivity.
• Recognise that the reliability of infrastructure is particularly important vis-à-vis its impact on international trade and production costs for small enterprises. Poor quality or unreliable infrastructure service provision may mean that firms are reluctant to invest productive capital, or have to reduce such investment in favour of "complementary" capital to compensate for the lack of infrastructure
• Care should be taken not to get into a situation of oversupply of infrastructure, which can have a negative impact on the economy as it draws scarce resources away from maintenance and operation of existing stocks.
• Investment in infrastructure projects should be done on the basis of national benefits and on a case-by-case basis. This implies the use of benefit-cost analysis.² Some authors have suggested trade-offs should include those between different kinds of infrastructure investment.
• It is worthwhile maintaining the processes NZ has established to limit infrastructure decisions being based on political influence (i.e. through pork barrelling or lobbying and coalition agreements) as such decisions may lead to distortion in infrastructure provision, particularly in the longer term.

Information and communication technology (ICT) is perhaps better thought of as a technological innovation that is "transforming" economic productivity by shifting economic growth onto a higher level, although the overall slope of the path is expected to remain the same. In some countries, the ICT producing sector has had an impact on the economy-wide average growth, influencing "capital deepening" (increased the intensity of physical capital per unit of labour) and assisting in more efficient work organisation outside of the ICT sector, creating "spillover" gains in productivity in these other sectors. The OECD is proposing to continue to monitor ICT development and its effects. The key action for governments in respect of ICT is to ensure that the macroeconomic policy climate is functioning well to encourage further investment and innovation.

The "infrastructure stocktake" has an important function to identify whether or not New Zealand's infrastructure is currently at or below its optimal level, as well as whether or not it is being efficiently or effectively utilised. It should, thus, provide guidance as to the direction of further investment in infrastructure.

¹Nijkamp and Poot (forthcoming) find that studies coving a longer period of time are more likely to find positive effects of infrastructure, suggesting that there is a lag between when the infrastructure investment occurs and the productivity gains becoming apparent. This is consistent with the notion that productivity gains may take time to emerge, as it may require re-organisation or development of complementary private sector investments.

²It must be recognised that the more "conventional" forms of cost-benefit analysis often have significant limitations, insofar as they may not take into account the full range of potential benefits from investment (i.e. spillover benefits); nor account for economic financing costs; may be based on historical evidence that has little or no relevance to the current situation; and may run into difficulty in measuring all of the benefits, even if they are included. In recognition of these limitations with respect to transport investment in New Zealand, Transfund has recently (2003/04) funded a research project to appraise the national, regional and local economic development benefits of land transport investment with the purpose of identifying how to model and assess these impacts for potential transport investment projects. While the analysis is focused on land transport investment, it may have a broader application for other types of infrastructure framework.