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Wednesday, 10 September 2014

Infrastructure and development

A recent World Bank blog piece  about infrastructure and development makes the following interesting comment :
"Will public investment in infrastructure be sufficient for unleashing faster economic growth in Sub-Saharan Africa? The evidence, both academic and empirical seems to say not necessarily. We see from the works of Rodrik, Hausmann and Velasco (2005)  that developing economies face multiple constraints to growth, and that public policy should focus on removing the binding constraints that really matter. However, that requires an accurate diagnosis of the binding constraints to growth" 
It is not sufficient just building infrastructure we need to be clear whether it is a binding constraint. And the good news is that in Zambia's case it is one of the binding constraints. The last constraints study actually suggested that the key binding constraints to inclusive growth are low investment in human capital, low infrastructure services and coordination failures.  In fact Zambia is addressing the first two except the last one - governance remains very poor and we can only hope that the recent political changes will now move the country forward in a better direction.
On infrastructure services, the problem is whether the current push is efficient from the public's perspective. There are two issues here. First, whether the government has not done enough to leverage private sector delivery of public infrastructure. This is not simply a question of public private partnerships in road, rail and education infrastructure development, it is also about having development control model that minimises external costs. 

The first place to start  in developing such a model is to have an adequate legislative framework for "developer contributions".  The simple answer to social infrastructure funding, particularly for housing construction finance is the “direct foreign investment” coming into the country . We need to get the firms who are pouring millions into mines and tourism and other sector to be tied to spending some of it on social infrastructure.

The call here is for a generic model that links new investment in areas to housing provision.  The model that is needed is similar to the framework that the UK has adopted under Section 106 of the Town and Planning Country Act (1995). This UK legislation basically makes it a condition that any new investment in any local area of the UK should be conditional on providing some minimum level of investment in schools, housing, transport and other things, if the Local Authority deems necessary. What you can basically say is that if a firm X invests in Mpulungu, the people in Mpulungu can require that firm X to deliver not just investment but some social infrastructure as well. But there has to be legislation to back them up!

The advantage of such a system is that not only does it relieve pressure on local resources (meeting the "internalisation of externality" condition), but also helps tackle local poverty by linking the investment to the local needs such as housing. In addition, as well as helping us with funding our social infrastructure shortage needs, this system has an added advantage that it makes foreign investment in some areas publicly acceptable. Governments wants foreign direct investment, the people simply want good houses and better schools. And of course from an economic perspective such a framework also helps to raise the costs of reneging by the new investor by making it that much costly for him/her to cut and run, like others have done in the past! So we find that in this it’s a win-win for everyone, and most importantly it directly helps relieve the housing problem.

The second approach is development of innovative mechanisms. One such idea is the tax-increment financing  (TIF). The idea is to draw a boundary round an area, borrow to pay for basic social infrastructure and repay the loan from the increase in property-tax revenues inside the redeveloped zone as private firms start building. The stumbling block is obviously where the local authorities "borrow" money from. If such an idea was developed in Zambia, it would certainly require Government lend these funds, although clever councils in urban areas might well be able to afford it. There are other such similar innovative ideas.

1 comment:

  1. Ya, talk of the massive Link Zambia 8000 road project, which the vice president has even said is already creating demand for construction equipment- will transform Zambia in a bid way.


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