Infrastructure investment and economic performance

and ubiquity of persistently modest rates of economic growth, infrastructure investment has once again found itself at the forefront of the public policy agenda. In an effort to boost global growth: Christine Lagarde, head of the International Monetary Fund, suggested that “investing in badly-needed, but well-designed, infrastructure is an obvious area of great potential”; fixing America’s infrastructure is a key element in US President Donald Trump’s plan to “make America great again”; China’s ambition to extend its global footprint is looking to use its infrastructure-led ‘Belt and Road’ initiative to do so; infrastructure is at the heart of EU Commission President JeanClaude Juncker’s Investment Plan for Europe; and the UK government is being urged to increase infrastructure spending to counteract any economic slowdown that might be occasioned by the country’s withdrawal from the European Union (Brexit in more popular parlance). These are just a handful of examples, but whilst few would disagree that infrastructure investment has a potentially positive impact on economic performance, it is the nature and magnitude of such impact that needs to be considered in informing economic policy and its implications for sustainability and other global challenges such as climate change. The positive benefits of infrastructure investment were for many years simply taken for granted by public policy analysts, until the work of Aschauer (1989), Munnell (1992), and others, elevated it to the economic mainstream. Whilst Aschauer’s work established what was perceived to be a statistically significant relationship between investment in infrastructure capital and economic growth, and suggested very high rates of return to such investment, Munnell supported and reinforced the idea that by greasing the wheels of future economic activity, the main beneficial impact of infrastructure investment was improved productivity. In any event, the relationship between infrastructure and economic growth has since been well established, with numerous empirical studies showcasing the positive attributes of investment in public capital. But while infrastructure may lead to higher productivity and output, past and current economic growth also increases the demand for infrastructure services and thereby induces increased supply. In short, it might well be that high GDP and high rates of infrastructure investment are correlated, but the direction of causality is not so clear, which has important implications for policy makers. Although rates of return from infrastructure projects may be significant, they were inevitably exaggerated by early studies because of the high positive correlation with overall economic activity per se. Analysts must control for what econometricians call ‘severe simultaneity bias’ and ‘spurious correlation’. Once this has been done returns are considerably reduced, and this is even before environmental impacts and broader sustainability