By Koki Hirota, Professor, Graduate School of Humanities and Social Sciences, Saitama University and Visiting Fellow, JICA Ogata Sadako Research Institute for Peace and Development
According to the principles adopted by the G20, quality infrastructure investment consists of six key components: maximising sustainable growth, economic efficiency throughout the life cycle, environmental considerations, resilience, social considerations and governance.
The emphasis on “quality growth[1]” has become a major international trend, moving away from the idea that income is the main driver of people’s well-being and affluence. The Sustainable Development Goals (SDGs) gave global visibility to this perspective, while OECD Beyond GDP and Better Life Index defined indicators to measure well-being beyond GDP. Quality infrastructure investment is one methodology for putting these goals into practice and achieving development that is not just about growth, but also inclusiveness, sustainability, and resilience.
The myth that economic growth automatically reduces poverty has been broken, partly due to the persistence of inequality. According to the environmental Kuznets curve hypothesis, environmental pollution decreases with growth when income exceeds a certain level, however this does not seem to apply to greenhouse gas emissions. Therefore, rather than tackling the issues of inequality, sustainability, or resilience after growth is achieved, a holistic approach should integrate these factors in the preparatory stage of development initiatives – including infrastructure building.
Broader criteria for infrastructure investment
Infrastructure investment inherently has an inclusive dimension in a sense that it benefits a broad range of people. As infrastructure stock increases, so does its maintenance spending, thus smaller life cycle costs will enhance the sustainability of infrastructure services[2]. Quality infrastructure investment aims not only to invest in resilience and sustainability, for instance through disaster risk reduction or renewable energy, but also for these objectives to be part of the selection criteria and design of all projects.
How we evaluate the benefits of infrastructure projects has evolved over a long period. Infrastructure is an investment, which means that it should generate profit. Although infrastructure projects should indeed promote economic growth, the selection process should also evaluate their “wider benefits”. Infrastructure is a public good and can have positive ripple effects. For instance, if roads are improved, commuting becomes easier, which ultimately boosts labour productivity. However, existing evaluation methods do not always grasp the scope of these wider effects.
For example, the development of arterial roads between major cities and gateways, such as international ports, promotes economic growth throughout the region. In Japan, the Pacific Belt Zone created in the 1960s, helped to spread growth throughout the country. In Vietnam, the improvement of an arterial road connecting the capital Hanoi and the international port Hai Phong attracted a high volume of foreign investments in the areas located between them as well, which in turn created significant job opportunities and promoted business. Being able to measure and estimate these wider benefits can help to make better decisions in designing and selecting infrastructure projects. This joint study by four donors has come up with ways to do this.
Expanding the benefits of quality infrastructure
Infrastructure can be more inclusive, sustainable and resilient through how the project is designed. For example, in areas where an economic corridor is located, benefits can be further expanded by improving the local road network. According to the World Bank, rural road infrastructure contributes greatly to reducing inequality. Another example comes from Vietnam, where Japan’s cooperation modelled on its Michinoeki system of government-designated rest stops ledto the installation of roadside stations on arterial roads, which provide local residents with opportunities to raise their incomes, as it is used not only as a resting place for drivers, but also as a market to sell local products. Promotion of traffic safety efforts while paved, wide and high-grade roads were being developed, is another example from Vietnam.
Finally, unlike private investment, infrastructure investment goes through a particularly long process from planning to completion. Good governance is required to follow due process for transparency and efficient use of funds and to respond properly to unexpected changes of circumstances during planning and operation. One study estimates that differences in the quality of public investment lead to twofold differences in the extent to which public investment is converted to capital stock.
Ultimately, better selection criteria – such as the principles set forth by the G7 and G20 – leads to infrastructure with broader benefits. More investment should go to projects that meet this criteria and contribute to reducing income inequality and achieving the SDGs.
The OECD Development Centre, in collaboration with the G20 Development Working Group, will host a Roundtable on G20 Quality Infrastructure Investment ‘Building the Future: The Role of Quality Infrastructure in Bridging Transport Infrastructure Gaps in Developing Countries’ on 23rd November 2022.
To register, click here to attend in person and here to attend online.
[1] APEC defines quality growth as balanced, inclusive, sustainable, innovative, and secure growth (APEC, 2011), while Japan defines the growth with inclusiveness, sustainability and resilience (MOFA of Japan, 2015).
[2] Bhattacharya (2010) estimates that maintenance costs account for about 1/3 of economic infrastructure demand for 2010-2020 in Asia. Ishizuka et al. (2019) estimated that most of the demand for social infrastructure such as schools and hospitals in Japan is for the maintenance, rehabilitation and replacement of facilities, while the demand for new construction is very limited.