Cees Bruggemans Chief Economist at FNB

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Infrastructure Conundrum


By Cees Bruggemans, Chief Economist FNB Cees@fnb.co.za

8 November 2011

We are not alone in struggling to get infrastructure upgrades. It is a worldwide phenomenon.

Except (most prominently) in China.

The US has an aging infrastructure. With long-term US government bonds only yielding 2%, now is the time to borrow and spent liberally on infrastructure. Finance won't remain this cheap forever, and the US economy could do with a stiff shot in the arm for a couple of years.

The same can be seen elsewhere.

Aussie is seriously short of export-oriented transport infrastructure. In Canada, the cities are lustily expanding but not the infrastructure, giving rise to growing congestion.

Holland could do with a serious road upgrade. England, which won the war but never had its 19th century infrastructure thoroughly thrashed, sits with ancient infrastructure problems that only grow worse.

Yet now is the time to borrow long at 2% or less (the Germans can now borrow at 1.8%) and seriously make a dent in infrastructure shortcomings while it would be good for the economy as idled resources would be mobilised.

But it doesn't happen.

If anything, the fiscal purists want to cut back budget deficits, and then preferably by cutting spending, for it doesn't hurt growth as much compared to raising taxes.

And nothing is so easy as to 'postpone' long-term infrastructure maintenance, replacement and new expansion 'temporarily' for the duration of the budget 'emergency'.

Plenty of time to catch up later or so goes the argument.

Besides such budgetary urgency and shenanigans, however, there lies another reality.

In modern times, post-WW2, democracies the world over have greatly increased state spending as share of national income in order to provide social services.

Education, health care, housing, but also old-age pensions, unemployment benefits and many other forms of state intervention in society.

That costs money. When competing with infrastructure, these many social agendas have many champions fighting for their political causes. Infrastructure has its millions of users, but these are faceless and not well organised or as easily mobilised.

Over decades, these many good causes have mushroomed and taken over budget space, and then some.

Infrastructure maintenance was kept up (but in many places inadequately, aging the existing infrastructure). And new things were build, but not really enough to keep pace with growth and development.

Until finally the structure of things can't bear it any longer and starts crying out for new infrastructure.

It is at this point that something similar starts to happen nearly everywhere.

You want more new infrastructure that will cost an arm and a leg, yes?

That's possible, but it can't come out of existing budget space. The tax burden is already far too high, existing budget (social) priorities must be met (can't easily be politically altered) and so we may have to find a new source of money to fund your infrastructure ideas.

Income and excise tax increases are out, for the tax burden is already too high. Cutting other forms of spending is in any case already happening. That leaves the option of charging users of infrastructure directly.

Eskom is getting additional resources via higher tariffs and through borrowing. For other types of infrastructure (toll roads) it may be possible to devise a direct user charge.

If consumers don't like this and don't want to pay, the biggest risk they face is that the new infrastructure won't get build.

These choices are giving rise to intense debate.

No to higher income taxes of all kinds. Politically, certain types of social spending are untouchable. That leaves the user paying more directly for infrastructure. If not, it won't be build.

But how then that China is maintaining a stupendous infrastructure-build effort?

It is said that this past decade China build the equivalent infrastructure of another Europe.

The Chinese think big in very short time frames.

Within a ten-twenty year period, a highway network comparable to the Interstate Highways in the US gets conceived and done.

Similarly for rail transport imitating the European rail capacity.

And airport infrastructure countrywide.

Even regarding the need for new big cities. China is planning to build another 10 000 of them. Big ones.

That is its way of addressing inequalities between inland and coastal, get a better balance going between domestic and export, and through industralisation and urbanisation a better balance between rural and city.

As to the means of doing so, it is startlingly brutal and reminds of Stalin and Mao.

Given the distant past, with Japan long a competitor and aggressive invader, the rich West a potential invader and old communist friends to be trusted least of all (Siberia is the world's biggest land claim), it is strategically important to strengthen the country beyond the means of potential foreign invaders. And to do so quickly.

In order to generate the savings, which makes possible the high fixed investment levels that drives the pace of expansion, the broader population was required for just a few generations to make important sacrifices.

Instead of allowing private producers to shape consumer habits and spending at the expense of savings (by guiding their aspirations, expectations and entitlement syndromes), instead limit the range of consumer goods made available, limit the ability to invest, and make the average household deeply insecure by not providing social safety nets for education, health care, housing, old age and unemployment.

That will turn any population into record savers. By channeling these savings cheaply (at low mandatory interest rates) into state-controlled banks, the conduit exists to garner vast savings and channel them into required investments, especially infrastructure.

Thus it is possible to have these gigantic infrastructure schemes in short time spans.

But it follows a model that starves household of consumption choices and benefits, relative to elected democracies where social goodies, private and public, dominate all, and infrastructure as a public good comes last (along with saving), also keeping growth much more modest than in force-fed China.

So it boils down to what you want most, second, third.

And what you are prepared to pay for the pleasure, within the limitations of democratic majorities.

Cees Bruggemans
Chief Economist FNB
Twitter sound bites @ ceesbruggemans

Infrastructure Conundrum

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