RP needs hiked investments in infra to spur growth

The National Government must increase investments in infrastructure if it is to increase productivity, reduce poverty, and increase economic growth, former Budget Secretary Benjamin Diokno said.

In a lecture held at the University of the Philippines School of Economics recently, Diokno said that the inability of the government to invest in infrastructure could result in low economic growth.

"Not being able to invest in infrastructure would result in a low growth scenario, the economy will probably grow by three percent, which is practically the same rate as the population growth, so there is no improvement," Diokno, a long-time professor at the UP School of Economics, said.

He said that situation could trigger a serious chain of events leading to a financial crisis.

Flat growth could result in no new revenues for the government and that would further expand or raise the fiscal deficit. In turn, a higher deficit would mean more borrowings. But due to the poor credit rating, lack of confidence and poor financial image, the country would have to borrow at higher interest rates.

The NG would then be forced to reduce expenditures, which historically meant a reduction in the annual spending for health, education and other social services. The situation is not helped any by the continued weakness of tax revenue collection.

Viewing the situation in a broader perspective, World Bank president James Wolfensohn, in a separate statement, said that investments in infrastructure play a key role in overall development.

"Improving infrastructure in developing countries is increasingly recognized as a key factor in reducing poverty, although developing and underdeveloped countries are confronted with an enormous shortage of funds for infrastructure development," the World Bank chief said.

A recent study of Latin American countries estimated that a lack of investment in infrastructure during the 1990s reduced long-term growth by one to three percentage points, depending on the country.

At the project level, World Bank infrastructure projects have had a 20 percent average economic rate of return, and in recent years have averaged 35 percent. Infrastructure is a critical element of a well-functioning investment climate, and the lack of infrastructure is consistently ranked as one of the key impediments to investments by the private sector.

Another study found that if increases in the physical stocks of telecommunications and power generation in Africa had been comparable to those in East Asia, the continent’s annual growth rate would have been about 1.3 percent higher during the 1980-90s.

Estimates of the impact of infrastructure on poverty reduction in the late 1990s showed that infrastructure investments cut poverty by as much as 2.1 percent in low-income countries and 1.4 percent in middle-income countries.

Based on World Bank studies, the unmet access, quality, and financing needs for infrastructure services remain staggering despite a clear consensus on the importance of infrastructure. For example, in rural areas in low-income countries, only 20 percent of the population has electricity access, and less than two percent with access to a mainline telephone.

The access challenge is also severely compounded by the low quality of infrastructure services. In low-income countries, energy losses are twice as large; water losses are four times as high; faulty telephone lines are 10 times more common; and only 29 percent of roads are paved, compared to developed economies.

A recent study of seven Latin American countries suggests that because of poor quality, the effectiveness of public infrastructure is only about 74 percent of that in industrial countries. The related long-run cost is equivalent to about 40 percent of real per capita income.

But meeting the challenge of increasing access to quality infrastructure services will require sizable investments, the multilateral funding agency said.

Current estimates point to financing needs of about seven percent of gross domestic product (GDP) for all developing countries for both new investment and operations and maintenance (O&M) expenditures. Financing needs in low-income countries can potentially be as high as nine percent of GDP.

Comparing past actual investment and O&M rates (on average about 3.5 percent of GDP in all developing countries) to projected requirements indicates the need to potentially double actual financing for infrastructure. Therefore, significant additional resources are needed to increase access to quality infrastructure services.