Home > Growth, Interest Rates > Lost opportunity to upgrade infrastructure in developed economies

Lost opportunity to upgrade infrastructure in developed economies

November 13, 2015 Leave a comment Go to comments

InfrastructureThe Economist had an article on the lost opportunity of a lot of developed economies upgrading their infrastructure EG

  • 33% of railway bridges in Germany is over 100 years old
  • 50% of London’s water mains are also over 100 years old
  • In the US the average bridge is 42 years old and the average dam 52.

The American Society of Civil Engineers rates around 14,000 of the country’s dams as “high hazard” and 151,238 of its bridges as “deficient”. As well as being dangerous it is also expensive as traffic jams on urban highways cost America over $100 billion in wasted time and fuel each year; congestion at airports costs $22 billion and another $150 billion is lost to power outages.

The G20 economies will need to spend between $15 trillion-20 trillion by 2030 to upgrade infrastructure. McKinsey, a consultancy, reckons that in 2007-12 investment in infrastructure in rich countries was about 2.5% of GDP a year when it should have been 3.5%. This was a missed opportunity to upgrade infrastructure for the following reasons:

  • Interest rates have been a extremely low levels
  • There has been a lot of spare capacity in the construction industry which in turn means that the costs of contracting companies to do the work is low.

Investment in infrastructure can provide a tremendous boost to an economy:

  • Paving roads has helped double school attendance by girls in Morocco;
  • Improved sanitation has helped reduce child mortality in India by over 50%.
  • Increased government spending on infrastructure by 1% of GDP would increase GDP, after 3 years, in the USA by 1.7%, 2.5% in the UK and 1.4% in the Euro Zone.

Politics vs Practicality

Politicians still seem to favour investment projects that attract attention. Rather than upgrading bridges, roads, subways etc the priority is more eye-catching ventures. The USA post stimulus spending on infrastructure dedicated $8bn to a high speed rail service but only $1.5bn to small more practical projects.

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