Jaya Josie: Public Infrastructure Investment--A BRICS Perspective for Inclusive Sustainable Development

2017-10-04 IMI

Macro-Finance Salon Series International Monetary Institute (IMI),

Renmin University Beijing, 15 December 2015

Public Infrastructure Investment: A BRICS Perspective for Inclusive Sustainable Development

Jaya Josie, Head of BRICS Research Center, Human Sciences Research Council (HSRC), South Africa

Introduction The original aim of the paper on which this lecture is based was to discuss the role of public infrastructure investment for integrating Sustainable Development Goals (SDG) in the development programs of BRICS countries. From a micro-to-macro perspective is the provision of public infrastructure a key intermediate factor for ensuring that an individual’s living standard, capabilities and human, socio-economic and political rights are macro-economically sustainable in the long-term? The MDGs emphasised human capital, infrastructure, and socio-economic and political human rights as integral to increasing an individual’s living standards and human capabilities. The paper discussed a possible relationship between development finance and BRICS public infrastructure investment policy to address inclusive sustainable development and public infrastructure backlogs of deficits that militate against meeting SDG targets. The recent establishment of the BRICS New Development Bank and the accession of the RMB to international reserve currency status present China with an opportunity to bridge the long-term infrastructure investment financing gap faced by for developing countries for the provision of basic infrastructure services to address the SDG goals. The lecture first discusses the extent to which infrastructure investment may act as a catalyst for promoting SDGs. Secondly, I review of the current trends in infrastructure investment as they relate to gross fixed capital formation (GFCF) among BRICS countries. Thirdly, I consider a possible theoretical framework for public investment to address basic public infrastructure service backlogs targeting SDGs in BRICS countries. Finally, I discuss the possible role of a BRICS development finance institution in financing public infrastructure investment, and conclude with some specific proposals.

1. Infrastructure Investment a Catalyst for Post-2015 Sustainable Development Goals

Over the past two decades the development debate internationally has been dominated by two trends (Sachs, 2012; Loewe, 2012) that juxtaposed sustainable development goals (SDGs) with millennium development goals (MDGs). The MDG campaign has its roots in the 2000 Declaration of the Millennium Summit of the United Nations (UN) for attaining Millennium Development Goals (MDGs) by 2015 (Millennium Development Report, 2013). This programme was adopted in 2001 by the UN General Assembly, and established as an integral part of the UN agenda. The MDGs seeks to ensure that an individual’s living standard, capabilities and human, socio-economic and political rights are sustainable in the long-term. Eight MDGs were identified that included the eradication of extreme poverty and hunger; achieving universal primary education; promoting gender equality and empowering women; reducing child mortality rates; improving maternal health; combating HIV/AIDS, malaria, and other diseases; ensuring environmental sustainability; developing a global partnership for development. Presupposing the programme for the MDGs is a requirement for adequate human capital, infrastructure, and socio-economic and political human rights for improved living standards and enhancing human capabilities. The campaign for SDGs on the other hand started with the Earth Summit in Rio de Janeiro in 1992 and continued at the Rio+20 summit in June 2012 (Loewe, 2012). The latter argued for integrating and extending MDGS as part of a post-2015 campaign for attaining global sustainable development goals (SDGs), and culminated in the release in May 2013 of a UN panel report on a Post-2015 Development Agenda focusing on a new global partnership for eradicating extreme poverty and transforming economies through sustainable development by 2030. This UN post-2015 Development Agenda underscores a convergence of the MDGs and SDGs. One argument (Sachs, 2012) suggests that the SDG’s could provide the necessary impetus for a sustainable global development trajectory. The other (Loewe, 2012) argues that indeed the SDG agenda is a pre-condition for attaining, and sustaining the MDG targets into a post-2015 development trajectory. The SDG agenda promotes among others, poverty reduction; food security, nutrition and sustainable agriculture; water and sanitation; energy; sustainable tourism, transport, cities and human settlements; health and population; full and productive employment, decent work for all and social protection; least developed countries; landlocked developing countries;  African regional efforts; education; gender equality and the empowerment of women (Loewe, 2012). When comparing the MDG and SDG targets it is clear that not only do they have much in common, but they also complement each other. However attaining the targets for the provision of sustainable basic infrastructure services explicit in some of the MDGs and SDGs requires a long-term commitment for infrastructure investment in physical and social infrastructure in particular. Such investment has to be differentiated, if it seeks to address inter and intra-regional spatial and socio-economic disparities that militate against attaining the MDGs and SDGs. If the SDG policy targets set the public infrastructure standard that must be reached beyond 2015, then public infrastructure financing must seek to progressively close the gap between the existing norm and the desired standard within the post-2015 time frame for SDGs. Next, let us consider this proposition from a BRICS perspective by first reviewing the infrastructure investment trends and needs within BRICS member states, and then theoretically illustrate how a BRICS development finance institution, such as a new BRICS Development Bank (BDB), may be able to complement and supplement public infrastructure investment taking account of spatial disparities attain SDG targets in BRICS member states, and associated developing and emerging economies.

Understanding Infrastructure investment trends: A long-term BRICS Perspective

BRICS member states have set up the New Development Bank as a new complementary and supplementary development finance institution to mobilize resources for infrastructure and development projects not only for BRICS member states but also for other emerging and developing economies. Such an initiative will be a positive response to the problem of insufficient long-term financing and foreign direct investment faced by developing countries in addressing challenges of infrastructure development. To target infrastructure investment to address economic and social infrastructure backlogs resulting from socio-economic and spatial disparities policymakers require an indicator that captures both national and per capita infrastructure needs for inclusive and sustainable growth and development. The literature on public infrastructure investment in economic development suggests that its role is mediated through its contribution to capital stock in macroeconomic aggregates. By implication the role and measurement of capital stock in sustainable economic development implies that capital stock and capital backlog estimates can be used in conjunction with capital cost disparity indicators to estimate the level of physical and social infrastructure investment required for financing public infrastructure in disadvantaged regional and sub-regional economies (Josie et al, 2008). The relationship between infrastructure investment and GDP is expressed through the value of the infrastructure investment asset component in the total value of gross fixed capital formation (GFCF) of a country’s national account calculation of the GDP[1] (Natrass: 2000; Vane & Thompson, 1989). Although there are other determinants of general investment such as variations in business confidence and tax polices (Vane & Thompson, 1989) increases in public infrastructure investment will have a significant impact on the levels of capital stock in general and economic development in particular. Timmer and van Ark (2002) demonstrated this relationship in constructing fixed non-residential capital stocks for South Korea and Taiwan. Aschauer (1989) tested this proposition in a seminal article that presented estimates to show dramatic returns to public capital investment in the USA. Naqvi, (2003), using the Aschauer model compared the productivity of public capital against private capital in Pakistan from 1965 to 2000 and demonstrated that externalities generated by public capital stock shows that public capital was more productive than private capital in growth. In a Europe-wide survey Romp and de Haan (2005) concluded that although not all empirical studies can show that public capital has positive impacts on economic growth there is currently greater unanimity that public capital investment increases economic growth. The arguments and conclusions advanced by Aschauer, and others, have been challenged by Hulten and Schwab (1993) both methodologically and conceptually. The critique suggests that the US data may indicate a correlation between infrastructure and output growth, but this association cannot be interpreted to mean that lower infrastructure was the cause of slower growth. The authors argue that any one of several other variables such as low productivity and higher costs may have had just as significant an impact on slowing growth for the period of Aschauer’s study. However, Hulten and Schwab (1993) do not question the need for public infrastructure investment they merely challenge the presumed causality between public infrastructure investment and economic growth. The authors propose that rather than arguing for more public infrastructure investment greater emphasis should be placed on developing and devising more effective ways of allocating and spending existing levels of public capital expenditure. The recent commitment (FOCAC, December 2015) by China to invest US$ 60 billion in Africa is an example of an attempt to finance infrastructure backlogs and deficits in developing economies. Ndulu et al (2005) and Ndulu (2006) note that in sub-Saharan Africa inadequate public infrastructure is the greatest obstacle to faster economic growth. In this regard Sub-Saharan African economies were characterized by low capital accumulation, high prices of investment goods, low productivity of investment and a higher level of geographical disadvantages that compromised growth and regional integration. Given that the consensus in the literature seems to err on the side of increasing public infrastructure investment restating the role and contribution of infrastructure investment in capital stock will be important. Infrastructure is a component of the capital stock of a country. The value of an infrastructure asset[2] in GFCF is determined by the value the asset is expected to earn for the delivery, production or generation of specific capital services over its lifetime (OECD Manual: 16). The standard formula (OECD Manual: 16) for calculating infrastructure asset values is written as:

Where:

V_t is the real value of an asset at the beginning of year t,
f is the real rental in each period,
T is the service life of the asset in years,
τ takes values of 1, 2, 3…. T, and
r is the discount rate used to reduce the future flow of rentals to their present values.

Thus the role of infrastructure value in GFCF underscores the significance of capital stock in economic growth. This is evident from the most recent GFCF trends in BRICS member states presented below According to historical data provided by the World Bank in 2013 China and India increased their GFCF investment over the last 9 and 10 years. Other countries saw a decrease in one or more years. On average China’s GFCF grew by 13.5%, and over the last 10 years South Africa’s was the lowest at 7.7%. South Africa is the only country where GFCF dropped in two consecutive years, i.e. 2009 and 2010. Brazil saw a decrease in both 2009 and 2012 and, Russia recorded a decrease in GFCF for 2009. (See Table 1 below.) Table 1: Gross Fixed Capital Formation at Constant 2005 Prices in US Dollars

	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
Brazil	124.35	135.69	140.61	154.35	175.73	199.58	186.16	225.87	236.52	227.04
Russia	108.93	122.65	135.65	160.07	193.68	214.21	183.37	194.13	213.96	226.80
India	175.65	217.77	253.04	288.00	334.67	346.40	372.96	425.15	443.79	451.44
China	721.63	809.57	905.91	1020.96	1158.79	1270.03	1560.87	1741.93	1907.41
South Africa	33.11	37.37	41.48	46.51	53.01	60.05	57.34	56.17	58.70	62.03

Source: World Bank, 2013

[1] Thus GDP is equal to the sum of consumption (C), GCF, government spending (G), exports (X), imports (Z) and can be written as GDP = C + GCF + G + X – Z. [2] The SNA93 defines fixed assets as produced assets that are used repeatedly, or continuously in the production process for more than one year.

Illustrative Framework: Public Infrastructure Investment to support Basic Public Services

Theoretically, to determine the desired level of capital stock needed to achieve economic objectives a reasonable estimate of existing capital stock has to be calculated. The difference between the desired level and existing level of capital stock is the level of capital backlog that has to be eradicated. The cost of eradicating capital backlogs while taking account of regional and sub-regional capital cost disparities determines the level of fixed investment that will be required to achieve socio-economic goals. Thus capital stock data is a critical input for measuring and forecasting infrastructure investment and, for estimating infrastructure deficiencies or backlogs (Levtchenkova and Petchey, 2000). However, the challenge for public infrastructure investment in emerging economies such as South Africa is the absence of disaggregated capital stock and GFCF data at local level. The South African Reserve Bank (SARB) publishes the public sector economic infrastructure components of South Africa’s GFCF and the per capita fixed capital stock data aggregated at national level although it is collected locally. However, for targeted public infrastructure investment across sub-regions capital stock estimates for these areas will provide an important indicator for determining the amount of financing required for public investment to the desired level of capital stock in the economy. Alternative approaches for estimating capital stock such as the perpetual inventory method (PIM) demand infrastructure expenditure time-series data spanning at least two to three decades to smooth out errors (Levtchenkova and Petchey, 2002). In developing a policy model for reducing capital backlogs in transitional economies and using South Africa as a case study, Petchey and Levtchenkova (2002) concluded that compared to an international benchmark the overall amount of physical infrastructure and social infrastructure available for the provision of basic services was insufficient. The results from the study show a marked variation across provinces in South Africa indicating widely variable access to services across provinces. Figure 2 illustrates the theoretical possibility of how the development gap between a desired benchmark standard and current norm can be closed.

In Figure 2 the actual per person capital stock of a representative poor region for a particular service is plotted (point b) against the standard capital stock for the service across all regions and in which the standard capital stock is growing over time. In the diagramme, the actual capital stock is depicted below the standard. The region has a capital backlog equal to the distance in ab. In a current period, this would have grown to equal the distance cd because investment is insufficient to reduce the backlog of the preceding period. In addition because of low investment over time the backlog has increased further to equal the distance ef. The key question is how to raise the level of net investment so that its actual capital stock for the service equals the desired standard at some future period? Line de represents the development trajectory for closing the investment gap, and is arbitrary in the illustration. Of course there can be several possibile trajectories depending on how quickly or gradually the investment gap can be closed, and therefore the pace and amount of investment will define the shape of line de.

The BRICS New Development Bank & Public Infrastructure Investment

A leaders statement at the BRICS Summit in Durban, South Africa, 2013 acknowledged that developing countries face challenges of infrastructure development due to insufficient long-term financing and foreign direct investment, especially investment in capital stock. The statement asserted that BRICS cooperation towards more productive use of global financial resources can make a positive contribution to addressing the problem. Table 1 demonstrates that among BRICS member states trends for capital GFCF vary widely. As a percentage of GDP total capital investment across BRICS has also been variable (See Table 2). According to Business Monitor International (BMI) forecasts, Russia is expected to grow from 2012 to 2022 after experiencing a decrease from 2008 to 2011. Brazil also decreased its investment in 2009 and BMI expects the 2012 data to show another decrease. However, for other years, including the BMI forecasts, an increase in investment spending is expected. China witnessed an increase from 2008 to 2010 and a decrease in 2011, with the trend expected to continue through to 2022. South Africa is the only country that shows a persistent marginal decrease in its spending. Table 2: Total Capital Investment as a Percentage of GDP

	2008	2009	2010	2011	2012e*	2013f*	2014f*	2015f*	2016f*	2017f*	2018f*	2019f*	2020f*	2021f*	2022f*
Brazil	19	16.9	18.4	19.3	18.9	19.6	20.2	20.8	21.2	21.5	21.7	21.9	22	22.1	22.2
Russia	23.8	22	21.9	20.9	21.8	22.3	23.4	24.3	25	25.2	25.6	25.9	26.2	26.5	26.8
India	33.9	33.5	32.6	32.9	31.3	31.5	32	32.5	33	33.1	33.2	33.4	33.4	33.3	33
China	40.7	45.3	47.9	46.2	44.8	43.5	42.8	42.2	41.4	40.7	40	39.3	38.7	38	37.4
South Africa	23	21.8	19.6	18.9	19.6	19.4	19.3	19.2	19.1	19	18.9	18.8	18.8	18.8	18.7

Beyond 2014, it was expected that all BRICS countries would have increased their per capita investment (See Table 3). Past trends show that between 2008 through to 2011 China increased its investment, and is expected to grow further until 2022. Brazil, Russia, and South Africa all decreased their investment from 2008 to 2009; however, South Africa is also expected to decrease its spending further from 2011 to 2013 where after all three are expected to show growth in investment. Out of all member countries India has the lowest per capita investment. Table 3: Capital Investment Per Capita in US Dollars

	2008	2009	2010	2011	2012e*	2013f*	2014f*	2015f*	2016f*	2017f*	2018f*	2019f*	2020f*	2021f*	2022f*
Brazil	1 556.5	1 395.0	1 972.4	2 424.5	2 122.0	2 187.1	2 267.1	2 363.5	2 638.0	3 084.3	3 516.5	4 015.5	4 593.4	5 268.5	5 891.2
Russia	2 764.4	1 876.7	2 267.5	2 713.7	2 764.8	3 049.7	3 484.2	4 084.2	4 749.0	5 380.5	6 058.5	6 795.4	7 629.5	8 554.3	9 609.8
India	326.1	357.9	418.2	494.5	526.6	477.3	555.9	607.3	671.0	734.8	805.0	882.1	962.2	1 045.0	1 129.8
China	1 387.6	1 718.1	2 099.2	2 470.3	2 693.9	2 843.6	2 990.1	3 176.3	3 381.4	3 601.0	3 836.2	4 088.0	4 357.7	4 646.6	4 956.2
South Africa	1 276.3	1 245.8	1 418.1	1 527.7	1 494.5	1 458.4	1 571.8	1 690.2	1 817.4	1 954.2	2 101.3	2 259.5	2 429.4	2 612.0	2 808.2

Conclusion and Recommendations In conclusion the questions to ask is can BRICS initiated infrastructure investment be equitable across member states and associated regional economies? Secondly, how can public infrastructure investment contribute towards this sustainable economic development among BRICS member states and associated regional economies experiencing public infrastructure backlogs? Of course these questions raise the fundamental issue of the role and impact of public infrastructure investment in sustainable and inclusive economic development. The lecture briefly reviewed and discussed some of the key concepts and issues that may mediate the role and impact of public infrastructure investment for sustainable and inclusive economic growth that can contribute towards attaining SDG targets for basic infrastructure. If BRICS member states want to be part of the SDG agenda member states should consider the following proposals: 1) The BRICS New Development Bank should include a programme for public infrastructure investment targeting the provision of basic services; 2) Give serious consideration to promoting and sharing research for disaggregating and recalibrating capital stock data to local levels to facilitate planning and targeting infrastructure investment; 3) Define an acceptable and consistent set of SDG indicators across BRICS that may be used to take account of socio-economic and spatial disparities that differentiate regions, sub-regions and communities from each other. The latter two will be important for making investment decisions in favour of meeting SDG targets. References Aschauer, D.A. 1989; Is Public Expenditure Productive, Journal of Monetary Economics, 23: 177-200, USA. 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Jaya Josie: Public Infrastructure Investment--A BRICS Perspective for Inclusive Sustainable Development

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