Effects of Infrastructure on Economic Growth of Nation
Infrastructure contributes to economic growth of a nation both by increasing the productivity and enhancing the quality of life through the following two mechanisms.
- Contributions to growth through reductions in costs
- Contributions to growth through structural change
Contributions to Growth through Reductions in Costs
Investment in infrastructure thereby leading to access to reliable provision of infrastructure services bring spill over effects on: (i) production, investment, and employment; (ii) improve competitiveness at the international market; and (iii) develop the domestic market.
Effects on production, investment and employment: Services provided by infrastructure such as electricity, telecommunications, water, and transport are intermediate inputs for various industries, agriculture, and services sector. These services account for a major portion of the expenses. Investment in infrastructure could lead to increase in stock of economic infrastructure thereby leading to economies of scale (i.e. declining unit costs as volume of output increases) and getting the benefits of reduced costs to users of each service unit consumed. The reduction in these input costs also raises the profitability of production, and thus permits higher levels of output and income.
In case of absolute unavailability or unreliable provision of infrastructure services, the enterprises are forced to seek higher cost alternatives. The unavailable and/or unreliable infrastructure services lead to underutilization of existing productive capacity, constrain production efficiency and output growth. The unreliable infrastructure services also impose direct cost of production delays, and loss of raw materials or outputs. In addition to this, infrastructure service users are also required to invest in alternative sources and thus raising their capital costs.
Access to adequate infrastructure facilities promotes growth of small and medium enterprises (SMEs) and generation of employment. The SMEs, which are predominantly labour intensive, are not in a position to meet the relatively high infrastructure cost burdens so they tend to start close to urban areas with easy access to infrastructure services. Once they expand their production, the SMEs relocate to peripheral areas of the cities. In the absence of adequate infrastructure facilities, the cities will not be able to promote growth of SMEs and generate employment.
Availability of appropriate infrastructure facilities has a strong bearing on the attractiveness of the region for investment. The decision to make investment need to take into consideration various variables relating to labour cost, taxation, market size (collectively known as features of comparative advantage), infrastructure quality, degree of industrialization, level of past foreign direct investment (collectively known as agglomeration benefits), socio-political risk, and openness of economic policy. Infrastructure quality is one of the critical factors taken into consideration while making investment into manufacturing and electronic industries in developing countries.