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Florencia Seré

Economist, Cámara de Construcción de Uruguay


 


Why is Investment in Infrastructure so Important? Why Should Investment in Infrastructure be a Priority for Countries?


According to the Royal Spanish Academy, infrastructure is a set of elements, provisions, or services necessary for the proper functioning of a country, a city or any organization. Besides, it is important to remark that the inadequate state of infrastructure has been one of the main historic obstacles for economic growth and development, particularly in countries that are part of Latin America and the Caribbean.


In numbers, the CEPAL states that, in average, the annual investment in infrastructure in Latin America should represent between 5% and 8% of the regional Gross Domestic Product (GDP) in order to start reducing the existing gap between the developed countries and Latin American ones. 


In order to understand the reasons why it is important to invest in infrastructure, we first need to know that there is one important problem related to infrastructure that is the following: there are usually unlimited needs regarding infrastructure while there are limited resources to build it up. In this sense, some challenges emerge regarding financing schemes, technological and digital updates and the ability and capacity of managing projects and resources. Due to what was mentioned before, the private sector has acquired a more important role lately, providing “know-how”, talented human resources, as well as financial appeasement.


So, why is it so important to invest in infrastructure? Why are the CEPAL and other international and global organisms stating that investment in infrastructure in terms of GDP should be greater in undeveloped countries? According to reference bibliography, infrastructure acts as the backbone of a healthy economy, as investment in infrastructure is considered to be a “productive investment” or “pushing investment”. It is known that if a country invests in infrastructure, this will probably generate a greater economic dynamism, not only when going through the “construction” phase of the generation of infrastructure but also when passing through the “operation and use” phase. As it is considered to be a “productive investment” it is said that investment in infrastructure might be one of the main types of investment through which governments can obtain greater returns. 


Moreover, investment in infrastructure means employment creation (direct and indirect) and most of the time, it also promotes the development of human capital. According to the ILO (2020), investment in infrastructure can be one of the first and main measures that governments can implement in order to reactivate economies (for instance in contexts of crisis or even pandemic) as construction is a labor-intensive activity and can also absorb workers from other economic sectors easily. The IMF stated and proved in 2020 that public investment in infrastructure can play a central role in economic recovery, with the potential to generate between 2 and 8 jobs for every million dollars invested in traditional infrastructure and between 5 and 14 for every million dollars invested in Research and development, renewable energy, green electricity and Smart buildings.

 

At the same time, it is said that infrastructure is one of the main drivers of economic growth and development because investing in certain type of infrastructure definitely contributes to the improvement of the economy’s productivity and competitiveness, as infrastructure allows most of the economic activities to produce, trade and develop. Furthermore, investment in infrastructure tends to help to reduce inequality gaps, because of generating infrastructure assets (houses, sanitation, electric connections, among others) that might allow the most vulnerable population to meet basic and essential needs. This is the reason why investment in infrastructure is considered to be a relevant contribution to social welfare and a sustainable economic development. 


Due to the importance of infrastructure, this issue is a very relevant one for governments, for their public budgets and public timings. As it was mentioned before, economic resources, mainly in undeveloped countries, might be limited and this is why new and creative financing schemes have emerged lastly in Latin America, involving the private sector as a crucial financing partner (private initiatives, public-private participation projects, among others).


All in all, investment in infrastructure should be one of the main key central issues to be taken into account by governments when setting priorities while defining its budget, its investment plan and when designing different schemes and options to make necessary infrastructure projects real, looking forward to injecting dynamism to the economy, to promote economic development and to improve social welfare. 


“Build infrastructure, boost the economy and enrich society”




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