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For low-income countries, the absence of reliable infrastructure—roads, railways, ports, but also power supply—has become an increasingly binding constraint on growth. And we know that investment in infrastructure can raise productivity, boost growth, and help reduce poverty. But as straightforward as it sounds, getting investment decisions right is no easy feat.
For starters, low-income countries have massive investment needs. The World Bank has estimated that, in sub-Saharan Africa alone, the total financing need is around $93 billion per year. And one third of this still unfunded.
Even when financing is available, there’s a raft of other issues to tackle. What investments offer the biggest boost to growth? How much investment is needed and by whom? How to finance this investment without taking on too much debt?
New sources of growth and investment
Many low-income countries showed a lot of resilience during the global economic crisis. A global recovery is now underway, but it remains fragile and uneven. In particular, the more fragile outlook for many advanced economies means they’re less likely to be a big source of growth or financing for the foreseeable future. The key issue now is for low-income countries to unlock new sources of growth and investment financing. At the same time, the more robust recoveries of dynamic emerging market economies and their new status as development partners brings fresh perspectives. After all, scaling up investment was a large part of their successful shift to a higher growth path.
Against this backdrop, the IMF recently sponsored a one-day conference on the issue of scaling up infrastructure investment in low-income countries, which was a chance to bring these different perspectives together. Several overarching messages emerged.
1. Stronger framework for public sector investment decisions
There are several broad principles that can guide better investment decisions
- First, countries need to develop a coherent strategy for scaling up infrastructure that maximizes the growth potential.
- Second, countries need to follow through on their investment strategies. For this, they need a strong institutional framework that keeps implementation in line with the strategy, ensures that projects are properly appraised and good projects selected, and sees that adequate resources are budgeted so that investment projects can be completed and maintained. Good governance and strong public financial management systems are critical.
- Third, countries need to be savvy about how they finance the scaling up.
- They need to make sure that the fiscal revenue base is strong and growing—through tax reform and good revenue administration—so that the public sector can more easily afford the debts it takes on.
- They need to ensure that all borrowing indeed finances investment, and hence growth, not consumption.
- They also need a good debt management strategy to ensure that the overall amount and type of debt that the country assumes is within its capacity to repay.
2. Support for capacity building
Multilateral institutions and donors can help with financing, of course, but their contribution to capacity building is equally important.
From the IMF’s perspective, this includes helping countries to design budgets consistent with infrastructure plans, to build capacity to manage their debt, and to develop better tools to assess the likely growth returns from investment.
But, new development partners have their own, fresh perspective on how to fill infrastructure gaps, so they have knowledge to pass on. The Chinese, for instance, have had a lot of success in planning coherent investment, constantly reassessing infrastructure gaps and reorienting resources. They also ensure that their infrastructure projects are linked up—for example, if they build a port, they also build roads and railways that lead to the port. Low-income countries can benefit from this kind of experience.
3. A bigger role for the private sector
While the government needs to define the strategy and identify gaps, there are areas where it is sensible to rely mostly on private sector investment. The energy sector and telecoms are two examples of where a mixture of public and private sector investment can work.
Tapping private sector equity financing also allows investment to be scaled up beyond what the government might be able to afford. So it is crucial that governments create the all important enabling environment—good tax system, good governance, and a sound legal framework—and give confidence that the environment will allow a proper return on private investments.
While it’s difficult to do justice to the richness of discussions at the conference, we hope it can set the stage for ongoing dialogue about how low-income countries can increase the volume and quality of investment in a sustainable way.
Filed under: Economic Crisis, LICs, Low-income countries, Public debt Tagged: | capacity building, debt sustainability, enabling environment, global economic crisis, growth potential, infrastructure, investment strategies, low-income countries, private investment, sustainable investment