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Infrastructure in times of crisis

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  • June 19, 2020
  • Tags Development Finance, Infrastructure, Economy, COVID-19, Pandemic, Resilience

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It is universally accepted that the world as we know it will look different after this, but our position as a continent emerging from a COVID-19 era will be determined by the decisions we make in policy and subsequently, investment. In their recovery plans, governments must not neglect infrastructure development, writes Zinhle Mncube, an MPhil in Development Finance (MDevF) student, in this opinion piece.

 

In our third and hopefully, final block of MDevF this year, one of my elective modules was Infrastructure Finance. Infrastructure Finance seeks to “put into context the relationship between infrastructure and economic growth as well as interrogate the depth of the infrastructure gap facing the African continent”. This module was put together for the professional who is interested in understanding the linkages between infrastructure, economic growth and economic development. What drew me to the module was that it aligned with my work, which involves developing industrial infrastructure in small, neglected communities. This infrastructure will assist the communities to be more economically sustainable.

The importance of infrastructure cannot be understated. For any well-functioning economy, whether we are looking at a community in Touwsrivier in the Western Cape or the national economy, infrastructure is a conduit to development. In a sample study of countries, Calderón and Servén (2010) found that on average, growth increased by 1.6% between 2001 and 2005 due to infrastructure development. The authors further added that increasing the quantum of infrastructure assists in reducing inequality. This augments the argument, also shared by the authors, that the development of infrastructure improves the ability of poor individuals or communities to access more productive opportunities.

However, how important is infrastructure in times of economic downturn? Does infrastructure create resilience in an economy?

 

Impact of the COVID-19 pandemic

From various reports, we can see how the virus has significantly comprised what was deemed as well-run health systems in developed countries and cities. The fear is that should the spread of the novel COVID-19 amplify in Sub-Saharan Africa, it will devastate already struggling healthcare systems and thus impacting all other responses to diseases such as malaria and HIV/AIDS. In 2018, a World Health Organization (WHO) report on spending in healthcare found that governments in low and lower-to-middle income countries (where most African countries are categorised) spent between US$10 and US$50 per capita respectively on health whereas upper middle income and high-income countries spend just over US$200 and more than US$2000 per capita on healthcare. To be blunt, Africa cannot afford not to contain the virus.

To be blunt, Africa cannot afford not to contain the virus.

The health crisis that is borne by the virus is simultaneously met with the continuing global economic fallout. A number of countries have instituted restrictions in the form of national lockdowns or self-quarantining of which the purpose is to limit the movement of people whether it is commuting to work or to catch up with friends at a restaurant. The implications of these actions by governments, while necessary, is that most of the businesses (unless deemed essential) have been closed.

In the South African news cycle, we have seen many small and informal businesses sharing their anguish at the effect of the lockdown. Most of these businesses are survivalist in nature and need to operate daily for the owners to make ends meet and feed their families.

The COVID-19 pandemic has also negatively impacted stock markets and the value of currencies all over the world. Towards the end of March, the leading equity market indices in the US, the S&P 500 and NASDAQ, fell by 20% for the quarter and 23% respectively – numbers last seen in the 2008 financial crisis and the 1987 Black Monday crash. On the 16th March, the Johannesburg Securities Exchange All-Share Index fell by 32.6% since the beginning of the year. In monetary terms, that comes up to R2.3 trillion (more than USD126.1 billion) in equity value wiped out off the JSE.

To soften this economic blow, the South African government announced a R800 billion (about USD26 billion) economic relief which will go towards adding more capacity to its health sector; providing a grant for the unemployed and more allocated funds to those who are caregivers; support for companies; tax relief and support for employees and other supportive measures for the monetary and financial markets. In the continent, the African Development Bank recently launched a USD10 billion Response Facility to assist its member countries to fight the pandemic.

In April, the International Monetary Fund approved a USD3.4 billion in emergency financial assistance under its Rapid Finance Instrument which would support Nigeria’s response to the pandemic which caused a massive economic fall out in the country led by the sharp fall in oil prices.

Globally, the United States introduced stimulus packages to assist individuals who will be out of work as well as business in distress. The stimulus package from US government comes up to a staggering US$2 trillion. It’s expected that more countries will follow suit in implementing similar measures, quantitative easing included.

Some of the interventions involve the central banks cutting interest rates which assists in reducing the cost of debt that households and businesses have to pay to banks. However, some central banks in emerging economies have reduced their interest rates to such an extent that they no longer compensate for inflation anymore. This has led to foreign funds exiting emerging markets further stunting their ability to recover.

 

Pandemic and Infrastructure

So, where does infrastructure fit in all this crisis talk? Let’s first start with defining infrastructure. Paging back to my infrastructure finance notes, infrastructure refers to the physical components that support the built environment (built environment such as schools, hospitals, commercial and government) and its associated physical support. This cuts across several sectors such as energy, transportation, water, communication and of course, health.

The infrastructure allows for economic activity to take place and if built with the right quality, enables the economy to run efficiently.

Infrastructure is the railway system that transports commodities and people to their desired destination; it is the gas pipeline that connects the gas fields of Pande Mozambique to South Africa. Telecommunication network such as cell phone towers falls under this definition as well along with the distribution network that takes electricity from power stations to households. The infrastructure allows for economic activity to take place and if built with the right quality, enables the economy to run efficiently.

With the national lockdown in South Africa, all people living in the country by law are required to stay at home. All businesses, except for essential services such as healthcare and grocery shops, have also been closed. Some companies, like my employer, have encouraged employees to continue working from home.

Assuming that employees can fight off the temptation of an extra hour (or five) of sleep, they will need the following infrastructure elements to be able to work productively from home:

  • Consistent electricity supply
  • Stable internet service
  • Running water and sanitation

The absence of the above infrastructure can easily result in minimal to no productivity. The lack of well-built infrastructure hampers any government’s response to an all-encompassing crisis like the COVID-19 to a point of paralysis. The African Development Bank (AfDB) alludes to this in their 2018 African Economic Outlook, stating that poor infrastructure not only results in lost opportunity for economic growth, but it also slows human development and increases child mortality.

…the South African government has responded admirably to the COVID-19 pandemic considering the pace and ever-changing environment it faces.

In my view, the South African government has responded admirably to the COVID-19 pandemic considering the pace and ever-changing environment it faces. What has helped them in no small measure has been an able national road network, a well-behaved national electricity grid (thanks, Eskom), water infrastructure that reaches most South African homes and a telecommunications and radio infrastructure that has enabled the government to communicate important messaging to the public.

Global economies are forecasted to go into recession as a result of the pandemic. How quickly and effectively an economy recovers will in part be determined by current and planned infrastructure stock. In his findings, J Stupack (2018) found that investing in infrastructure like roads, railways, airports and utilities produces noteworthy gains in economic output. Further to that, public investment in infrastructure during a recession has a more substantial economic production than if the same investment were to be made during a period of expansion.

With a number of people expected to be out of work, infrastructure development can absorb some of the workers in the short-term while the rest of the market picks itself up. The AfDB further states that investment in quality infrastructure achieves long-term returns that can withstand the volatility of stock and bond markets.

 

Conclusion

It is universally accepted that the world as we know it will look different after this, but our position as a continent emerging from a COVID-19 era will be determined by the decisions we make in policy and subsequently, investment. Recovery from the pandemic will require a rejigging and reallocation of fiscus which might require extra funds from external financiers. In their recovery plans, governments must not neglect infrastructure development.

Before the COVID-19 pandemic, the AfDB found that Africa had an infrastructure gap of USD107.5 billion a year to be on par with the rest of the world and to unlock its growth potential. Whilst it is unlikely that this gap will be closed in the near future, the continent must make strides towards that target. This is no longer just about Africa’s continued economic growth trajectory, but it now speaks to the resilience of its economy.

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