PHD RESEARCH INSIGHTS
Here is what I want you to know about infrastructure, economic growth and development.
This is part of my PhD work at Oxford University.
IS ALL GOOD NEWS GOOD NEWS? THINK AGAIN.
Global infrastructure is estimated to require investments in the order of USD 28 trillion over the next 20 years in order to serve needs (Heathcote and Mulheirn, 2020). New capacity additions are considered crucial for granting businesses and households access to reliable electricity around the world, and for contributing to economic growth.
In my research I find that the infrastructure-growth story is more complicated than we thought in developing countries. Households and firms react in unexpected ways when they are surprised or disappointed by infrastructure projects. I believe that infrastructure change-makers should be aware of these counter-intuitive behaviors when embarking on projects.
Here are the specifics. My research shows that GDP and investment are hurt when infrastructure projects fail in developing countries - this is what we would expect. What is striking is that failed power plants are costly for years after the disappointment occurred. Bad news lingers.
What about good news, then? When unexpected power plants are commissioned in developing countries, firms and households do not prepare for the future benefits of the additional power capacity like they should. We would expect a boost to output in anticipation of the electricity that is yet to flow. The data suggest the opposite: output declines ever so slightly.
LOW BORROWING RATES HIDE THE TRICKY TRUTH IN EMERGING MARKETS.
Access to hard currency borrowing is becoming an increasingly important external funding source for emerging market firms: the amount of outstanding corporate external debt surpassed its sovereign counterpart in 2012 and continues to increase in relative importance.
Although median sovereign debt to GDP ratios in emerging markets are well within historical ranges, I find that this metric can mask the true risks facing emerging economies from a debt sustainability perspective. The starting point relies on checking whether the median rate of real GDP growth exceeds the average real bond yield paid by a sovereign issuer. Put simply, even if interest rates are historically low, they can pose a problem for governments that wish to continue to borrow without having to raise taxes or cut spending in order to keep debt-to-GDP ratios within bounds.
In my research I find that emerging countries' breathing space for running a primary fiscal deficit while continuing to roll over debt has been shrinking over the past 10 years: periods in which the median economic growth rate across emerging economies exceeded the rate payable on sovereign hard currency bonds have become shorter--lived since 2000. Why does this matter?
I believe it matters because perceived government debt sustainability can directly impact corporate borrowing costs. Specifically, I investigate how the yield - growth trend could affect firms in these economies through the channel of investor beliefs -- transfer risks.
INSIGHTS FROM MY WORLD BANK WORK
This is what I think you should know about Africa's infrastructure sector. Some work from my years at the Bank.
ELECTRICITY TARIFFS ARE FAR FROM FUTURE-PROOF.
600 million. This is the number of Africans that still remain unconnected to the power grid as of 2020 (IEA, 2020). Electricity pricing lies at the center of a solution to this gridlock. Tariff structures influence the investment behaviors of electric utilities across the developing world, affecting their ability to cover essential costs and maintain capital-intensive grids, lines and stations.
My World Bank colleagues and I evaluated the performance of electricity tariff designs along cost recovery, vertical equity (affordability), and horizontal equity (or price differentiation). We also investigate the extent to which current electricity tariff designs are well-suited to incentivize efficient adoption of emerging technologies.
Most countries' tariff structures are far from future-proof. The scant use of load-related charges to cover the fixed costs of the network, the continued preponderance of increasing block tariffs for residential customers, and the limited application of time-of-use pricing are all immediate problems that need to be addressed if grids are to meet the challenges to come.
DEVELOPING ECONOMIES HAVE LARGELY DONE THINGS ``THEIR WAY''.
Some 25 years have elapsed since international financial institutions espoused a package of power sector reform measures that became known as the Washington Consensus.
But what was the uptake of power sector reforms, and to what extent were countries' unique paths affected by the economic and political characteristics of the developing countries concerned?
Exploiting a unique new data set on power sector reforms adopted by 88 countries across the developing world over 25 years, the Chief Economist for Infrastructure at the World Bank and I take stock of the lessons learned.
Only a small minority of developing countries fully implemented the reform model as originally prescribed. For the majority, reforms were only selectively adopted according to ease of implementation, often stagnated at an intermediate stage, and were sometimes packaged and sequenced in ways unrelated to the original logic.
Despite how the Washington Consensus is perceived, governments appear to have taken the liberty to implement reforms as they saw fit.