Infrastructure Investment and Poverty

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Thursday, January 16, 2020 /11:29 AM / By FDC Ltd / Header Image Credit: FDC

 

Infrastructure is an important component of economic growth. If created and properly maintained, it increases productivity and improves the quality of life. Basic physical infrastructure includes four main categories: transportation, energy, water and sanitation, and Information and Communication Technologies (ICT). It is a key element of poverty alleviation and often acts as a catalyst to development and enhances the impact of interventions to improve the poor's access to other assets, e.g., human, social, financial, and natural assets.

 

Conversely, deficiency of infrastructure constitutes a serious hindrance to sustainable growth and development and possibly worsens the poverty level.2 Infrastructure deficit may be in form of lack of access to infrastructure - without improved rural roads, poor regions can be cut off from participating in the market economy causing an increase in the number of people falling into poverty. This deficit can also come in form of the inability of poor people to afford infrastructure services which cost the poor people their time and money.

 

In the case of Vietnam, investment in rural infrastructure has proven to be the key driver of its growth. A number of strategies - including the introduction of policies and organization of programs to encourage both domestic and foreign investment have been successfully implemented, which spurred growth and reduced poverty rate. These programs have impacted many facets of households, including infrastructure investment (roads, irrigation, schools, health clinics, electricity), capacity building, skills upgrading, ensuring access to basic social services such as clean water and latrines, health services, primary and secondary enrolment.

 

This strategy has been successful in Vietnam where investment in rural roads significantly increased a household wealth index by 0.17%4 and the poorest 40% of households benefitted the most from travel time savings. Also, investment in education has resulted in high primary school completion rates, strong gender parity, low student/teacher ratios, and a low out of school rate.

 

Nigeria's infrastructure investment

Nigeria has been experiencing weak growth in recent years owing to the reduction in infrastructure investment. Infrastructure in the country is in a deplorable state due to poor government policies, which impede the country's ability to mobilize revenues, allocate them effectively and manage innovative funding model for infrastructure.

 

The World Economic Forum's 2019 Global competitiveness index ranks Nigeria 116 out of 141 countries, a ranking which is far below average. This points to the poor state of infrastructure. According to an Asian Development Bank report, a country's infrastructure spend should amount to a minimum of 6% of GDP to attain a reasonable level of sustainable development. Over the past decade, Nigeria's infrastructure spending contributed a small percentage to GDP compared with other developing countries, particularly in Asia.

 

Even though the GDP of Nigeria has been increasing in recent years, this increase is far below the rapid growth in population. Recently, the World Bank predicted a further increase in the number of people living in poverty in Nigeria, if the current pace of economic growth is maintained. This can be averted if the government pays more attention to the dilapidated state of infrastructure. The need to create reforms by the government, which put investment in infrastructure at the top of the list is paramount to meeting the growing demand of the population in order to promote economic development and reduce poverty.

 

Why rural infrastructure investment?

More than half of Nigeria's population resides in rural areas. The population in the country has been increasing rapidly with a limited infrastructure (especially in the rural areas) not designed to sustain the masses and meet their demands. The situation is exacerbated by the bad state of existing rural infrastructure: water supply is neither clean nor adequate to meet their needs; local roads are inaccessible; power supply is non-existent in some areas, and high cost of living - all contributing to the increasing rate of poverty. Over the years, the number of people living in extreme poverty in the country has increased. Most of that increase occurs in the rural areas. According to the estimates of World Data Lab's. Poverty Clock, about 90 million people live in extreme poverty.

 

These people are greatly affected by the negative impact of inadequate infrastructure, including lack of opportunity to generate income, vulnerability, and inaccessibility to good education among others. The extreme poverty in Nigeria is worrisome and demands urgent policies that will boost employment and aggregate income.

 

Boosting the investment in rural infrastructure including creation and improvement of rural roads, development of educational and health facilities as well as water and sanitation will enhance economic activity, create jobs (indirect and direct) and remove bottlenecks in the economy. It will improve the living conditions of the poor, which will in turn contribute to the growth of the economy and go a long way in reducing the number of people living in poverty.

 

Vietnam's investment in rural infrastructure: a case study

Vietnam has one of the fastest growing economies in the world. It has shown significant improvement in the past thirty years in poverty reduction and economic growth, which has benefitted its citizens. Between 2002 and 2018, more than 45 million people were lifted out of poverty. Poverty rates declined sharply from over 70% to below 6%, and GDP per capita increased by 2.5 times to $2,500 in 2018.

 

An average of 1.5 million Vietnamese joined the global middle-income class each year since 2014 due to the impact of these reforms. Prior to this development, the country experienced extreme poverty after the war with the United States in the 1960s and 1970s. The Vietnamese were largely dependent on agriculture for survival and 80% of the country's poor lived in rural areas.

 

Linked to the high degree of rural poverty was the dilapidated state of the rural infrastructure result of the war. The reduction in poverty was as a result of the actions taken by the Vietnamese government including investment in rural infrastructure by providing and developing infrastructure, engagement of the private sector for additional investment and introduction of policies promoting foreign investment.

 

Development of basic physical infrastructure

Vietnam managed to improve its infrastructure ranking from the 95th place in 2012 to 79th (out of 141 countries) in 2016 while Nigeria's infrastructure ranking worsened from 130th to 132nd.

 

In developing infrastructure, the Vietnamese government increased spending on rural infrastructure by rehabilitating and upgrading roads and working on road connectivity and building more national road networks.

 

The rehabilitation of the rural roads impacted the communities in terms of shortening the travel time between cities for business opportunities, enabling easier access to the markets as well as accessibility of education and health care facilities. Productivity also improved. To further increase economic growth and reduce poverty in the rural areas, the country invested in the development of its schools, hospitals, and power supply.

 

Particularly, the government of Vietnam constructed industrial parks (e.g. the Hanoi industrial park) to promote commercial activities. This investment attracted foreign manufacturers, creating more jobs and reducing the poverty rate.

 

Private sector investment

Given the huge cost associated with infrastructure investment, the Vietnam government recognized the need to engage the private sector for investment. It created platforms that increased private sector participation as well as enlightenment on the need to invest in rural infrastructure. An annual meeting, coordinated by the Vietnam Committee for Commerce and Industry, was organized to advocate a liberal business environment for domestic private sector. Today, Vietnam is known for its dynamic and strong private sector. The private sector has been contributing remarkably to the development of the country.

 

Policies promoting foreign investment

The Vietnam government has been successful in mobilizing external resources for poverty reduction. It places high importance on financial aid from international donors. With assistance from international donors, NGOs and UN agencies, the government of Vietnam has been able to organize initiatives for development and poverty reduction. In Vietnam, there are different forums where government, donors and NGOs discuss poverty. One is the Poverty Task Force consisting of government agencies, donors and NGOs, who meet regularly to share information, policies and studies on poverty.

 

This provides the opportunity for government agencies to discuss the causes of poverty and proffer appropriate solutions for poverty reduction. FDI has been pivotal. Vietnam's economy has attracted foreign investment from countries like Japan, China and Australia. FDI accounted for 25% of investment in Vietnam between 2011 and 2015, and contributed 20.1% of GDP in 2015. This has also made FDI a major employer of labour, with 3.5 million direct and 4 million indirect jobs created by foreign investors. This contributed to the economy's growth and development through job creation and the decreasing rate of poverty.

 

The success in poverty reduction can be largely attributed to the adoption of effective support policies by the government and active participation of all sectors of the economy. Despite the reduction in poverty, the Vietnam government continues to work towards sustaining the increase in economic growth and reducing the rate of poverty even further. As demonstrated by Vietnam, it is possible to address the challenges of poverty reduction through transport infrastructure.

 

Without improved roads, it would be difficult for farmers to move beyond subsistence farming and access national and international markets with their surpluses. Improved roads connectivity reduces transaction costs due to distance and allow for easier transport of inputs, such as fertilizers. The resultant effect of better roads in rural areas is that the household wealth index in the rural area will increase. Another key element the Vietnam government considered was the promotion of the agricultural sector.

 

The policies put in place for promoting agriculture have proven to be an important driver of the Vietnamese development. Infrastructure such as roads, markets, irrigation system and lands were developed to promote agricultural development. Vietnam was able to achieve its economic growth rate due to their investment made in education, health and access to amenities. This increased the number of educated labor force thus contributing to the growth of the economy through innovations and technological advancement. The Vietnam government's efforts to release these resources have proven to be a sustainable approach to reducing poverty and promoting growth.

 

Moreover, the creation of a stable and political environment has gone a long way in attracting foreign investors as well as domestic investment for economic growth. The government recognized the need to engage the private sector and make policies that attract foreign investors who have contributed to the massive infrastructural development as well as creation of jobs. Through sound policies, the government has been able to effectively organize and redistribute resources from the rich provinces to the poor ones thus, encouraging inclusive growth.

 

Conclusion

Investing in infrastructure has proven to be a great tool for poverty reduction through its direct impact on incomes, and its impact on the non-income aspects of poverty by contributing to improvement in health, nutrition, education and social cohesion. It is a call for government to address the issue of deficit infrastructure through the development of programs for health and education services that take full advantage of improved access to transport services, electricity and communications, especially in rural areas.

 

This can be achieved either through domestic investment or foreign investment. Unlike Vietnam, which is vulnerable to natural disasters, Nigeria is blessed with abundant resources and favorable weather conditions, hence the need for frequent rehabilitation of infrastructure in Nigeria is reduced. The gains in infrastructure will have a multiplier effect and would boost productivity and output, thereby leading to economic growth and development in Nigeria.

 

Proshare Nigeria Pvt. Ltd.


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