Low-Income Countries Infrastructure Seminar Series

Transportation and the Spatial Distribution of Economic Activity

Stephen J. Redding , Princeton University

The lecture summarizes recent theoretical and empirical advances for understanding the impact of transportation infrastructure. The new spatial models are sufficiently rich to connect the observed features of data and yet tractable enough to be amenable to analytical analysis and policy-relevant counterfactuals (e.g., the construction of a new railway line). Using the natural experiments of the invention of the steam railway in the 19^th century London and Argentina’s integration into the world economy in the late-19^th century, this presentation shows how transport infrastructure shapes the spatial distribution of economic activity, both within individual cities and across cities.

SMEs amidst the Pandemic and Reopening: Digital Edge and Transformation

Xiaobo Zhang : National School of Development at Peking University

Using administrative universal firm registration data as well as online and offline surveys of small business owners in China, we find that digitization significantly increases SMEs' resilience against the COVID-19 pandemic. After the lockdown in January 2020, firm entries have exhibited a V-shaped pattern, with entries of e-commerce firms experiencing a less pronounced initial drop and a quicker rebound. Meanwhile, digital technology adoption of existing firms measured in various dimensions (captured by, e.g., the alteration of operation scope to include e-commerce activities) has also accelerated during the pandemic, and the effect persists one year after full reopening. 

The seminar presents empirical evidence on the role of digitization in improving the resilience of small- and medium-sized enterprises (SMEs) to the COVID-19 pandemic based on administrative universal firm registration data as well as online and offline surveys of small business owners in China. The main messages from the seminar are as follows:

1. E-commerce enhances the resilience of SMEs to the pandemic in that firms with higher proportion of e-commerce sales prior to the pandemic are more likely to:

stay open during the pandemic

reopen after the restrictions are lifted

maintain higher cash flow buffer

hold more positive business outlook

2. E-commerce platform enhances firms’ resilience by

facilitating firms' connection to both consumers and supplies and

expediting cash flows from consumers to firms and improving liquidity

3.  The pandemic accelerates digitization among Chinese business firms by both the

extensive margin: more entries from firms doing business electronically; and

intensive margin: surviving firms expanding their business share in e-commerce.

4.  Digitization is a multi-facet phenomenon, to which e-commerce is only one dimension. SMEs also deepen their adoption of other aspects of digitization—artificial intelligence, work-from-home technologies, information management system, etc.—and benefit from them.

5.  To fully utilize e-commerce and more broadly digitization, it requires, however, an economy to have supporting infrastructure such as reliable internet backbones, well-connected transportation system and far-reaching logistic network. Meanwhile, digital literacy of both the consumers and entrepreneurs is one crucial bottleneck to digitization. Entrepreneurs cited lack of time to invest in learning e-commerce related knowledge as the major obstacles to conducting business electronically.

6. On the cost side, digitization increases the vulnerability of the economy to cyberattacks, which could expose the financial sector to additional source of instability. In addition, monopoly of digital platform could also have important distributional consequences.

Risk of Investing in Long-Term Infrastructure and Technology in Asia

Martin Kimmig (Asian Infrastructure Investment Bank) 

The Asian Infrastructure Investment Bank (AIIB) is a multilateral lender for infrastructure projects. As banks shift focus to short-run projects or projects that can be sold off in financial markets, the AIIB seeks to fill this gap. The risks associated with longer term projects (15-18 years) are unique as they require assets to be locked in for extended periods.

Infrastructure investment has a large effect on development, especially in Low Income Countries. Despite this, many Asian countries are not investing sufficiently. Infrastructure in developing countries is on the order to two times more productive than in developed countries.  Recommended infrastructure investment is described by a 4-8-10 rule. Developed countries should around 4-5% of GDP on infrastructure, developing countries should spend 8% on infrastructure, and high savings countries should spend around 10%. Lower recommended investment by developed countries is because of relatively high capacity and investment efficiency. China continues to be an outlier with high infrastructure investment (over 17%).

The need for infrastructure investment in Asia (excluding China) is estimated to be around $26 trillion dollars with about 10% of this being climate related investment. Financing for investment comes from Multilateral Development Banks (2%), public financing (90%) and private financing (8%). The AIIB sees the most room for expansion of private sector financing for infrastructure in the future.  

Long-term investment in infrastructure needs to account for several trends in Asia. (1) The increase in the middle class and aging of the population creates a need for higher infrastructure investment, especially in healthcare. (2) The urbanization of Asia and rise of megacities. (3) Risks associate with climate change.  (4) The introduction and expansion of new disruptive technologies (e.g. cloud technology, renewable energy). (5) regionalization and the trend towards larger regional and intra-regional trade. 

Investors face risk from stranded assets. This has been seen recently with the decline in the price of coal relative to other energy sources. Despite this trend and poor outlook for coal, countries are still investing in coal infrastructure. Risks to infrastructure projects stem from poor economic outlook, geopolitical tensions, and rising debt levels. Most projects the AIIB deals with involve some form of foreign investment leading to currency exposure and country-specific risks (e.g. regulatory risk, nationalization of projects). Strong monetary policy, debt sustainability and reputation are mitigating factors limiting the exposure of investors.

COVID-19 present a major hurdle to infrastructure investment. In the short-run, countries risk losing viable businesses and a slow recovery. In the long-run, current increases in debt ratios may not disappear and may become a permanent burden for countries. Future infrastructure investment should focus on green recovery, digital infrastructure and private sector financing.

COVID-19: Impact on Infrastructure

Herb Ladley (IMG Rebel)