A summary of America's infrastructure problems can be reviewed here: http://www.asce.org/reportcard/2005/index.cfm

Earlier this year following our Roundtable on Renewing California's Infrastructure we prepared a whitepaper summarizing the challenges in California and the way forward for the infrastructure sector. Here is an excerpt of that paper, which, given the present discussions at the national level, is relevant not just to California but also to many other states as well:

Implications of California's Infrastructure Problems

California's infrastructure problems will have serious repercussions for the State and its citizens--now and in the future--for competitiveness and economic growth, living standards, and loss of global influence and leadership.

Slower Economic Growth

Infrastructure's contributions to growth in both per capita and broader measures of GDP have been documented in numerous national, regional, and global studies. For example, a World Bank study found that annual investments of 1% of GDP in infrastructure typically support 1% growth in GDP. While infrastructure is necessary to generate sustained increases in economic growth, rates of infrastructure-driven growth differ greatly over time and across countries. Moreover, infrastructure is insufficient in and of itself for growth to occur--other human, social, economic, resource, and institutional endowments need be present in catalyzing proportions. Furthermore, nonlinearity in endogenous growth patterns can make the influence of infrastructure on growth difficult to decipher due to knowledge spillovers, circular-and-cumulative causation, and agglomeration effects. Accordingly, infrastructure is not something that should be purchased by a State in unlimited quantities--some countries have "overprovided" beyond the growth-maximizing level.

But what is clear from decades of research is that when infrastructure becomes a bottleneck or limiting factor--as is the case with California's congestion--further investment can unleash unusually attractive returns. In many cases, "it is more important to improve the quality of the existing infrastructure than to engage in further investment." World Bank research has documented that after periods of sustained neglect--as in California at the State level over the past three decades--new infrastructure investment can yield extraordinary returns relative to investments in other types of public capital formation. California is currently living on a 30-year-old collection of infrastructure, and obvious problems like road and port congestion, power blackouts, and leaky pipes are creating a drag on the State's economic output. Economic side effects will only worsen if the neglect continues.

Reduced Quality of Life

At the household level, definitions and indicators of quality of life often include measures of access to basic infrastructure services such as water supply, sanitation, transportation, and electricity. Moreover, a strong link exists between access to infrastructure and family income. Infrastructure affects almost every aspect of the daily lives of Californians--and if infrastructure regresses, so will the quality of life for many, if not most, citizens of the State.

Loss of Global Leadership Position

A further implication of California's eroding infrastructure is that the State risks losing its position of leadership in the global economy. California is the world's eighth largest economy, making it larger than most independent nations. In the race between states and nations to attract foreign direct investment, infrastructure is critically important. More than ever before, capital is going to economies with two important features--large economic size and attractive business environment, which together account for 75% of the variance in global foreign direct investment flows. If California can go beyond mere investing in fixing potholes to developing an advanced infrastructure system unrivaled in Western economies, it could continue to attract a disproportionate share of global capital and achieve amazing returns.

On the flipside, if California slides out of the 10 most attractive global business environments, it could quickly lose hundreds of billions of dollars in new investment flows. Indeed, the 10 economies that topped the business environment rankings published by The Economist magazine in 2007 attracted more than half of all global capital flows. Thus the pressure of globalization adds a high-stakes dimension to this game not present in the 1970s or 1980s.

In making facility location decisions companies pay particular attention to the quality and availability of infrastructure. To the extent that companies relocate to states or countries with better infrastructure, their economic benefit to California is lost for the duration. The state of California's infrastructure is becoming a serious weakness it its competition with other jurisdictions.

California has an opportunity to become the gateway of Asian trade and investment in North America, as Asia's share of the global economy is expected to grow 30-40% over the next 20 years. But this privileged position as a portal in the global supply chain is by no means secure. In recent months Chinese leaders have raised serious concerns about California's commitment to infrastructure investment, and Chinese planners are said to be actively exploring alternate transportation hubs in Mexico, Canada, and Washington state. If these shifts occur, they would involve long-term infrastructure arrangements that would take a generation to reverse.

Posted by rjorr at October 21, 2008 10:29 AM