A State of Good Repair: How Infrastructure Maintenance Reduces Inequality and Spurs Economic Growth
By John Gibson and Felix Rioja
Policymakers on both sides of the political divide are considering expanding infrastructure-related spending. However, the exact dollar amount needed and where best to target these funds is still a subject of debate.
While new projects clearly garner more attention from the press, maintenance in the form of fixing roads and bridges, cleaning water networks and repairing damaged power grids may actually play a more vital role in the determination of economic growth and the distribution of wealth within a country, according to our research.
Poor infrastructure networks—whether roads, railways, airports, water systems or power utilities—are rated globally among the greatest barriers to doing business. Insufficient spending can lead to deterioration and a reduction in services, which will increase transportation and production costs to businesses.
To look at it another way, increasing maintenance spending can raise a country’s Gross Domestic Product (GDP), because businesses would have infrastructure in good condition which, in turn, reduces production costs and facilitates easier access to markets.
To study the connection between infrastructure spending and economic growth and inequality, we developed a macroeconomic model of Mexico, which has fallen behind in terms of infrastructure investment and maintenance over the past several years. The model allowed us to predict how increases in the country’s infrastructure investment and maintenance would affect its GDP and distribution of wealth.
We found that if additional infrastructure spending programs were diverted to maintaining the existing infrastructure stock, it would simultaneously increase aggregate GDP and foster a more equitable distribution of wealth.
The intuition behind our finding hinges on how different types of infrastructure spending affect the return earned on private savings and wealth. Maintenance spending improves and restores the quality of infrastructure, which helps businesses to be more productive, raising the returns to their investments.
Higher returns to business investment also mean higher returns for household savings. As households then decide to raise their savings, poorer households increase their savings comparatively more than richer households. This results in an increase in the wealth of poorer households relative to richer households and a reduction in inequality.
Our research suggests additional infrastructure spending has the potential to increase the rate of economic growth and reduce the degree of inequality present within an economy. For this reason, policymakers would do well to pay much more attention to maintenance within their priorities.