Can government investment in infrastructure fuel the sort of dynamism that propels an economy forward? Today, that’s virtually an unquestioned truth. Infrastructure spending is constantly cited as the way forward for a stagnating euro zone; in the US, both candidates for president promised billions of it. When Donald J. Trump takes office on 20 January, that’s the one aspect of his economic agenda that, it appears, Democrats will be able to get behind. Yet caution is warranted. Some in the West have perhaps forgotten two aspects of public investment in infrastructure. First, it takes ages to have real effects. And second, it creates interest groups that warp public spending for decades thereafter. For evidence of that first point, look no further than India—Over the past couple of years, the Indian government has sharply increased the money it spends on infrastructure, private investment has slowed for several quarters. It turns out that companies care more about a stable investment environment and favourable regulations than government backing for a few new roads and bridges. Better infrastructure might yet transform the Indian economy. But that’s far in the future and it depends crucially on getting the spending right. The second point is, about viewing public infrastructure spending as economic magic. Consider the People’s Republic of China. The country that famously poured more concrete in a few years this century than the US did in the entire century that preceded it is now burdened by excess capacity and poor returns on its investment. The point is not that publicly-financed infrastructure is bad. It’s just that governments should only invest in infrastructure when and where it’s really needed—where that money will clearly enhance the productive capacity of the economy.

(Live Mint)