Public investment for sustainable growth – managing subnational risks

The new global emphasis on public infrastructure for connectivity builds on the declarations of the UN Sustainable Development Agenda, and most recently the Belt and Road Initiative that seeks to connect global economies and recreate old trading links and generate new ones. Infrastructure also holds the key to addressing the Middle-Income Trap, along with education and innovation. Yet, there is considerable evidence from the EU, Latin America and China to show that while the advantages of connectivity investment are significant and necessary, in isolation these are far from sufficient in ensuring more inclusive and sustainable outcomes. Sustainable growth involves private investments that are channeled to the most promising and productive activities. Of course, firms respond to price signals, but with imperfect or incomplete information, tend to reinforce existing profit centers where the jobs tend to be concentrated (London, Barcelona, Milan, Shanghai, Guangzhou-Shenzhen, Santiago de Chile), typically resulting in increasing inequality, congestion and pollution. The resulting conurbations attract migrants, and in large metropolitan areas in Latin America and South Asia, there is a sharp increase in informality that leads to incentives for cheating that result in low productivity (see Levy, #ref1376#2008#/ref1376#). Regional connectivity may not always result in a more equal or level playing field and in the cases mentioned above may have exacerbated imbalances and inequalities. As seen in the UK, which has experienced a strong recovery since the 2008 crisis, the Brexit vote suggests that there may be a political backlash if employment and income generation, or adjustment costs, are not more evenly distributed. In this paper, we argue that a combination of instruments is likely to be needed at both national and local levels, including tax handles, and full information, particularly involving liabilities within an intertemporal framework, to ensure sustainable and inclusive development. Since most of the policies are implemented at the sub-national level, local financing, institutions and incentives affect the possibility of creating new “growth hubs” or clean and efficient cities that are needed for sustainable growth. We draw on evidence from the EU, China and Chile, which is considered by the IFIs as one of the leading countries as far as investment management is concerned. We also use empirical illustrations based on the theory of reform applied to the Chilean case to illustrate how to improve on the investment allocations that are already praised as arms-length by the Bretton Woods Institutions, to develop a sustainable growth strategy that also addresses the middle-income trap. This has wider applications in Europe, and China, and in the implementation of the Belt and Road Initiative