Investment: How to make it pan out and sustainable

When undertaking an investment project, one might think of trade-offs among present and future consumption, benefits and cost. We all accept that most public-project investments are useful, but how much and how well we should spend on them, and for what purposes, are worth discussing.

In Thailand, we have plans for infrastructure mega-projects. It might be worthwhile discussing another country’s experience in this area.

In 2009, United States President Barack Obama took office when the US economy was suffering a recession. His advisers proposed a stimulus package to increase aggregate demand. 

The package would cost the federal government about US$800 billion (Bt28.61 trillion), or about 5 per cent of annual gross domestic product. This included some tax cuts, higher transfer payments, and increases in government purchases. 

Some economists argued that increased spending was better than reducing taxes because, according to standard Keynesian theory, the government-purchases multiplier exceeds the tax multiplier. To explain this simply, when the government spends one baht, whereas the government gives people a tax cut of one baht, some of that baht might be saved. 

According to an analysis by Obama economists, the government-purchases multiplier is 1.57, whereas the tax multiplier is 0.99. Thus they argued that increased government spending on roads, schools and other infrastructure was the better path to increase aggregate demand and create jobs. 

We know that the logic here is Keynesian. However, the Obama stimulus proposal was controversial among economists. 

In March 2008, economist Paul Krugman wrote in The New York Times: “Employment has already fallen more in this recession than in the 1981-82 slump, considered the worst since the Great Depression. As a result, Mr Obama’s promise that his plan will create or save 3.5 million jobs by the end of 2010 looks underwhelming.”

Some recent studies of fiscal policy since 1970 in countries that are members of the Organisation for Economic Cooperation and Development found that successful fiscal stimulus relied much on cuts in business and income taxes, whereas it failed on increases in government spending. [Footnote 1]

Economist Gary Becker explained the concern in his blog: “Putting new infrastructure spending in depressed areas like Detroit might have a big stimulating effect ... However, many of these areas are also declining because they have been producing goods and service that are not in great demand, and will not be in demand in the future.” 

Finally, the United States’ $787-billion stimulus bill was signed on February 17, 2009. 

What do you think? The US economy recovered, but much more slowly than the Obama administration economists expected. Was it because the administration should have been more cautious with its policies or because the economy was too sticky at the time?

There are two beliefs on sustainability. The first is “ecological sustainability” as proposed by the ecological economics school, while “neo-classical sustainability” is defined as dynamic efficiency presuming automatically rising social welfare. 

Infrastructure projects that are expensive but either lack benefits or are inefficient for development are considered white elephants. However, economists Hadi Salehi Esfahani and Maria Teresa Ramirez found important positive effects of infrastructure investment especially where it is linked to high-quality and transparent institutions.

These all might provide some ideas for obtaining benefits from Thailand’s project investments for sustainable development. Economics can help find ways to make good investments and make the best use of resources. 

Footnote 1: Alberto Alesina and Silvia Ardagna, “Large Changes in Fiscal Policy: Taxes Versus Spending”, Tax Policy and the Economy 24 (2010).

 

Apirada Chinprateep PhD is assistant professor, School of Development Economics, National Institute of Development Administration. She can be reached at [email protected] or [email protected].