## Emerging Economy Consumers Drive Infrastructure Needs

_IMF Blog, May 4, 2017_

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**Canonical URL:** [Emerging Economy Consumers Drive Infrastructure Needs](https://www.imf.org/en/blogs/articles/2017/05/04/emerging-economy-consumers-drive-infrastructure-needs)

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## Bibliographic details
- Authors: Paolo Mauro
- Published: May 4, 2017

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### Income, consumption patterns, and Engel’s Law
- Reference to Engel’s Law: household expenditure on food rises with income and family size, but the proportion of income spent on food falls.
- Evidence from household surveys for 20 advanced and emerging market economies shows a strong and positive relationship between personal income and transportation spending.
- Exact numerical relationship highlighted:
  - People making $200 a year devote 1 percent of their income to transportation.
  - People making $20,000 a year devote 18 percent of their income to transportation.

### Projected changes in incomes and transport demand
- Over the next 20 years:
  - The number of people earning between $6,000 and $20,000 worldwide will rise by a little more than a billion, and many of these will purchase their first car.
  - The number of people earning more than $20,000 will increase by almost 800 million, and many of these will begin to fly for leisure.
- Regional projections:
  - Consumer spending on transportation is projected to quadruple by 2035 in India, China, and other parts of emerging Asia, as well as in sub-Saharan Africa.
- Infrastructure cost estimate:
  - Merely building the paved roads and railroads needed to accommodate growing world demand for transportation could cost some $48 trillion over the next 20 years.
  - Emerging market and developing economies will need the bulk of that investment.

### Financing needs and the role of the private sector
- Public financing options:
  - Altering government spending priorities or raising money through taxes could finance some infrastructure investment.
- Private sector imperative:
  - The only realistic way to meet the large and growing infrastructure gap in emerging markets is through the private sector, including pension funds and life insurance companies worldwide.
- Conditions to unlock private capital:
  - Changes to prudential requirements to allow investors to hold internationally diversified portfolios of infrastructure projects.
  - Use of public-private partnerships with multilateral and regional development banks to provide the approval required by these investors.
  - Stable regulatory environments free from arbitrary political interference are necessary to attract private investors.
- Fiscal risk and disclosure:
  - Calls on government guarantees of public-private partnerships have occasionally imposed budgetary costs equivalent to one or more percentage points of GDP in many countries, including Colombia, Indonesia, and Portugal.
  - To reduce these risks, governments will need to monitor and disclose fiscal obligations stemming from projects involving private participation.
  - Several countries, including Chile, now regularly monitor and disclose such obligations.

### Transparency, governance, and project effectiveness
- Core governance priorities:
  - Transparency and an independent media are critical to monitor and report on projects and to allow citizens to pressure policymakers to pursue the public interest.
  - Publication of tenders and key contract features, good record-keeping, and quality control during procurement (project evaluation, tendering) and contract performance are essential.
- Anti-corruption and accountability measures:
  - These procurement and disclosure practices help ensure financing is put to productive uses and not illicitly siphoned off or directed to low-value-added projects favored by political supporters.
  - To deter fraud, governments must offer whistleblowers rewards and protection from retaliation.
- Institutional weaknesses:
  - Many emerging economies score poorly on indicators of the quality of the institutional setup for project selection and implementation.
  - Corruption afflicts all countries; advanced economies also need to protect infrastructure investment projects from undue private influence and arbitrary political interference.

### Environmental and long-term policy choices
- Green construction and modal choices:
  - Citizens would benefit from new “green” construction choices.
  - Favoring metro-railways and other public transportation over roads in new transportation networks will help reduce carbon emissions for decades.
- Overarching recommendation:
  - Infrastructure investment holds enormous promise and potential, but realizing benefits requires policymakers to adopt and safeguard appropriate checks and balances to make sure citizens benefit from the right choices.

*Source: Emerging Economy Consumers Drive Infrastructure Needs, Paolo Mauro, May 4, 2017.*

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## References

- [https://www.imf.org/wp-content/uploads/2017/05/IMF_Infrastructure_chart1.jpg](https://www.imf.org/wp-content/uploads/2017/05/IMF_Infrastructure_chart1.jpg)
- [https://www.imf.org/wp-content/uploads/2017/05/IMF_Infrastructure_chart-2.jpg](https://www.imf.org/wp-content/uploads/2017/05/IMF_Infrastructure_chart-2.jpg)
- [Several countries](http://www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/Analyzing-and-Managing-Fiscal-Risks-Best-Practices-PP5042)

_Source: https://www.imf.org/en/blogs/articles/2017/05/04/emerging-economy-consumers-drive-infrastructure-needs_