Friday, December 8, 2006

Infrastructure and economic growth

Many in Israel consider the government's expenditures on higher education and on research (not R&D) as insufficient. There is no disagreement that the country is not spending sufficient amounts on physical infrastructure such as land transportation, energy, etc. Some suggest that eventually this will affect the quality of life to such extent that many will leave the country and affect its future performance.

Recently I agreed to participate in a strategic planning exercise concerned with the possibility that a small open economy, such as Israel or a big urban area elsewhere can increase drastically its rate of economic growth in a very short time. While the project is concerned with all aspects of economic life, the working group that I participate in is concerned with infrastructure. In particular, I was asked to lead the energy infrastructure team.

The issues that I have started to consider include possible obstacles that the absence of appropriate infrastructure can create on the path to accelerated growth. Energy infrastructure consists of the physical elements required for:

· The exploration, development and production of primary energy,
· The transformation of primary energy into useable forms by means such as electricity generation and oil refining,
· The transmission and distribution of energy to end-users by means such as wires, pipelines and end-use stations, and
· The storage of energy in various forms.

The required infrastructure in Israel should grow in some relation to population growth and that of the national economy. The nature of the future infrastructure will be also influenced by technological changes and relative to the world energy prices.

As in many other aspects of this country, also here special attention must be devoted to the special conditions of Israel, i.e., scarcity of local energy resources and economic distance from sources and markets.

Among the issues that we are considering are the following:

1. What infrastructure will be needed? This is perhaps the most difficult issue that this report will address. Lack of “appropriate” infrastructure will be felt in the future and unevenly over time and space.
2. How can we decide what is enough and what is optimal?
3. Will insufficient infrastructure affect the quality of life to the extent that it will generate out-migration and impact the desired rate of economic growth?
4. Who should supply this infrastructure?
5. What should be the preferred method of financing the infrastructure?

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