ADBI series on Asian Economic Integration and Cooperation
Edited by Douglas H. Brooks and Jayant Menon
Chapter 9: Infrastructure Financing: Impacts on Macroeconomic Balances
9. Infrastructure ﬁnancing: impacts on macroeconomic balances1 Douglas H. Brooks and Fan Zhai The public sector is still the dominant source of infrastructure ﬁnancing in developing countries, although public–private partnerships play an expanding role, as does foreign direct investment. Changes in technology have led to unbundling of services in the power sector and huge private investments in telecommunications, but most of the burden of ensuring an adequate level of infrastructure services to support growth and development still lies with the public sector. Even there, there are myriad combinations of revenueraising, expenditure decentralization, ﬁnancing mechanisms and risk management practices. This can be seen most clearly in large, rapidly growing developing economies. Rapid growth has been accompanied by increasing urbanization, rising incomes in the growing urban middle class and a shift towards greater consumption of services. All this has led to strong demand growth for urban infrastructure, in particular. This chapter compares and contrasts the recent experience of the People’s Republic of China (PRC) with that of India in terms of infrastructure ﬁnancing and resulting implications for macroeconomic growth. Similarities and diﬀerences are highlighted, and then each country is considered in more detail. A computable general equilibrium model is employed to examine the macroeconomic implications of alternative ﬁnancing experiences. In particular, options of ﬁnancing through a consumption tax, a labour income tax or through debt are considered. Diﬀerential macroeconomic impacts of these options are revealed as dependent on diﬀerences in economic structure in the base period. There are...
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