A Tale of Two Countries – Does infrastructure capacity lead economic growth, or does it result from economic growth?

An MBA student’s prospective on the stark differences of two emerging markets, India and Chile

by Max Spivak, BS ‘07 MBA ‘14 MILR ‘15

What came first, the chicken or the egg? This was the question I kept asking myself during my winter break travels to India and Chile. Does a country need infrastructure to develop or does a country need to develop to create infrastructure?

India and Chile tell two different stories. India has 1.2 billion people and Chile has 70 times less – 17.6 million people. Physically India is only four times the size of Chile. Logically this would mean that India would be focused on maintaining and developing its infrastructure. From a tourist point of view, this was not the case.

Despite, the drastic size differential in economics, size and population – India has little infrastructure, both physical and legal, while Chile is on the opposite side of the spectrum. Despite having 70 times more people, India only produces 16 times the electricity Chile does[1]. Only 13 out of every 100 people in India have Internet access, while in Chile 63 out of every 100 are online. The disparity is drastic.

While traveling through India and experiencing its poor infrastructure, I observed the promise of economic development everywhere – especially in Bangalore. Bangalore is India’s Silicon Valley, featuring an abundance of start-ups and optimism about India’s future. One professor at IIMB even told me that India’s economy will become fully developed in ten years and will overtake many Western countries. Ten years! The roads are torn up, there are no sidewalks, and plumbing is limited. From a legal perspective, the rules are not followed and laws are mere suggestions. Yet, this professor was perfectly confident in his statement. Why?

Traveling through India, it was very difficult to see how the promise of great success can be achieved in a country that has the world’s second largest population, but can’t provide its citizens with adequate transportation. How can internal commerce function when herds of goats block the only highway between the capital and a main city? How can legal systems hold when the penalty for going the wrong way – as my fiancÉe and I observed firsthand – is a 300-rupee ($5 dollar) bribe?

My travels to Chile painted a completely different picture. Vast highways connected bustling cities. Working plumbing, heating and lighting provided confidence. Drivers showed turn signals, maintained speed limits and yielded to each other. There was order – there was confidence in a system – there were rules that were being followed. Chile seemed to have the ingredients to fuel growth that India seemingly lacks.

I decided to test my theory and calculated the amount of road to people in the two countries. India had 3.3 meters to one person while Chile had 4.6[2], a difference of close to 40%. India has 1.6 million kilometers of road to build to be at the same ratio as Chile. Along with those roads are electric grids, water pipes, bridges, tunnels, and everything else that goes along with physical infrastructure.

My very simple analysis has led me to believe that infrastructure capacity – both physical and legal – must grow prior to the population, not as a result of it. The Institute of Developing Economies studied China’s development and economic growth and concluded, “It is necessary to design an economic policy that improves the physical infrastructure as well as human capital formation for sustainable economic growth in developing countries.”[3] A similar global study focusing on times of crisis, asserted that “Economic returns to infrastructure investments are high in developing countries, which have become important drivers of global growth.”[4]

My travels, logic and peer-reviewed research has led me to believe that infrastructure is the key to development, and not vice-versa. Developing and emerging markets that focus on infrastructure position them for success, drive job growth, and build a skeleton for business. Chile is an excellent example. India, on the other hand, is a giant with a very weak frame.

---

[1] World Bank

[2] United Nations

[3] Sahoo, P., Dash, R.K. and Nataraj, G. (2010) ‘Infrastructure Development and Economic Growth in China’. Discussion Paper 261. Tokyo: IDE.

[4] http://www.worldscientific.com/doi/abs/10.1142/S1793993312500159