An economy’s infrastructure includes roads, railways, ports, utilities (electricity, water and gas) and telecommunications. A poor infrastructure harms development because:
1) Lower Productivity.
As the quality of an economy’s roads, railways, airports and ports worsens, transport costs rise and productivity declines. So the PPF, productive capacity and output are constrained. Lower output means lower economic growth and less goods and services available for consumers so lower living standards. Japan developed Taiwan’s roads, ports and railroads during colonial rule (1905-1945), thisacted as a growth pole for industry from the 1950s.
2) Less Exchange.
As the quality of telecommunications worsens, exchange costs rise and agents are disincentivized to trade so AD falls.
3) Repelled MNCs.
If utilities are poor then electricity costs are high and there may be unpredictable black-outs, so domestic firms may not invest and MNCs may be deterred from entering the country. So investment is constrained and the potential for growth and development is constrained.
However, poor infrastructure may not be a major constraint on development because: – LDCs may be able to upgrade their infrastructure quicker than HICs did in the past. For example, LDCs could jump straight to fibre optic cables to provide the most efficient internet. – MNCs may still be attracted to LDCs to take advantage of cheap labour or weaker environmental laws even if the infrastructure is poor. – Maybe other factors are more important development constraints. For example, a civil war means the LDC’s population is fighting so investment is disincentivized no matter the quality of the infrastructure.