Underinvesting in Resilience

Underinvestment in infrastructure (including deferred maintenance) is widespread where the consequences are uncertain and/or not immediate. In reality, underinvestment and investment with debt financing are equivalent in one crucial respect: they both transfer costs to a future cohort. But even debt financing would be better than no investment at all, given the deadweight losses.

Cities and countries that aspire to be hubs or critical components in national or global financial and economic systems need to be predictable, reliable, and resilient. That implies a transparent rule of law, and competent, conservative, and countercyclical macroeconomic management. But it also includes physical resilience and the ability to withstand shocks.

Hubs that lack resilience create cascades of collateral damage when they fail. Over time, they will be bypassed and replaced by more resilient alternatives.

Michael Spence, a Nobel laureate in economics, is Professor of Economics at New York University’s Stern School of Business and Senior Fellow at the Hoover Institution. His latest book is The Next Convergence – The Future of Economic Growth in a Multispeed World ().

Copyright: Project Syndicate, 2012.

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