There has been much research on the relationship between the construction industry and economic development in developing countries. There has been a significant correlation between the two, especially in terms of income and GDP. However, generalisations about this relationship need to be approached with caution. The reality is that each case is different and aggregate numbers are of little use for policy-making. The relationship is, however, a significant one, and it is more complex than many had originally thought.
In a country like Sri Lanka, the construction industry has strong links with other sectors of the economy. There has been considerable research on sectoral and input-output linkages in construction, but there has been limited literature on the impact of these linkages on the economic development and construction of the country. Input-output tables have been compiled in Sri Lanka since the 1970s, but their construction share remains considerably lower than that of developed countries.
There are a number of factors that influence the process of linkage formation. Most importantly, the host country’s institutional and policy environment has a significant impact on the ability of the local economy to absorb foreign knowledge and skills. Other factors include the availability of human resources, the quality of infrastructure, and political stability. The quality and cost of domestic suppliers is also a factor.
A more efficient system of backward linkages can improve the competitiveness of local firms, boost economic activity in the host economy, and benefit both local firms and suppliers. Moreover, these links can foster the development of a thriving enterprise sector. Further, backward linkages can promote technological and managerial capabilities of the firms involved in the linkages, and lower production costs in the host economy.
Backward linkages between construction and other sectors are an important aspect of construction policy. This is because construction is a significant contributor to economic growth and its interactions with other sectors. However, if the construction sector grows too rapidly, it can lead to a negative effect on economic growth. It can only contribute to the economy when other sectors are productive enough to absorb the construction outputs.
The value added by the construction industry is an important metric to measure the contribution of the construction industry to national income. The United Nations measures this by defining value added in construction as the gross output value of the industry less the value of all its current purchases from other enterprises. This figure does not include input materials, components, hiring plant, and professional fees.
An effective linkage promotion programme combines several measures to increase the number of foreign affiliates in a particular industry. It should be based on an understanding of the economy and its competitive nature. It should also address competitive needs of domestic enterprises and the impact on public and private support institutions. In addition, it must include policies that enhance the skills and technological capacity of the domestic firms.
Impact of inadequate infrastructure on economic development
Lack of infrastructure can negatively impact the economic development of a country. In Africa, for example, poor infrastructure can decrease national economic growth by as much as two percentage points each year, while reducing business productivity by as much as 40%. This is particularly problematic, as Africa is endowed with a vast resource base but has some of the lowest productivity rates in the world.
Poor infrastructure can also have a negative impact on social harmony and political stability. Investing in such critical infrastructure is essential for economic development. The world needs around USD3.3 trillion worth of infrastructure each year by 2030, with more than 60 percent of that money coming from developing countries. And with climate change a real threat, the Asian Development Bank estimates that by 2030, USD1.7 trillion will be spent in Asia alone to improve its infrastructure and combat poverty.
In addition to being critical for national security, infrastructure is essential for disaster preparation. President Dwight Eisenhower justified investment in the national highway system by citing the nation’s “appalling inadequacies” in the event of a nuclear war. He also cited a report from Vice President Richard Nixon citing the country’s “failings” when addressing the Governors Conference in Lake George, New York, July 12, 1954.
Since the 1960s, investments in infrastructure have been falling. Meanwhile, growing economies are using existing infrastructure more. But overuse can lead to the destruction of infrastructure. This can have dire consequences for a country’s economy, making it difficult to move goods and services. This leads to diminished productivity and limited economic growth.
While government investment in infrastructure is crucial, it should not come at the expense of economic development. It needs to leverage other funding sources, create incentives for private engagement, and support regional planning. And it needs to be sustainable and responsive to demographic, fiscal, and environmental changes. But if the United States is to remain competitive, it must address the issue of infrastructure.
The secretary-general of UNCTAD, Rubens Ricupero, stressed the need for competition in infrastructure. He cited examples of countries like Brazil where cartels have taken over the Brazilian port system. Despite the fact that BrazilPORTS was privatized, it is still dominated by cartels.
Impact of monetary and interest rate policies on economic development
Monetary and interest rate policies affect household spending decisions in several ways. Lower interest rates give consumers incentives to push consumption forward, while higher rates reward saving. However, delaying consumption into the future can slow down economic growth in the present. To avoid this, the government should aim for an interest rate that steers the real economy towards long-term growth and high return investments.
The manufacturing and construction sectors are more sensitive to changes in interest rates. When interest rates are low, more consumers take out loans, increasing the demand for construction products. At the same time, a decline in interest rates encourages more consumers to buy cars, increasing automobile production and sales. In the retail sector, however, interest rate changes have a less significant impact.
A contractionary monetary policy has the greatest impact on the Great Lakes region, where manufacturing accounts for a large portion of the country’s GSP. Conversely, the Rocky Mountain and Southwest regions are less sensitive to interest rate increases, because they have more diverse industries.
The interest rate is a central economic policy instrument. It is set by the central bank and affects the very short interest rate in the money market. The longer term interest rate, on the other hand, is influenced by expectations about future instruments and confidence in the central bank’s monetary policy.
Low interest rates and low inflation are two of the major causes of asset price rises and increased debt. However, these effects can be offset by increased confidence in the inflation target and increased international competitiveness. The result is lower inflation and higher earnings for the economy. Low interest rates may also encourage increased lending by banks.