Infrastructure focused on equality

*Unassigned quotes attributable to Professor Naaraayanan

Infrastructure has long been seen as one of the most important vehicles of economic stimulus and a driver of growth for the developing world. However, measuring the impact and understanding of those who benefit most has always been challenging. In a conversation with Kemi Badru, an MBA 2021 Student and President of the LBS Infrastructure and Construction Club, Lakshmi Naaraayanan, Assistant Professor of Finance, discusses his research and the findings that he hopes will lead to a better understanding of the true benefits of infrastructure.

As a financial economist, Professor Naaraayanan’s research focuses on understanding whether and how economies flourish around infrastructure investments and the role of financing plays in it. Some of his current work sheds light on the role of finance in helping  businesses and households to actualise growth opportunities created by infrastructure investments. Given the current discussions around post-pandemic recovery, this is incredibly topical. He tells Badru that his personal motivation for pursuing this research stems from his academic background as a civil engineer. Seeing the impact and importance of infrastructure, and how it has the potential to improve lives, he wanted to explore why he was seeing a disparity in where and who were experiencing these benefits.

With US President Biden announcing a US$2 trillion infrastructure plan, and with similar policy discussions ongoing in other developed and developing nations, the potential for infrastructure to provide the backbone to a post-pandemic recovery stimulus is strong. Naaraayanan highlights that he has seen infrastructure become an increasingly popular strategy to spur economic growth in times of turmoil.

“The first kind of response for major governments outside of making sure that there is no systemic risk, is to think about investing in infrastructure heavily as a means to the process of recovery.”

He is also quick to point out, however, that the true benefits are difficult to quantify, and without proper financial support, a lot of people are left behind. Few people dispute the positive impact of infrastructure but analysing who benefits is becoming increasingly important with policymakers expecting trickle-down benefits of better connectivity, especially for rural households. The underlying assumption that all people will be able to benefit from infrastructure investments maybe flawed and can lead to misguided policymaking. Badru points out that often in developing nations communities will receive access to electricity, but productivity will not increase due to their inability to properly harness and use it.

Naaraayanan says part of the solution might be to encourage private sector banks to provide financing support to households. Roughly speaking, what needs to be avoided is local and national government carrying both the burden of financing the infrastructure investment in addition to providing financing to individuals. Encouraging the development and participation of private credit markets in rural communities, has the potential to  relieve some pressure on government and simultaneously allow the marginalized households to benefit. In his research, Naaraayanan shows that the complementary role of private finance offers a compounding regional growth effect for government infrastructure investment. The research provides convincing estimates of the impact of road connectivity on access to, and productive utilization of, formal financial services.

“Infrastructure that you’re building today has to account for changes that you foresee for the next 20, 25 years, 50 years.”

Badru points out that governments are always trying to prioritise the most important projects, due to limited capital, and asks what policymakers can do to incentivise this type of complementary private market capital. Naaraayanan suggests that policymakers potentially could direct effort based on the anticipated trickle-down benefits. He offers the analogy of two islands that have recently been connected due to infrastructure investment. Who would be benefiting? Without private capital, it would be the wealthier citizens, as they are already positioned to use these new roads, ports, bridges etc. With banks and other financial institutions providing loans, more marginalised citizens are likely to benefit. This makes good business sense for the banks as well, as they would want to provide capital in a way that maximises financial returns.

“[Our] research is informative to policymakers about the importance of having both finance and infrastructure and… at the same time how that interacts within a village and who gets these opportunities.”

Through highlighting the relationship between infrastructure improvements and private financing, policymakers could learn about the role of private capital markets in shifting the income distribution in rural communities and in the process ensure these trickle-down benefits are realised for the poorer income households.

Badru shifts the conversation to financial inclusion and asks about the tangential aspects of the relationship between infrastructure and financial support. How does this impact the progress of education and gender equality in school and the workplace? It largely comes down to connectivity, and the current outlook is quite promising, says Naaraayanan. Connectivity has been shown to increase school enrolment across the board. In his research, he finds that the financing present to support the use of infrastructure, also leads to increase in economic activity such as entrepreneurship , especially among women. On top of that, benefits of infrastructure improvements extend to female labor force participation with female-founded businesses disproportionally hiring more women.

Finally, and of increasing importance, Badru asks how his research plays into both the post-pandemic recovery and the threat from the changing climate. As early as the 1860s, governments have been using large infrastructure projects to recover from crisis, such as railroads, says Naaraayanan, and this has only increased with time. He adds it is an exciting prospect, and ultimately crucial, that so much of the discussion around infrastructure investment, as a method of recovery, eludes discussion of climate change today. Infrastructure investments must be able to tackle climate change, the most pressing concern facing humanity, especially as many economies are increasing infrastructure investments and preparing for the future. Simultaneously, he hopes that this spreads into combating social inequalities as well.

“If you’re serious about de-carbonization, we’ll have to also think about the fact that that also needs up-skilling or re-skilling of workers.”

A lot of focus needs to be on reskilling workers and retooling infrastructure to cope with climate change. Doing so with private sector financing support will ensure that the maximum benefit will be derived from government investment.

In conclusion, Naaraayanan sketches a view of infrastructure being central to the response to current and future crisis, but also the reduction of inequality across income and gender. As with most large-scale projects, infrastructure is not a short-term fix, but rather a long-term investment in society. Getting these investments right, and providing the appropriate financial support to households and businesses, will ensure that the intended beneficiaries will receive the highest possible social and financial return.


Professor Naaraayanan is Assistant Professor of Finance at London Business School. His research interest lie in empirical corporate finance, including corporate governance, entrepreneurship, financial intermediation and socially responsible investing. Naaraayanan’s research  was awarded funding from the Wheeler Institute during our biannual call for proposals and is featured in our research brochure.

Kemi Badru (MBA2021) is Co-President of the Infrastructure & Construction Club and Co-President (Finance) of the Private Equity & Venture Capital Club at London Business School.

Zachary Day (MBA2021) is the Co-President of the Military in Business club at London Business School. Prior to his studies, he was an officer in the Canadian Armed Forces where he served in various operational and strategic roles from 2015-2019. Zachary is an intern for the Wheeler Institute, contributing to the creation of content that amplifies the role of business in improving lives.

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