Interventionist policy
Improving infrastructure:
Infrastructure refers to the basic structures and facilities needed for society to be
productive. When the government invests in infrastructure such as roads, railways, or
digital connectivity, it improves the efficiency of the economy. Better transport links
reduce journey times and costs for both firms and workers, lowering firms’ costs of
production. This allows goods to be produced and distributed more quickly, which
increases productivity and competitiveness in international markets. As unit costs fall,
firms can lower prices, stimulating both domestic consumption and exports. This
process shifts the LRAS curve outwards, as the productive potential of the economy
rises, and leads to economic growth with higher real output and lower inflationary
pressure. Over time, improved infrastructure can also attract greater foreign direct
investment (FDI), as overseas firms are more willing to invest in countries with reliable
transport networks and energy supplies. For example, China’s investment in high-speed
rail has reduced transport bottlenecks between cities and industrial hubs, making it
easier for manufacturers such as those in the EV and steel sectors to distribute goods
domestically and abroad. This has increased efficiency, supported export growth, and
strengthened China’s long-term international competitiveness.
However, the extent to which improved infrastructure generates growth depends on
whether the economy is operating near full capacity, which links to the Classical vs
Keynesian view of LRAS. Under the Classical perspective, the LRAS curve is vertical in
the long run, meaning that any improvement in infrastructure directly raises productive
potential and leads to higher output. By contrast, the Keynesian LRAS is elastic when
there is spare capacity. If the economy has low aggregate demand and is stuck in a
recession, an outward shift in LRAS may not translate into higher growth, since firms
have no incentive to produce more when demand is weak. For example, after the 2008
financial crisis, China invested heavily in infrastructure projects such as high-speed rail
and new cities. While this raised potential output, in some regions demand was not
strong enough to justify the scale of supply expansion, leaving underused “ghost cities.”
This shows although infrastructure spending can shift LRAS outwards, the actual impact
on real growth depends on the level of demand. If demand remains weak, much of the
new capacity may go unused, meaning growth and employment benefits are limited.
Another limitation is the presence of significant time lags in infrastructure projects. Even
once the government recognises the need for infrastructure (recognition lag) and
approves funding (implementation lag), it can take years for projects to be completed
and deliver results (effect lag). This means the benefits of infrastructure spending may
only be realised in the long run, and short-term growth may not improve. For instance,
Improving infrastructure:
Infrastructure refers to the basic structures and facilities needed for society to be
productive. When the government invests in infrastructure such as roads, railways, or
digital connectivity, it improves the efficiency of the economy. Better transport links
reduce journey times and costs for both firms and workers, lowering firms’ costs of
production. This allows goods to be produced and distributed more quickly, which
increases productivity and competitiveness in international markets. As unit costs fall,
firms can lower prices, stimulating both domestic consumption and exports. This
process shifts the LRAS curve outwards, as the productive potential of the economy
rises, and leads to economic growth with higher real output and lower inflationary
pressure. Over time, improved infrastructure can also attract greater foreign direct
investment (FDI), as overseas firms are more willing to invest in countries with reliable
transport networks and energy supplies. For example, China’s investment in high-speed
rail has reduced transport bottlenecks between cities and industrial hubs, making it
easier for manufacturers such as those in the EV and steel sectors to distribute goods
domestically and abroad. This has increased efficiency, supported export growth, and
strengthened China’s long-term international competitiveness.
However, the extent to which improved infrastructure generates growth depends on
whether the economy is operating near full capacity, which links to the Classical vs
Keynesian view of LRAS. Under the Classical perspective, the LRAS curve is vertical in
the long run, meaning that any improvement in infrastructure directly raises productive
potential and leads to higher output. By contrast, the Keynesian LRAS is elastic when
there is spare capacity. If the economy has low aggregate demand and is stuck in a
recession, an outward shift in LRAS may not translate into higher growth, since firms
have no incentive to produce more when demand is weak. For example, after the 2008
financial crisis, China invested heavily in infrastructure projects such as high-speed rail
and new cities. While this raised potential output, in some regions demand was not
strong enough to justify the scale of supply expansion, leaving underused “ghost cities.”
This shows although infrastructure spending can shift LRAS outwards, the actual impact
on real growth depends on the level of demand. If demand remains weak, much of the
new capacity may go unused, meaning growth and employment benefits are limited.
Another limitation is the presence of significant time lags in infrastructure projects. Even
once the government recognises the need for infrastructure (recognition lag) and
approves funding (implementation lag), it can take years for projects to be completed
and deliver results (effect lag). This means the benefits of infrastructure spending may
only be realised in the long run, and short-term growth may not improve. For instance,
