Infrastructure and economic development Luis Servén The World Bank Lima, July 2015
“[T]he sovereign has only three duties to attend to; three duties...
Infrastructure and economic development Luis Servén The World Bank Lima, July 2015
“[T]he sovereign has only three duties to attend to; three duties of great importance […] Thirdly, the duty of erecting and maintaining certain public works […] which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.” Adam Smith, Wealth of Nations, Book IV.
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Motivation Why infrastructure? Two reasons • Growth – Development of core infrastructure (transport, power, telecom) raises output and the productivity of other inputs (labor, non-infrastructure capital)
• Poverty / inequality – Infrastructure development may have a disproportionate effect on the income / welfare of the poor – by widening their economic opportunities
4.1.1 Infrastructure Stock and Economic Growth 7 CHN
6
TWN BWA KOR
Growth in real GDP per capita (%)
5 THA
MYS 4 LKA
-4
MLT HKG CYP OMN SGP
IRL ARE JPN ROM PRT HUNESP TUN GRC LUX IDN 3 IND GHA NOR PAN PAK ISL DOM RUS EGY AUT TTO POL ITA ISR BEL FIN MAR LVA FRA CZE BLR USA TUR BRA SVN DEU CAN CHL AUS GBR DNK NLD SYR SWE 2 COL MEX SAU BHR IRN SVK MRT EST CHE ETH TZA PHLPRY ZAFCRI ECU NZL NPL MWI URY BGRLBY BGD SLV 1DZA GTM PERARG COG CIV BFA CMR BEN GAB RWA GMB HND YEM JAM LTU UGA BOL VEN SDN GNB KAZ NGA BDI KEN ZMB 0 TCDTGO JOR GIN HRV ZWE HTI SEN -3 -2CAF SLE -1 AGO NIC 0 1 2 3 4 KGZ NER -1 MDG QAT YSR UKR -2 ZAR y = 0.4812x + 1.6724 IRQ -3 R2 = 0.1701 -4
Aggregate Index of Infrastructure Stocks, IK1 (in logs) 7
Not only the quantity -- the quality of infrastructure also matters 4.1.2 Infrastructure Quality and Economic Growth 7
Growth in real GDP per capita (%)
BWA6
HTI -4
-3
CHN
KOR
TWN
MLT HKG 5 CYP OMN THA MYS SGP 4 JPN IRLARE ROM LKA PRT HUN GRCESP NOR LUX TUNIDN IND 3 GHA PAK PAN ISL DOMTTO EGY RUS AUT POL ISR ITAFRA FIN BEL MAR LVA CZE BLR BRA CHL USA TUR SVN DEU CAN AUS GBR NLD SWE DNK SYRCOL 2 MEX SAU BHR MRT EST IRN CRI ETH TZA PHL ZAF CHE ECU PRY NZL SVK NPL MWI URY DZA BGR BGD LBY SLV 1 GTM COG PER ARG CIV CMR BFA BEN HND GAB YEM RWA GMB JAM UGA LTU BOL VEN KAZ SDN GNB NGA BDI ZMB KENTCD 0 GIN HRV JOR TGO ZWE SEN CAF -2 NIC SLE -1AGO 0 1 2 KGZ NER MDG -1 QAT YSRUKR -2 ZAR y = 0.6312x + 1.8891 IRQ -3 R2 = 0.2054
3
-4
Aggregate Index of Infrastructure Quality, IQ (in logs) 8
Figure 3. Infrastructure Stocks vs. Income Inequality 0.7
0.6 ZWE BRA
KEN
Gini Coefficient (0-1)
SEN BFA
MDG NGA PNG TZA
ETH
UGA BGD RWA
IDN
HND BWA
MEX COL PAN ECU CHL BOL GTM 0.5 PER TUR ZMB DOM SLV PHL MYS THA VEN
PRYIRN MAR TUN CIV LKA 0.4 JOR EGY GHA CHN IND PAK 0.3
ZAF CRI
TTO
JAM
URY ARG MUS
HKG SGP AUS PRT GRC
USA NZLFRA IRL ITANORJPN DNKCHE YSR SWE DEU CAN ISR TWN NLD FIN GBR AUT ROM POL ESP BEL CYP HUN BGR
KOR
0.2
y = -0.0303x + 0.403 R² = 0.2157
0.1
0.0 -4
-3
-2
-1
0
1
2
3
Infrastructure Stocks (1st. Principal Component) 9
Figure 4. Infrastructure Quality vs. Income Inequality 0.7
0.6
BRA KEN
ZWE
Gini Coefficient (0-1)
HND BWA SEN MEX COL ECU PAN CHL BOL GTM PER DOM MDG TUR BFA SLV PHL THA VEN NGA
TZA
IND PAK
0.5 ZAF ZMB MYS TTO
CRI PNG IRN JAM URY PRY MAR LKA TUN ARG CIV 0.4 ETH JOR MUS UGA EGY AUS PRT GRC NZL GHA CHN KOR BGD IDN YSR TWN 0.3 RWA ESP POL ROM CYP HUN BGR 0.2
BHS HKG
SGP
FRA USA JPN ITA IRL NOR DNK SWE CAN DEU FIN GBR AUT NLD
CHE ISR BEL
y = -0.0523x + 0.3887 R² = 0.2942
0.1
0.0 -2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Infrastructure Quality (1st. Principal Component)
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Infrastructure and growth How does infrastructure affect growth? • As another productive input – just like labor or noninfrastructure capital – Direct + indirect effect if inputs are gross complements (from Arrow and Kurz 1970)
• By reducing the cost of accumulating other inputs – E.g., lower the cost of installing new capital (Turnovsky 1996) or accessing education
• Through spillover effects on TFP – More efficient organization of production (Duggal et al 1999) – Lowering the cost of innovation and technological upgrading (Bougheas et al 2000, Agenor 2013) 11
Infrastructure and growth How big is the impact of infrastructure on growth? • Big literature after finding of huge effects in the US (Aschauer 1989)
• Reverse causality a big problem – demand for infrastructure services typically rises with income growth – Can lead to overstated growth effects of infrastructure supply – Identifying information needed to separate demand and supply effects (internal / external instruments; full structural models)
• Infrastructure measurement also an issue – Physical assets vs investment flows (or their accumulation) – Multidimensionality of core infrastructure – transport, power, telecom…Synthetic índices of physical assets as an alternative 12
Infrastructure and growth Two common approaches with macro data: – Infrastructure as another input in the aggregate production function (or its dual, the cost function) • Along with human and non-infrastructure physical capital • Typically focus on direct effects only – holding other inputs constant
– Growth regressions augmented with infrastructure measures • Along with other determinants of long-run growth: trade openness, fiscal policy, structural features • Usually yields total effects – allowing for changes in other inputs
Also some sector and firm-level studies • e.g., electification and roads programs in India 13
Infrastructure and growth A majority of studies find sizable positive effects – Especially recent studies of developing economies – And studies using physical indicators (e.g., km of roads) – But not those using infrastructure spending • owing to spending inefficiency and waste (Tanzi and Davoodi 1997; Pritchett 2000; Keefer-Knack 2007; Collier 2015)
Growth effect of infrastructure: empirical studies by reported finding (Straub 2007) Negative None Positive
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Production function approach • Infrastructure elasticity estimates center around 0.10 • Implied output effects are economically significant Projected effect of infrastructure catch-up to OECD median (direct effect only – holding physical and human capital constant)
Region
Increase in output per worker
East Asian Tigers
11.5%
Eastern Europe Latin America Middle East & N. Africa South Asia Sub-Saharan Africa
8.3% 13.7% 15.5% 26.0% 36.3%
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Country-specific estimates of the infrastructure elasticity of output (Synthetic Infrastructure Index) 40 35 30 25 20 15 10 5 0
