Infrastructure: achievements, challenges, and opportunities

1 IInfrastructure: achievements, challenges, and opportunitiesInfrastructure servicesincluding power, trans-port, telecommunications, provision of water andsanitation, and safe disposal of wastesare centralto the activities of households and to economic pro-duction. This reality becomes painfully evidentwhen natural disasters or civil disturbances destroyor disable power stations, roads and bridges, tele-phone lines, canals, and water mains. Major in-frastructure failures quickly and radically reducecommunities' quality of life and productivity. Con-versely, improving infrastructure services enhanceswelfare and fosters economic infrastructure services to meet thedemands of businesses, households, and other usersis one of the major challenges of economic devel-opment. The availability of infrastructure has in-creased significantly in developing countries overthe past several decades.

2 In many cases, however,the full benefits of past investments are not beingrealized, resulting in a serious waste of resourcesand lost economic opportunities . This outcome isfrequently caused by inadequate incentives embod-ied in the institutional arrangements for providinginfrastructure services. While the special technicaland economic characteristics of infrastructure givegovernment an essential role in its provision, domi-nant and pervasive intervention by governmentshas in many cases failed to promote efficient or re-sponsive delivery of services. Recent changes inthinking and technology have revealed increasedscope for commercial principles in infrastructureprovision. These offer new ways to harness marketforces even where typical competition would fail,and they bring the infrastructure user's perspectiveto the Report focuses on economic Infrastructure: the long-lived engineered structures, equipment,and facilities, and the services they provide that areused in economic production and by infrastructure includes public utilities (power,piped gas, telecommunications, water supply, sani-tation and sewerage, solid waste collection and dis-posal), public works (major dam and canal worksfor irrigation, and roads), and other transport sec-tors (railways, urban transport, ports and water-ways, and airports).

3 Social infrastructure, often en-compassing education and health care, representsan equally important although very different set ofissues that are not analyzed in this Report (see WorldDevelopment Report 1993: Investing in Health).As defined here, infrastructure covers a complexof distinct sectors that, by any measure, represent alarge share of an economy. Taken togethei the ser-vices associated with the use of infrastructure (mea-sured in terms of value added) account for roughly 7to 11 percent of GDP (Table ), with transportbeing the largest sector. Transport alone commonlyabsorbs 5 to 8 percent of total paid employment. Asample of developing countries shows that infra-Table Value added of infrastructure servicesby country group(percentage of GDP)Transport,Note: At market prices. At factor cost (for which fewer observations areavailable), the values are slightly higher.

4 Figures in parentheses arenumber of observations. Data are for 1990 or latest available yearSource: World Bank national accounts , (9)(26)(3)Gas, electricity,and (22) (36) (5)Low-income Middle-incomeHigh-incomeSectorcountriesc ountriescountriesFigure Public infrastructure investmentis a large fraction of both total and publicinvestment in developing of investment allocatedto infrastructure605040302010 Total investmentPublic investmentLow-income countriesMiddle-income countriesSample: Twelve low-income and eight middle-incomecountries; unweighted averages, : Easterly and Rebelo typically represents about 20 percent oftotal investment and 40 to 60 percent of public in-vestment (Figure ). In round figures, public infra-structure investment ranges from 2 to 8 percent (andaverages 4 percent) of GDP. Even these shares un-derstate the social and economic importance of in-frastructure, which has strong links to growth ,poverty reduction, and environmental 's impact on developmentLinks to economic growthInfrastructure represents, if not the engine , then the"wheels" of economic activity.

5 Input-output tablesshow that in the economies of Japan and the UnitedStates, for example, telecommunications, electricity,and water are used in the production process of14nearly every sector, and transport is an input forevery commodity. Users demand infrastructure ser-vices not only for direct consumption but also forraising their productivity by, for instance, reducingthe time and effort needed to secure safe water, tobring crops to market, or to commute to research in recent years has been devotedto estimating the productivity of infrastructure in-vestments (Box ). Many studies attempting tolink aggregate infrastructure spending to growth ofGDP show very high returns in a time-series analy-sis. Some cross-national studies of economic growthand infrastructure notably, one using public in-vestments in transport and communications and an-other using capital stocks in roads, railways, andtelephonesalso show that infrastructure variablesare positively and significantly correlated withgrowth in developing countries.

6 In both types ofstudies, however, whether infrastructure invest-ment causes growth or growth causes infrastructureinvestment is not fully established. Moreover, theremay be other factors driving the growth of bothGDP and infrastructure that are not fully accountedfor. Neither the time-series nor the cross-sectionalstudiessatisfactorilyexpl ainthemechanismsthrough which infrastructure may affect studies focusing on rural infrastructure'seffect on the local economy in certain developingcountries have revealed more about the nature ofthe apparent benefits. Studying data over time fromeighty-five districts in thirteen Indian states, re-searchers found that lower transport costs increasedfarmers' access to markets and led to considerableagricultural expansion and that modern irrigationmethods brought higher yields. At the same time,because improved communications (through roads)lowered banks' costs of doing business, banks ex-panded lending to farmers, and farmers used thefunds to buy fertilizer, further increasing yields.

7 Ac-cording to a household- and village-level surveyconducted in Bangladesh, villages classified as"most developed" in terms of access to transport in-frastructure were significantly better off than the"less developed" villagesin terms of agriculturalproduction, incomes and labor demand, and health.(Itisdifficult, however, to verify whether theBangladesh study took into account all possible in-tervening factors, such as unobserved differencesamong the communities in natural endowments.)What is evident is that a strong association existsbetween the availability of certain infrastructure -telecommunications (in particular), power, pavedroads, and access to safe waterand per capitaGDP (Figure ). An analysis of the value of infra-Box on infrastructure investmenttoo good to be true?Recent studies in the United States suggest that the im-pact of infrastructure investments on economic growthrepresents startlingly high rates of return (up to 60 per-cent).

8 Too good to be true? Possibly. The results presentedin Box table may overestimate the productivity of in-frastructure for two reasons. First, there may be a com-mon factor that causes growth in both output and infra-structure that is not included in the study. Second, it maybe that growth leads to infrastructure investment, andnot that investment produces growth . A number of stud-ies have found that causation runs in both directions. Yetmore sophisticated estimates that address these issues ei-ther have concluded that the positive results were notmuch affected by different econometric methods or havefound no noticeable impact of infrastructure on findingof an extremely high impact or of anegligible impactis entirely credible, and research ef-forts continue in an attempt to refine the alternative approach estimates the impact of in-Box table from studies of infrastructure productivityUnited StatesUnited States48 states, United States5 metro areas, United StatesRegions, JapanRegions, FranceTaiwan, ChinaKoreaIsraelMexicoMulticountry, OECDM ulticountry, developingMulticountry, OECDand developingMulticountry, on production costs.

9 Studies (summarizedin Aschauer 1993) found that infrastructure significantlyreduces production costs in manufacturing in Germany,Japan, Mexico, Sweden, the United Kingdom, and theUnited States. One estimate suggests that three-quartersof federal investment in highways in the 1950s and1960s can be justified on the basis of reductions in truck-ing costs there is still no consensus on the magnitude oron the exact nature of the impact of infrastructure ongrowth, many studies on the topic have concluded thatthe role of infrastructure in growth is substantial, signifi-cant, and frequently greater than that of investment inother forms of capital. Although the indications to dateare suggestive, there is still a need to explain why thefindings vary so much from study to study. Until thisproblem is resolved, results are neither specific nor solidenough to serve as the basis for designing policies for in-frastructure 1989 Munnell 1990 Holtz-Eakin 1992 Duffy-Deno and Eberts 1991 Mera 1973 Prud'homme 1993 Uchimura and Gao 1993 Uchimura and Gao 1993 Bregman and Marom 1993 Shah 1988, 199219 Canning and Fay 199395 Canning and Fay 1993-Baffes and Shah and Rebelo 1993 Percentage changes in output with respect to a 1 percent change in the level of of discounted value of increase in dependent variable to discounted value of investment in public capitalNonmilitary public capitalPublic capitalPublic capitalIndustrial infrastructurePublic capitalTransportation, water, andcommunicationTransportation, water, andcommunicationTransportation, power, water, andsanitationPower, communication.

10 AndtransportationTransportationTransport ationInfrastructure capital stocksTransportation and communicationstructure stocks indicates that their compositionchanges significantly as incomes rise. For low-in-come countries, more basic infrastructure is impor-tant such as water, irrigation, and (to a lesser ex-tent)transport. As economies mature into themiddle-income stage, most of the basic consump-tion demands for water are met, the share of agri-culture in the economy shrinks, and more transportinfrastructure is provided. The share of power andtelecommunications in investment and infrastruc-ture stocks becomes even greater in high-incomecountries. Data for 1990 indicate that, while total in-frastructure stocks increase by 1 percent with each1 percent increment in per capita GDP, householdaccess to safe water increases by percent, pavedroads increase by percent, power by percent,and telecommunications by relationships suggest that infrastructurehas a high potential payoff in terms of economicgrowth, yet they do not provide a basis for prescrib-15 Implied rateSampleElasticity'of returnbAuthor/yearInfrastructure measureFigure Per capita availability of major infrastructure is closely related to income main linesper thousand persons50010020511,000 Jordan.