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.

2 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. 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.

3 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.

4 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). 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).

5 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.

6 At factor cost (for which fewer observations areavailable), the values are slightly higher. 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.

7 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.

8 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 ).

9 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. In both types ofstudies, however, whether infrastructure invest-ment causes growth or growth causes infrastructureinvestment is not fully established.

10 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.