ASi" kUCTURE FlOR DEVELOPMENT

Bx1.1 Returns on infrastructure investment--too
good to be true?
Recent studies In the United Stae sgetthat thle mni- frawtructure on production costs. Studies (summarized
pact of Infrastructure Investments on economice growth in Asehauer 1993) found that infrastrcture significantly
represents startlingly high rats of retumn (up to.60 per- reduces production costs in manufacturing In Germany,
cent). Toogood tobe true? Possibly. Thie resuitspresented Japan, Mexico, Sweden, the United Kingdom, and the.
In Box taible 1.1 may overestimate the productivity of In- United States. One estimate suggests that threeupnrters
frastructur for two reasns. First, there may be a cam- of ULS. federal Investmnent
highways In the 1950s and
rmon. factor thant causes growth In both output and infra- 1960s can be justified on the basis of reductions in truck-.
structure fithtL risnt Included In the study. Second, it may lag costs alone.
be that growth leads to infrastru tur tIvesTmet, and While there Is still no consensus on the magnitude or
~no t thant iivestment-produces growth. A niumber of stud- on the exact nature of the Impact of infrastructure on
les have found that causation runs In both directions. Yet -growth, many studies an the topic have concluded that
more sophisticted estimates that address these Issues el- the role of Infrastructure In growth Is substantial signifi-
-ther have concluded that the positive msuits were not cant and frequently greter than that'of investmnent In
much affected by different econometric methods or have other (rnus of capital. Although the indications to date
found no -noticeable impact of infrastructur on growth. are suggetive, ther'e is still'a need to explai-n why the
Neither finding--.of an extremely~ high impact or of a findings vary so much from study to study Until this
neglgble imnpact-is entirely credible, and research ef'- problem is resolved, results are neither specific nor solid
forts continue in an attempt,to refine the methodology.
.enough to serve as the basis for designing policies for in-
An alterntive approach estinates the impact of in- frastructure investnienL.
Box table 1.1 Results from studies of infrasiructure productivity
NIaplfed rate
Sample - Ekslkilyj o~~~f nrtumpb AaIlwr/ysrrr . 1sf rastrucdtureemmure
United States 0.39 60 Aschauer 1989 .Nonmilitary public capital
United States, 0.34 60 Munnell 1990 Nonmilitary public capital
48 states, United States 0 0 Hot-ai 92Publiccapitol
5metro area, United States 0.08 - utrDn n brs19 ulc capital.
FRigions,japan 0.20 96. Mera 1973 Industrial infrastructure
Regions, France 0.08 12 Prud'homrnr1993 . Public capitld
Taiwan, China 0.24 77 Uchimunand Gao 1993 Transportation, water, and
Korea. 0.19 5i.. Uchimuma and Gao 1993
l[srael 0.31-0.44 54-70 Bregmnan and Marom 1993
Mexico 0.05 ~~~~~~5-7 Shah 1988,1992
-commnunication
Transportation, water, and
communication
Transportation., power, water, and
Poe,communication, and
transportation
Multicountry,-OECED 0.07 19 Canning and Fay 1993 -TrnmsPortation
Multlcointzy, developing 0.07 95 Canning and Fay 1993 Transportation
Mu1tiwuntry, OECD 0.01-0.16 - Bafies and Shah 1993 Infrastructure capital stodcks
and deveoping.
*MUtidCOuntry,~ developing 0.16 63 Easterly and Rebelo 1993 Thmsportation mid comimunicatio
Percntage dhanges in output with impect to. a1 percet change In the level of(Infrastructume
b. Ratio of discounted value of inemnse in depmenden variable to discounted value of InvestnienL
infrast,ucttu.
-a.
strLucture stodcks indicates that their composition ture stocks becomes even greater in high-income
* ch~~danges significantly as incomes rise. For low-in- countries. Data for 1990 indicate that, while total in-
-come countries, more basic infr-astructure is impor- frastructure stodcks increase by 1 percent. with each.
tant-such as water, -irrigation, and (to a lesser ex- 1. percent increment in per capita ODP, household
tent) transport. As economries mature into the access to safe water increases by 0.3 percent, paved
middle-income stage, most of the basic consump- roads increase by 0.8 percent, power by 1.5 percent,
lion demands for water are met, the share of. agri- and telecommunications by 1.7 percent.
culture in the economy'shrinks, and more transport These relationships suggest. that infrastructure
infrastructure iLS provided. The share of power and has a high potential payoff in terms of economic
telecommunications in.investment and infrastrw got,ythedontpviea basis for prescrib