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Saturday, 13 June 2009

Infrastructure powered growth

A new World Bank Policy Research Working Paper offers new evidence on the impact of infrastructure development on economic growth in African countries. This is a much studied area, but it attempts to advance the literature by assessing the impact of several types of infrastructure instead of the overall infrastructure, as well as including measures of service quality.

Key conclusions :
Our main results :

(a) Growth is positively affected by the volume of infrastructure stocks and the quality of infrastructure services. Their impact is robust and statistically significant to changes in the aggregate index of infrastructure used. Our empirical estimates address the issue of reverse causality and survive a battery of statistical tests.... From this we conclude that the above results reflect causal, and not merely coincidental, effects of infrastructure on productivity growth.

(b) Our simulations show that our empirical findings are significant not only statistically but also economically. For instance, if all African countries were to catch up with the region’s leader, Mauritius, in terms of infrastructure stock and quality, their rate of economic growth would be enhanced—on average by 2.2 percent per year, and ranging from 0.6 to 3.5 percent (South Africa and Niger, respectively). Catching up with the East Asian "miracle" economies (EAP7) median would involve even larger gains (2.6 percent per year), though with a larger variation—that is, ranging from 0.4 to 3.9 percent per year (Mauritius and Niger, respectively). But we should point out that these catch-up scenarios implicitly assume potentially large investment efforts in the transition toward increased levels of infrastructure development.

Finally, when identifying areas of opportunity to trigger productivity growth we find that African countries have a higher probability of getting larger benefits from infrastructure development through larger stocks of infrastructure. The African infrastructure gap, especially with the representative countries in Western Europe and the EAP7, is still very large. But the payoffs are heterogeneous across subregions—with North Africa showing a narrower infrastructure gap and Central Africa showing the largest gap.
The charts below brings it closer to home (click to enlarge) - the message for our policy makers couldn't be louder :

Chart 1: Potential growth per capita benefits due to higher infrastructure development - reaching Mauritius infrastructure level
Chart 2: Potential growth per capita benefits due to higher infrastructure development - reaching the EAP7 infrastructure level

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