Infrastructure and growth in developing countries : recent advances and research challenges

This paper presents a survey of recent research on the economics of infrastructure in developing countries. Energy, transport, telecommunications, water and sanitation are considered. The survey covers two main set of issues: the linkages between infrastructure and economic growth (at the economy-wide, regional and sectoral level) and the composition, sequencing and efficiency of alternative infrastructure investments, including thearbitrage between new investments and maintenance expenditures; OPEX and CAPEX, and public versus private investment. Following the introduction, section 2 discusses the theoretical foundations (growth theory and new economic geography). Section 3 assesses the analysis of 140 specifications from 64 recent empirical papers-examining type of data used, level of aggregation, econometric techniques and nature of the sample-and discusses both the macro-econometric and micro-econometric contributions of these papers. Finally section 4 discusses directions for future research and suggests priorities in data development.Transport Economics Policy&Planning,Economic Theory&Research,Non Bank Financial Institutions,Infrastructure Economics,Political Economy

Infrastructure and Growth in Developing Countries: Recent Advances and Research Challenges

This paper presents a survey of recent research on the economics of infrastructure in developing countries. Energy, transport, telecommunications, water and sanitation are considered. The survey covers two main set of issues: the linkages between infrastructure and economic growth (at the economy-wide, regional and sectoral level) and the composition, sequencing and efficiency of alternative infrastructure investments, including the arbitrage between new investments and maintenance expenditures; OPEX and CAPEX, and public versus private investment. Following the introduction, section 2 discusses the theoretical foundations (growth theory and new economic geography). Section 3 assesses the analysis of 140 specifications from 64 recent empirical papers examining type of data used, level of aggregation, econometric techniques and nature of the sample and discusses both the macro-econometric and microeconometric contributions of these papers. Finally section 4 discusses directions for future research and suggests priorities in data development.

Opportunism, Corruption and the Multinational Firm’s Mode of Entry

The paper models the boundaries of the multinational firm by looking at a simple trade-off between FDI (internal expansion with strong control rights) and debt (arm’s length expansion with loose control rights) in the context of contractual incompleteness due to institutional constraints in host countries, i.e. problems of commitment and, especially, corruption. It develops a theoretical approach to the two main types of corruption: petty bureaucratic corruption and high-level political corruption. The model predicts that multinational firms prefer FDI the weaker the ability to commit of the host country, while both types of corruption shift the trade-off marginally toward debt. Cross-country panel empirical evidence supports these conclusions.FDI, Debt, Multinational firms, Capital flows, Expropriation, Corruption.

Informal Sector: The Credit Market Channel

We build a model of firms’ choice between formality and informality. Complying with costly registration procedures allows the firms to benefit from key public goods, enforcement of property rights and contracts, that make the participation in the formal credit market possible. In a moral hazard framework with credit rationing, their decision is shaped by the interaction between the cost of entry into formality, and the relative efficiency of formal versus informal credit mechanisms and their related institutional arrangements. The model is consistent with existing stylized facts on the determinants of informality.Formal and Informal Sectors, Credit Markets, Institutional Arrangements.

Privatization and Changes in Corruption Patterns: The Roots of Public Discontent

This paper offers a theory of how the degree of corruption that prevails in a society responds to changes in the ownership structure of major public service providers. We show that there are cases in which privatization, even though it fosters investments in infrastructure, also opens the door to more corruption. The public dissatisfaction towards privatization is then crucially affected by the changes in the degree and pattern of corruption. Our model thus helps understand the seemingly paradoxical situation prevailing in Latin America, where most studies find that privatizations have been efficiency-enhancing and have fostered investments and, at the same time, popular dissatisfaction with the process is extremely high, especially among the middle class. We show that this line of explanation is supported by evidence from surveys in the region.

The Emergence of Institutions

This paper analyzes how institutions aimed at coordinating economic interactions may appear. We build a model in which agents play a prisoners’ dilemma game in a hypothetical state of nature. Agents can delegate the task of enforcing cooperation in interactions to one of them in exchange for a proper compensation. Two basic commitment problems stand in the way of institution formation. The first one is the individual commitment problem that arises because an agent chosen to run the institution may prefer to renege ex post. The second one is a “collective commitment” problem linked to the lack of binding agreements on the fee that will be charged by the centre once it is designated. This implies first that a potentially socially efficient institution may fail to arise because of the lack of individual incentives, and second that even if it arises, excessive rent extraction by the institution may imply a sub-optimal efficiency level, explaining the heterogeneity of observed institutional arrangements. An institution is less likely to arise in small groups with limited endowments, but also when the underlying commitment problem is not too severe. Finally, we show that the threat of secession by a subset of agents may endogenously solve part of the second commitment problem.Institution, Coordination, State of nature, Secession.

Infrastructure and economic growth in East Asia

This paper examines whether infrastructure investment has contributed to East Asia's economic growth using both a growth accounting framework and cross-country regressions. For most of the variables used, both the growth accounting exercise and cross-country regressions fail to find a significant link between infrastructure, productivity and growth. These conclusions contrast strongly with previous studies finding positive and significant effect for all infrastructure variables in the context of a production function study. This leads us to conclude that results from studies using macro-level data should be considered with extreme caution. The Authors suggest that infrastructure investment may have had the primary function of relieving constraints and bottlenecks as they arose, as opposed to directly encouraging growth.Transport Economics Policy&Planning,Banks&Banking Reform,Achieving Shared Growth,Economic Theory&Research,Non Bank Financial Institutions

Infrastructure and development : a critical appraisal of the macro level literature

This survey reviews the existing macro-level empirical literature on the link between infrastructure and development outcomes in a critical light. After providing a general framework that casts the relevant terms of the controversy on the real effect of infrastructure on growth in the context of an aggregate production function, it signals what are the relevant empirical questions to be addressed. This guides the systematic review of a number of empirical studies and the discussion of the main econometric challenges to the identification of the effect of infrastructure on output and productivity. Finally, building on related research, in particular in contract theory and political economy, the paper spells out several promising research avenues.Transport Economics Policy&Planning,Banks&Banking Reform,Economic Theory&Research,Political Economy,Non Bank Financial Institutions

Corruption and Product Market Competition

It is generally considered that more competition might help curb corruption, as rents, which motivate corrupt agreements, are decreasing in the degree of competition. This paper proposes a framework to analyze the relationship between corruption and competition. It studies the optimal incentive scheme for potentially corrupt officials in charge of inspecting firms that compete in the product market. Given that bribe-taking is sometimes tolerated in equilibrium, for specific values of the externality that motivated regulatory intervention, nonmonotonic effects arise and more competition may lead to an increase in corruption. Moreover, it is shown that in this context competition is always welfare improving, even though it might lead to more corruption.

Do regulation and institutional design matter for infrastructure sector performance ?

This paper evaluates the impact of economic regulation on infrastructure sector outcomes. It tests the impact of regulation from three different angles: aligning costs with tariffs and firm profitability; reducing opportunistic renegotiation; and measuring the effects on productivity, quality of service, coverage, and prices. The analysis uses an extensive data set of about 1,000 infrastructure concessions granted in Latin America from the late 1980s to the early 2000s. The analysis finds that as the theory indicates, regulation matters. The empirical work here reported shows that in three relevant economic aspects-aligning costsand tariffs; dissuading renegotiations; and improving productivity, quality of service, coverage, and tariffs-the structure, institutions, and procedures of regulation matter. Thus, significant efforts should continue to be made to improve the structure, quality, and institutionality of regulation. Regulation matters for protecting both consumers and investors, for aligning closely financial returns and the costs of capital, and for capturing higher levels of benefits from the provision of infrastructure services by the private sector.Emerging Markets,Debt Markets,Private Participation in Infrastructure,Infrastructure Economics,Infrastructure Regulation