WPS4914 POLICY RESEARCH WORKING PAPER 4914 Public Disclosure Authorized Infrastructure and Growth in Africa César Calderón Public Disclosure Authorized Public Disclosure Authorized The World Bank Public Disclosure Authorized Africa Region African Sustainable Development Front Office April 2009 POLICY RESEARCH WORKING PAPER 4914 Abstract The goal of the paper is to provide a comprehensive Across Africa, infrastructure contributed 99 basis points assessment of the impact of infrastructure development to per capita economic growth, versus 68 points for on growth in African countries. Based on econometric other structural policies. Most of the contribution came estimates for a sample of 136 countries from 1960–2005, from increases in stocks (89 basis points), versus quality the authors evaluate the impact on per capita growth improvements (10 basis points). of faster accumulation of infrastructure stocks and of The findings show that growth is positively affected enhancement in the quality of infrastructure services for by the volume of infrastructure stocks and the quality 39 African countries in three key infrastructure sectors: of infrastructure services; simulations show that our telecommunications, electricity, and roads. empirical findings are significant statistically and Using an econometric technique suitable for dynamic economically. Identifying areas of opportunity to generate panel data models and likely endogenous regressors, productivity growth, the authors find that African the authors find that infrastructure stocks and service countries are likely to gain more from larger stocks of quality boost economic growth. The growth payoff of infrastructure than from enhancements in the quality reaching the infrastructure development of the African of existing infrastructure. The payoffs are largest for leader (Mauritius) is 1.1 percent of GDP per year in telephone density, electricity-generating capacity, road- North Africa and 2.3 percent in Sub-Saharan Africa, with network length, and road quality. most of the contribution coming from more, rather than better, infrastructure. This paper—a product of the African Sustainable Development Front Office, Africa Region—is part of a larger effort in the region to gauge the status of public expenditure, investment needs, financing sources, and sector performance in the main infrastructure sectors for 24 African focus countries, including energy, information and communication technologies, irrigation, transport, and water and sanitation. Policy Research Working Papers are also posted on the Web at http://econ. worldbank.org. The author may be contacted at [email protected]. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Infrastructure and Growth in Africa César Calderón Acknowledgments This study is part of the Africa Infrastructure Country Diagnostic (AICD), a project designed to expand the world’s knowledge of physical infrastructure in Africa. Financing for AICD is provided by a multi-donor trust fund to which the main contributors are the Department for International Development (United Kingdom), the Public Private Infrastructure Advisory Facility, Agence Française de Développement, and the European Commission. Inquiries concerning the availability of datasets should be directed to [email protected]. The authors would like to thank the Public-Private Infrastructure Advisory Facility (PPIAF) for its financial support in constructing the data set on infrastructure stocks and quality measures. He would also like to thank Vivien Foster and Cecilia Briceño-Garmendia for very useful comments. Contents 1 Methodology 2 Measuring the quantity and quality of infrastructure 2 Principal components analysis (PCA) 3 The aggregate index of infrastructure stock 3 The aggregate index of infrastructure quality 4 Econometric methodology 5 2 Infrastructure trends in Africa 6 Aggregate indices of infrastructure development 7 Telecommunications 7 Electricity 8 Roads 9 3 Infrastructure and productivity growth in African countries 9 Regression analysis 10 Growth payoff from infrastructure development in 2001–5 relative to 1991–5 11 Infrastructure and other sources of growth in Africa 12 The contribution of infrastructure assets to growth in Africa 12 Potential growth payoff from infrastructure development among African countries 14 Scenario 1: Growth payoffs of reaching the leader in the African region 15 Scenario 2: Growth payoffs of reaching the representative country among the EAP7 16 Scenario 3: Growth payoffs of reaching the leader in South Asia 17 Scenario 4: Growth payoffs from reaching the representative country in Western Europe 18 4 Conclusions 19 References 20 Appendix 1 Econometric methodology 22 Figures and tables 25 About AICD 61 About the author César Calderón is an economist in the World Bank’s Office of the Chief Economist for Latin America and the Caribbean. iii he empirical literature on growth identifies inadequate infrastructure provision aone of the main Tproblems in Africa, along with poor education, political instability, and bad policies (Wheeler 1984, Hussain and Faruqee 1994). Easterly and Levine (1997) suggest that the ethnic diversity in Africa may explain bad policy decisions in the region and an inefficient provision of public goods (such as infrastructure). The literature on development economics, on the other hand, has stressed the importance of infrastructure on productivity growth. The World Bank’s 1994 World Development Report points out that productivity growth is higher in countries with an adequate and efficient supply of infrastructure services (World Bank 1994). The debate on the role of infrastructure in economic development has been reignited thanks to recent developments in policy circles. First, the increasing pressures of fiscal adjustment in most industrial and developing countries have called for public sector retrenchment and a decreasing participation in infrastructure. Second, the reduced participation of the public sector in infrastructure provision has opened infrastructure industries to the private sector. This reflects an increasing reliance on market mechanisms that has led to the privatization of public utilities, multiple concessions, and other forms of public–private partnership. Infrastructure is a key element present in policy debates. Lederman, Maloney, and Servén (2005) have found that the efficient provision of infrastructure is crucial for the success of trade-liberalization strategies aimed at optimal resource allocation and export growth. Access to infrastructure services, on the other hand, has been found to play a significant role in helping reduce income inequality (Estache, Foster, and Wodon 2002; Calderón and Chong 2004; Calderón and Servén 2004a; Galiani and others 2005). As we said before, however, the needs for fiscal adjustment and consolidation in many countries have led to a reduction of public infrastructure spending that has not been offset by an increase in private investment. This has resulted in the insufficient provision of infrastructure (Blanchard and Giavazzi 2004; Easterly and Servén 2003). The main objective of the present report is to provide a comprehensive assessment of the impact of infrastructure development on economic growth in African countries. Based on econometric estimates for a sample of 136 countries over the period 1960–2005, we evaluate the impact of a faster accumulation of infrastructure stocks and an enhancement in the quality of infrastructure services on economic growth across African countries over the 15-year study period. In the present report, we focus on three infrastructure sectors (telecommunications, electric power, and transportation), and, given the lack of monetary indicators for a large cross-country sample, we use physical indicators to measure not only the volume of infrastructure assets but also the quality of the services provided by these assets. The rest of the report is organized as follows. Section 2 describes the measures of infrastructure quantity and quality used in the analysis, and discusses the econometric issues that arise when attempting to measure the impact of infrastructure. In section 3 we offer a brief overview of trends in infrastructure development in Africa relative to other regions across the world. Section 4 presents an empirical assessment as well as some simulations for African countries. Section 5 concludes. INFRASTRUCTURE AND GROWTH IN AFRICA 1 Methodology In order to evaluate the impact of infrastructure development on economic growth, we have gathered a large macroeconomic panel data set with information organized in five-year periods for 136 countries over 1960–2005.1 Our panel data set is unbalanced since we do not have complete information for all countries over the sample period. To avoid biases introduced by countries with a very small number of observations, we