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In addition, selected case studies illustrate experiences with public infrastructure provision Ethiopia , private provision solar micro-grids in Kenya , and PPPs hydropower in Lao PDR. The next section sets the stage by selectively reviewing the empirical literature on the economic effects of infrastructure, pointing out potential downside risks in terms of growth dividend and distributional effects. Section III provides an overview of the evolution of various measures of quantity and quality of infrastructure in LIDCs since , making clear that infrastructure in LIDCs lags behind that in emerging markets on a number of dimensions.

It starts by looking at public investment and saving, taking advantage of broad availability of these indicators. It then zeroes in on public investment in economic infrastructure using survey data. The rest of the section covers private participation in infrastructure provision, the role of official development finance, and cross-border syndicated bank lending for LIDC infrastructure.

The last section concludes. Since the s there has been a wide body of literature looking at the possible development gains from investing in infrastructure World Bank, The economic importance of infrastructure investment has been analysed both at project and macro levels. At a project level, the focus is on the social cost-benefit of infrastructure projects and their implied internal rate of return see Marcelo et al.

The social cost-benefit analysis often tries to account for negative externalities. At a macro level, the impact of infrastructure investment is analysed using aggregate production function with the assumption that infrastructure is complementary to other inputs in the production function see Aschauer, ; Gramlich The macro literature shows that improvements in infrastructure could raise productivity, stimulate private investment Cavallo and Daude, , and facilitate domestic and international trade Bougheas et al.

However, public investment could be a poor proxy as it is composed of economic and social infrastructure spending as well as government investment on state owned enterprises. In addition, the link between spending and infrastructure build up could be very weak in cases where public investment efficiency is low due to poor project selection, non-transparent procurement processes, and corruption Pritchett, ; Tanzi and Davoodi, Focusing on transportation investments in Africa since , Jedwab and Storeygard show that increased market access has a positive effect on city growth, favouring urbanisation.

An interesting strand of literature looks at the historical experience of colonial Africa and India to shed light on how infrastructure investment shapes economic activity. The analysis of railroads in Ghana and Kenya shows that infrastructure investment can produce long-term economic gains by reducing trade costs and integrating markets, potentially transforming the economic landscape in poor, remote regions with high trade costs Jedwab and Moradi, ; Jedwab et al. Similar findings have been shown for colonial India, where railroads decreased trade costs and interregional price gaps and increased interregional and international trade as well as real income level Donaldson, The historical impact of railroads on the American economy is also consistent with a positive impact of infrastructure investment on market integration and economic development Donaldson and Hornbeck, Micro-level evidence shows that the distributional effect of infrastructure investment could vary.

For instance, Khandker et al. They also show that the poorest households are those benefiting the most. Similarly, Jedwab and Storeygard point to the importance of taking the local context into consideration, given the evidence of heterogeneous effects of transportation investments in Africa—which seem to favour small and remote cities. The evaluation of programs of infrastructure rehabilitation in Georgia and Vietnam also shows positive average effects, with some evidence of a stronger effect on the poor Lokshin and Yemtsov, ; Mu and van de Walle, Duflo and Pande look at large public infrastructure investments—specifically, dams in India—and find a bleaker picture as poverty, in the aggregate, rises.

Moreover, they point out significant distributional implications, as agricultural productivity increases in downstream districts, which benefit from irrigation, but not in those where dams are built, where construction activities causes loss of agricultural land and expose the population to diseases, resulting in higher poverty rates 4. Similarly, the extensive highway network built in China since the s has complicated spatial effect on economic activity, with winners and losers.

Large cities in the centre of a dense regional highway network grow faster and specialise in business services and manufacturing, while the hinterlands grow more slowly, and become relatively more specialised in agriculture Baum-Snow et al. This points to the importance of anticipating distributional effects of infrastructure projects and planning offsetting measures if such effects are expected to be negative.

Figure 1.

  2. Section 5. How we invest your money.
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Selected Infrastructure Indicators Median, latest available year between For example, in the s, a wave of public-financed infrastructure investment delivered poor results in terms of short and long run economic growth, mostly because of cost overruns, corruption and poor maintenance Arezki et al. After this negative experience, and following market liberalisation policies, the private sector started playing a more prominent role in financing infrastructure investment, partly through PPPs see Hammami et al. However, in many developing countries this resulted in high construction and maintenance costs Estache and Fay, Thus, public investment effectiveness and efficiency are not always assured and need to be achieved through appropriate institutions and policies.

Firm-level data compiled by the World Bank as part of the Enterprise Surveys World Bank, no date confirm the presence of large gaps in access to electricity, water and transportation infrastructure, and indicate that such gaps are an actual constraint on real economic activity Table 1, top panel.

5.1 Making an investment choice

The percentage of firms in LIDCs that identify access to electricity and transportation as a major constraint to their business activity is, respectively, 43 and 24 per cent. By contrast, the same percentages are 32 and 18 per cent, respectively, in emerging markets EMs.

Focusing on access to electricity, it is interesting to observe that 74 per cent of firms in LIDCs experience power outages—compared to 53 per cent in EMs. Furthermore, the average firm in LIDCs experiences 11 power outages per month, which implies a cost of 7. In contrast, in EMs firms have to deal with 4. This change has been broad-based across country groups, although frontier economies have shown faster accelerations and, on the contrary, changes in fragile states have been less perceptible. A few countries—particularly Vietnam—stand out with impressive performance across a range of indicators.

Information and communication technology ICT has expanded dramatically, with the number of Internet servers growing from near zero in to the average of 6 servers per million people in On the other hand, improvements in transport infrastructure have been relatively minor, even though transportation is typically the largest item in LIDC capital budgets.

Firm-level data from the World Bank Enterprise Survey confirm these trends, as the share of firms identifying electricity and water insufficiencies as major constraints to their business activity sharply decreased over the last decade, while almost no progress is observable on transportation infrastructure Table 1, bottom panel.

Table 1: Infrastructures and Economic Activity. Note: The top panel reports simple averages of all available country-representative surveys, over the period , by country groupings. The bottom panel reports changes between the most recent survey and the first one, starting in Then, the initial and final year changes because of data availability. Only countries with at least two surveys since are considered. Despite significantly faster growth, electricity generation capacity in LIDCs—even in frontier markets—remains considerably lower than in emerging markets Furthermore, electricity supply is also less reliable see Table 1.

Road density also lags behind 0. Mobile phone penetration made huge strides from near zero in to 72 per people in , but was still significantly lower than per people in EMs. Survey-based measures about the quality of national infrastructure compiled by the World Economic Forum Schwab, show a noticeable improvement in perceived infrastructure quality in LIDCs in the second half of the , but no progress for the median LIDCs since , leaving a large gap with advanced and emerging market economies Figure 2.

Figure 2. Perceptions of Infrastructure Quality Index, It is generally recognised, however, that the public sector provides the bulk of infrastructure in these countries. In addition, as we show in Section 4. Thus, we start our analysis by examining trends in public investment. Median public investment in LIDCs rose significantly from 5.

chapter fund manager selection using macroeconomic information Manual

Following a temporary slowdown in , public investment picked up again and stood at 6. Moreover, a large gap still remains compared to emerging and advanced economies. In the pre-crisis period, the scaling-up of public investment was common to most countries, which benefited from a favourable global environment, rising commodity prices, and debt relief under the HIPC and MDRI initiatives, among other factors.

In particular, commodity exporters expanded public investment more than other countries as they benefited from a large terms-of-trade improvement.

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These trends diverged in recent years, with public investment falling in commodity exporters as a decline in commodity prices led to fiscal pressures, while diversified exporters recorded a further small increase from the pre-GFC peak Figure 4. Figure 4. In every category, one can find examples of countries that achieved or maintained high public investment levels and examples of those that failed to do so. Public investment rose steadily in several commodity exporters, including Bolivia, Mongolia, Mozambique, Niger, and Tajikistan, until a drop in following a negative commodity price shock.

However, in some other countries, the ratio of public investment to GDP has declined significantly over time, reflecting, for example, intensified fragility in Eritrea and Yemen, and fiscal pressures in Nigeria and Uzbekistan. A few countries have not experienced a pronounced scaling-up, but have maintained fairly high levels of public investment throughout the past 15 years. On the other hand, in several countries, public investment has been quite low over the whole period e. Figure 6. Over the last decade and a half, there has been a clear correlation with correlation coefficient of 0.

However, the former was greater than the latter in most countries, especially in most recent years. Median public saving declined sharply during the GFC, and, after a brief rebound, started slipping again, with the latest slide reflecting lower commodity prices. As a result, median public saving has dropped 2.

Figure 7. Fiscal vulnerabilities have increased recently, particularly among commodity exporters. Budget deficits have gone up, interest rates have risen, and local currency depreciation has increased the burden of external debt. For instance, in Ethiopia issued a USD one billion Eurobond to finance imports related to export-oriented projects such as investment in the power transmission infrastructure, sugar factories, and the development of industrial parks IMF, Thirty-two country teams were able to provide information on public investment in economic infrastructure over the last five years, typically in consultation with the authorities.

This information offers valuable insights, even though the results should be taken with a grain of salt as quality and comparability of data cannot be assured. Looking across country groupings, frontier market economies had somewhat higher levels of investment, facilitated by easier access to financing and stronger economic prospects. Investment levels in fragile states were typically lower than average, likely reflecting limited fiscal space and weak institutional capacity Collier and Cust, Figure 8. Water and sanitation account for 22 per cent, the energy sector for 19 per cent and ICT for the residual 6 per cent.

The relatively low share of energy is somewhat troubling, since access to electricity is frequently identified as a key constraint to development in LIDCs see Payne, , for a review of the literature, and Di Bella and Grigoli, , for an application to Haiti and Nicaragua. Fairly broad private provision of ICT services has allowed governments to spend relatively little in that area. Since , LIDCs accounted for 6. After a sharp acceleration in the early s, PPP flows have declined in the most recent years.

Across Africa there are several examples of regional infrastructure projects, especially in the energy and transport sectors UNCTAD, For instance, the Central Corridor is an integrated transport program across five countries Burundi, DR Congo, Rwanda, Tanzania, and Uganda with an investment of about USD 18 billion involving local and international actors from the public and private sectors WEF, Figure 9.

There is considerable variation in the size of PPP projects, and some of them are very large, such as a coal plant in Laos with an investment of USD 3. Nine projects started since are valued over USD 1 billion. More than a quarter of the projects in LIDCs involve MDB support in the form of direct loans, syndication, equity investment, partial credit guarantees, and political risk coverage.

The presence of MDBs is associated with a lower probability that a project comes under distress or is cancelled, even after controlling for a set of project-specific variables and for year and country fixed effects. Figure The bulk of the money went to public projects, with direct support to the private sector amounting to USD 0.

These countries direct a considerable share of their development financing to infrastructure. According to the data on Chinese official development assistance published by AidData, between and infrastructure projects accounted for about 70 per cent of total Chinese financing.