Infrastructure and Economic. Norman V. Loayza, World ldbank Rei Odawara, World Bank

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1 Infrastructure and Economic Growth thin Egypt Norman V. Loayza, World ldbank Rei Odawara, World Bank

2 Motivation

3 Questions How does Egypt compare internationally regarding public infrastructure? Is Egypt tinvesting enough hin infrastructure? t What are the economic effects of increasing investment infrastructure in Egypt? What can these effects be improved?

4 Outline Status of Infrastructure Infrastructure and economic growth Investment expenditures and infrastructure Projections: Expenditures Infrastructure Growth

5 Status of Infrastructure in Egypt in International Context

6 gth (sqrt of 1,000 workers x arable land) log of total road leng -1 0 Infrastructure Indicators vs. per capita GDP Transport OMN SVN EST BEL LVA JPN IRL SWE JAM AUT CRI CHE SGP NOR BWA LTU NZLFRA NLD HUN AUSUSA PNG CZE ITA GRC FIN GIN BRA GBR YEM MYS DNK BOL ZAF POL GAB ROM SVK PRT ESP BLR CHL GMB TURHRV ISR ZAR SLE CAF VNM PHL COL LSOCIV MDG MRT IND ECU PAN GHA ZMB KGZNIC AGO LKAJOR EGY PER DOM DZABGR ARG MEX TCD SYR GNB RWA BEN KEN PAK IDN SLV IRN MUS BDI TZA HND KHM MAR CHN GTMUKR TUN KAZ URY RUS MLI NGA UGA SEN TGO NPL ARE BFA NER ETH HTI BGD CMR THA log of real per capita GDP ) 100 ed roads (% of total roads) Pave 0 20 BDI LBR ZAR AZE JOR UKR THA BGD BGR MUS CZE ISR SVNITA DEU FRA GBR DNK HKG AUT CHE IRLSGP ARE TWN GEO GRC KGZ UZB ARM LTU MDA BLR SVK KOR KAZ HRV NLD KWT CHN EGY MYS DOM LVA PRT JPN BEL NOR TJK JAM TUN DZA IRN MKD PAK POL NZLFIN USA IDN RUS SWE NPL MAR LBY BIH ROM TTO IND ESP HUN LKA AUS SDN AGO ALB GTM URY TUR MEX BWA CAN TGO PAN VEN BFA SEN NGA ARG SAU OMN NER HTI CRI ERI PHL ETH MOZ RWA HND MLI GMB GNB MDGGIN GHA ZMB LSO SYRSLV ZAF CHLEST KENCIV CMR YEM COL SLE TZABEN MRT VNM NIC COG NAM PER ECU PRY GAB UGA KHM BOL BRA CAF PNGMNG TCD log of real per capita GDP 6 8 Quality of roads 2 4 BDI DEU FRA CHE SGP DNK HKG JPN MYS TWNBEL AUTUSA NLD ARE GBR FIN CAN SWE CHL PRT KOR ESP JOR NAM SLV THA ISR AUS TUNZAF LTU KWT HRV SVN NZL NOR MUS ITA GRC CHN URY PAN PAK MAR GTMDOM JAM TUR MEX BWASVK ESTCZE IRL TZA BGD IND AZE ARM LVA HUN EGY MKD ARGPOL GMB KHM HND TTO MWIUGA GEO ETH MDG MLI PHL LKA BEN NGA VNM COL PER ECU DZA NIC NPL BFA ZMB LSO KEN TJK IDN UKR KAZ BRA BGR VEN CRI KGZ BOL ROM RUS MOZ MRT ALB CMR MDA MNG AGO PRY BIH TCD ds 6 8 Quality of railroad 2 4 BDI CHE JPN FRA DEU HKG BEL NLD DNK TWNFIN SWE SGP KOR CAN MYS ESPAUT USA GBR IND TUN SVK AUS NOR CZE PRT AZE CHN PAK NAMUKR RUS LVA LTU ISR THAZAF POL EST HUN SVN NZL EGY KAZ BGR MAR BWA GRC ITA TZA TJK GEO HRV ROM IRL MDA BGD BFA KGZ VNM MNGIDN LKA CHL PAN MKD TUR ARG MEX ARM JOR DZA MOZ MWI KENMRT NGA ARE MLI ETH UGA MDG ZMB CMR PHL GMB BEN LSO KHM TCD AGO BOL GTM NPL NIC HND DOM SLV ALB COL BIH PER BRA KWT URY MUS JAM CRI VEN PRY ECU TTO log of real per capita GDP log of real per capita GDP

7 Infrastructure Indicators vs. per capita GDP Transport (continued) Quality of port facilities BDI SGP DEU HKG NLD BEL FIN DNK JPN FRA ARE PANMYS SWE CANUSA NZL TWN JAM EST KOR ESP GBR NOR CHE NAM TUN THA MUS CHL ISR AUS LVA PRT HND ZAF GRC AUT URY SVN JOR IRLKWT GMB LTU PAK LKA MAR IND AZE CHN GTM EGY DOM SLV TZAKHM KEN GEO UKR BGR ARG RUS MEX POL HRV SVK CZE DZAROM TUR NGA COL HUN TTO ITA MOZ VNM PHL ECU KAZ BRA VENBWA MDG BGD BEN MRT CMR NIC IDN AGO PRY PER CRI MWI UGA ALB BFA ZMB LSO MKD TJK MNG ETH NPL MLI TCDKGZ MDA BIH BOL ARM Quality of air transport t BDI SGP DEU HKG NLD FRA JPN GBR ARE FIN DNK USA MYS AUS BEL CAN CHE SLV ZAF TWN PRT ESP SWE NOR ISRNZL AUT DOM JAM THA CHL KOR MUS GRC IRL IND AZE PAN LVA ESTCZE KEN JOR TUN KWT NAMCOL ZMB EGY TUR MEX PAK BRA ETH MAR LTU TTOSVN GTM HUN CRI ITA MDA PHL IDN ECU RUS GMB HND LKA KAZ HRV KHM VNM NIC VEN TZA ARM ARG BWA POL CHN SVK ROM MOZ UGA MDG NPL NGA DZABGR GEO AGO PER KGZ MWI BFA TJK BOL PRY ALB URY UKRMKD MNG MLI BGD BEN MRT BIH LSO CMR TCD log of real per capita GDP log of real per capita GDP

8 Infrastructure Indicators vs. per capita GDP Telecommunications workers) 6 8 inlines (lines per 1, log of total mai BDI CHNEGY UKR BIH MKD BLR CRI BGR HRV URY IRN MUS TUR POL HUN KOR ISR GRC ITA DEU FRA GBR SWE AUS BEL DNK HKG RUS CHL LVA EST LTU TTO CZE PRT SVN NZL ESP FIN JPN AUT NLD CAN CHE IRL USA SGP NOR MDA ARM BRA SYR JOR ROM ARG GEO SLV COL LBN MEX MYS SVK SAU ARE JAM VNM AZE GTM TUN KWT KAZ DOMECUZAF PAN VEN OMN KGZ NAM ALB THA DZA BWA YEM SDNIND NIC MNG HND BOL PER LKA MAR PRY SWZ PAK PHL IDN GAB LSOSEN NPL HTI CIV TGO GHA MRT LAO ERI BEN PNG ZMB ETH MWI MMR MLI KENNGA BFA CMR BGD AGO COG MOZ CAFRWA UGA MDG TZA GIN NER TCD 0 workers) 8 ne lines (lines per 1, log of cell phon 2 ZAR LBR BDI ISR ITA JAM LTU EST HUN CZE PRT SVNESP GRC FIN BGR TUR MYS CHL LVA HRV SVK DEU KOR FRA GBR SWE HKG BEL AUS DNK AUT NLD IRL SGP NOR POL NZLJPNCHEKWT ARE MKD PHLMAR JORALBTUN ZAF GTM PAN ROM MUS RUS TTO SAU USA MEX BWA GAB OMN CAN PRY DOM SLVBIHTHABRA UKR VEN ARG ECU MRTMDA BOL CHN NICMNGGEO AZE SWZ NAM COL GMB IDN SYR DZA BLR LBN CRI EGY PERKAZ URY LSOSEN CIV COG CMR HND LKA GHA NGAYEM KEN ARM IRN TGO BEN KHM UGATZA KGZ HTI MLI ZMB SDN VNM IND AGO LAOPAK LBY GNB MOZ BFA TJK UZB MWI MDGBGD GIN CAFRWA TCD NER ERI ETH NPL PNG ZAR MMR log of real per capita GDP log of real per capita GDP ain lines) hone faults (per 100 ma Teleph 0 20 BDI ETH NER MMR NPL KEN TJK ZMB IND UZB CIV SWZ LSO MOZ ERI TCD ALB ARM CAFMDG ZAF AZE KAZ NAMUKR MUS GAB BFA JAM COL TZA GHA MRT MNGLKA MAR SYR TUNBLR MYS CHL NGA RWA IDN GEO SLVBIH ECU PAN ROM TUR JOR LVA HRV POL EST SVN TGO BEN MKD LTU SVK SEN SDN MDA NIC PHL GIN HND PRY THA RUS HUNPRT GRC USA DZA CZE ESP GBR AUS BRA CRI BEL DNK BGR AUT IRL VENMEX OMN KOR SAUTWN KWT EGY JPN HKGSGP ARE.8 1 to main lines) Waiting list (the ratio of waiting list t BDI ERI ETH GNB TGO NPL LSO GHA KEN MWI GMB MMRBGD BEN SDN YEM MOZ CAF BFA ZMB LAOMDA KGZ TZA GIN MDG TJK SEN CIV IND PAK UZB PNG MNG HND SWZ ALB JAM LKA DZA UKR GEO ARM COL TUN THA BLR ROMRUS IRN BWA GAB EGY MAR AZE KAZ SLV BGR BOL PRY MUS POL JOR NAM PER ECUZAF BRA CRI URY PAN TUR ARG MYS CHL LVA HRV LTU SVK EST SAU HUNCZE OMN KOR SVN NZL TWN ITA GRC FIN JPN DEU FRA GBR SWE AUS DNK HKG AUT NLD CAN CHESGP KWT ARE NOR log of real per capita GDP log of real per capita GDP

9 per 1,000 workers) 2 g Capacity (megawatts p -2 0 og of Energy Generating -6-4 lo Infrastructure Indicators vs. per capita GDP Electricity NOR FIN SWE CAN USA KWT BGR LTUESTOMN SAU ISR ARM PRY RUS SVK CZE SVN NZL JPN FRA AUS DNK ESP ITA DEU BEL HKG AUT CHE SGP UKR TTO KOR GBR NLD IRL TJK BIH ARE GEO KAZ KGZ MDA MKD ZAF ROM BLR AZE DOM UZB ALB JAM URY IRN VEN LBN ARG MYS LVA LBY CHL HRV POL HUNPRT GRC TUR SYR JOR BRA CRI PAN MUS MEX MNG EGY TUN COL ECU THA GAB ZMB PHL HND MAR CHN GTM LAOIND PAK NIC LKA BOL SWZ NAM SLVPER DZA MOZ LBR PNG VNM IDN GHA CIV YEM BWA MRT ZAR LSO NGA CMR AGO MMR SLE MWI NPL MLI BGD HTI GINKENSDN COG SEN TZA GMB GNBERI BEN ETH UGA MDGBFA NER CAF BDI RWA TGO TCD KHM log of real per capita GDP 80 loss (% of total output) Power 0 20 ZAR HTI COG ECU MDA ALB TGO NGA DOM KGZ URY LBY IND VEN TZA PAK NIC YEM HNDSYR MMR NPL CMR KEN GHA BEN TJK SEN SDN CIV GEO PHL IDN AGO LKA NAMCOL MKD LVA MAR ARM AZE JOR ETH MOZ BGD VNM BOL SLV UKR BIHDZA KAZ BRA PAN IRN LBN TUR ARG MEX HRV GAB OMN EGY TUN UZB JAM BLR BGR PER CRI ROM RUS BWA POL EST HUN NZL HKG THA CHL PRT CHN ZAF LTU ZMB PRY GTM MYSSVK TTO CZE SAU ESP GRC ITA SVN KOR ISRTWN FIN JPN DEU FRA GBR KWT SWE AUS BEL DNK AUT NLD CAN IRL NOR CHE USA SGP ARE log of real per capita GDP ss to Electricity (% of po opulation) Acces 0 ZAR CHN JOR EGY TUN THA DZABRA CRI URY IRN VEN LBN SYR DOM MUS ARG MYS CHL LBY TTO OMN SAU ISR TWN ECU VNM MAR PRY COL JAM PAN PHL SLV PER NIC ZAF MNG LKA HND BOL IND PAK IDN GHA CIV NGACMR GAB HTI NPL BGD ERI BEN ETH TGO ZMB KHM MDG KEN MOZ MWI UGA MMR TZALSO BFA YEM SEN SDN COG AGO NAM BWA KOR SGP KWT ARE 6 8 pply Quality of electricity sup BDI JPN DEU FRA DNK FIN GBR ISR SWE BEL HKG NLD CHE AUTSGP ARE NOR CAN SVKCZE KOR JOR MYS PRT SVN TWN ESP AUS IRL USA KWT ZMB TUN THA MUS CHL EST MARNAM SLV CRI URY BRA PAN GTM COL PER BWA LVA HRV LTU HUN NZL ITA EGY GRC JAM PHL AZE ARM BIHDZA MKD KAZ POL TTO VEN ZAF BOL CHN BGR TUR ARG MEX ETH LKA ROM RUS MOZ MLI KGZ VNM MDA PAK IDN UKR HND BFALSO KEN IND PRY MRT NICMNG ECU MWI BEN GEO CMR NPL GMB KHM TZA AGO MDG UGABGD TJK NGA ALB DOM TCD log of real per capita GDP log of real per capita GDP

10 Infrastructure Indicators vs. per capita GDP Water & Sanitation ved Water Source (% of population) Access to Improv ZAR BDI LBR GEO ARM JOR BIHMKD BLR VNM PHL GTMALB UKRTHACRI URY BGR LBN MUS DOM NAMCOL JAM TUN ECUKAZ TUR ARG RUS MYS LVA HRV SVK EST HUN CZE PRT ISRESP GRC FIN JPN DEU FRA GBR SWE AUS DNK AUT NLD CAN CHE USA SGP ARE NOR EGY MEX CHL BWA ZAF TTO BRA PAN NPL KGZ MDA UZB IND PAK CHN SYR GMB BOL HND MMRBGD GHA CIV LKA MAR SLVPER DZAROM GAB LSO NIC IDN MWI SEN AZE PRY BFA MNG GIN SDNCMR COG CAF TJK RWA UGA BEN KHM YEM GNB ERI TGOMLI MRT LAO SWZ HTI ZMB KEN TZA SLE AGO MDG TCD NGA NER ETH MOZ PNG of population) 100 tation Facilities (% 50 Access to Sani 0 BDI ZARLBR MWI MMR URY BGR HRVSVK HUN CZE PRT ESP FIN JPN DEU SWE AUS DNK AUT NLD CAN CHEUSA SGP UZB ALB BIHTHA KAZ TJKKGZ GEO ARM SYR UKRDZA CRI LBY GRC ARE BLRMUS MYS CHLEST ARG TTO MKD TUR LKA GTM JORSLV RUS JAM TUN ECU AZE MEX MDA PHL DOM COL BRA LVA MAR PER PAN ROM PRY VNM HND CHN EGY PAK GMB ZMB CMR LAONIC MNG IDN AGO SWZ MLI PNG YEM KEN BOL BGD LSO SDN GNB MOZ CAF UGATZA BEN NGA NPL KHM SEN IND RWA CIV MRT HTI GIN SLE ETH TGO MDG BFA GHA NER TCD ERI COG NAM ZAF BWA GAB log of real per capita GDP log of real per capita GDP

11 Figure 2. Infrastructure indicators over time -- Transport b.) Paved roads (the share to total roads) Egypt Developing countries (40) World (60)

12 Figure 2. Infrastructure indicators over time -- Tl Telecommunication i c.) Main lines per 1,000 workers Egypt Developing countries World (60) (40)

13 Figure 2. Infrastructure indicators over time -- Electricity i d.) EGC per 1,000 workers (megawatts) Egypt Developing countries World (60) (40)

14 Status of infrastructure in Egypt Egypt has a level of public infrastructure consistent with its income level The result of decades of purposeful investment Notwithstanding this progress, Slowdown in electricity generation and transportation Slowdown in electricity generation and transportation in last decade

15 Infrastructure and Economic Growth

16 Empirical Approach (I) An empirical medium-term growth model: y i, t yi, t1 0 yi, t1 1' CVi, t 2PIi, t t i i, t Sample: 78 countries, 9 non-overlapping five-year obs. per country, Methodology: Generalized Method of Moments Methodology: Generalized Method of Moments (GMM) for models using panel data

17 Empirical Approach (II) Dependent variables: GDP Per capita growth rate Variables of interest: Indices of Electricity, Transportation & Telecomm. Government expenditures (burden of taxation) Initial GDP per capita (convergence) Control Variables: Regular growth determinants: Initial Output/Value added, Educational Investment, Financial Depth, Fiscal burden, Macro Volatility, Inflation, Trade Openness, TOT shocks, Period shifts

18 Estimation challenges: Joint endogeneity Unobserved country factors Dynamic equation Econometric methodology Methodology: GMM for dynamic models of panel data (Arellano and Bond 1991, Arellano and Bover 1995) GMM system estimator Joint endogeneity: Internal instruments -lagged levels and differences Unobserved country factors: Differencing and stationarity assumptions Specification tests: Sargan and serial correlation tests Previous applications: Growth: Levine, Loayza, and Beck (2000) Saving: Loayza, Schmidt-Hebbel, and Serven (2000) Crime: Fajnzylber, Lederman, and Loayza (2002)

19 GMM for dynamic models of panel data GMM for dynamic models of panel data GMM system estimator: Combines regression in differences y g and regression in levels into one system Regression in levels: Instruments: lagged differences of the explanatory and lagged t i i t i t i t i X y y,, 1,, ' dependent variables Regression in Differences: Instruments: previous observations of the explanatory and lagged ) ( ) '( ) ( 1,, 1,, 2, 1, 1,, t i t i t i t i t i t i t i t i X X y y y y Instruments: previous observations of the explanatory and lagged dependent variables in levels

20 Table 4. Economic Growth and Public Infrastructure Individual Effects Sample: 78 countries, (5-year period observations) Estimation Method: System GMM Dependent Variable: GDP per capita Growth [1] [2] [3] [4] Infrastructure Variables: Electricity Index *** [6.436] Transportation Index *** [5.631] Telecommunication Index *** [6.687] 687] Transportation & Telecommunication Index *** [7.171] Control Variables: Initial GDP per capita *** *** *** *** in logs [-5.175] [-5.900] [-7.133] [-7.576] Education ** *** secondary school enrollment rate, in logs [2.424] [2.973] [0.813] [1.186] Financial Depth ** *** *** *** private credit/gdp, in logs [2.114] [4.226] [7.165] [5.925] Crisis Volatility *** *** *** *** std dev of GDP per capita growth 5 [ ] [ ] [ ] [ ] Government Burden * government expenditure/gdp, in logs [-1.957] [-0.429] [-0.611] [0.213] Inflation *** *** *** 1+Growth rate of CPI, in logs [-0.362] [-3.189] [-5.071] [-4.561] Trade Openness *** *** ** *** (exports+imports)/gdp, in logs [9.487] [4.358] [2.432] [3.504] Growth rate of Terms of Trade *** *** *** *** log differences of terms of trade index [3.294] [2.942] [4.167] [4.019] Constant *** *** *** [0.208] [3.624] [5.036] [5.750] Observations Number of Countries Number of Instruments Arellano-Bond test for AR(1) in first differences Arellano-Bond test for AR(2) in first differences Hansen test of overidentifying restrictions Numbers in brackets are the corresponding t-statistics. * significant at 10%; ** significant at 5%; *** significant at 1% Period fixed effects were included (coefficients not reported).

21 Table 4. Economic Growth and Public Infrastructure Individual Effects Sample: 78 countries, (5-year period observations) Estimation Method: System GMM Infrastructure Variables: Dependent Variable: GDP per capita Growth [1] [2] [3] [4] Electricity Index *** [6.436] Transportation Index *** [5.631] Telecommunication Index *** [6.687] Transportation & Telecommunication Index *** [7.171] Observations Number of Countries Number of Instruments Arellano-Bond test for AR(1) in first differences Arellano-Bond test for AR(2) in first differences Hansen test of overidentifying restrictions

22 Table 5. Economic Growth and Public Infrastructure Joint Effects Sample: 78 countries, (5-year period observations) Estimation Method: System GMM Dependent Variable: GDP per capita Growth [1] [2] Infrastructure Variables: Electricity Index *** *** [5.353] [5.292] Transportation Index *** [3.102] Telecommunication Index *** [4.754] Transportation & Telecommunication Index *** [5.637] Observations Number of Countries Number of Instruments Arellano-Bond test for AR(1) in first differences Arellano-Bond test for AR(2) in first differences Hansen test of overidentifying restrictions

23 Growth Effects 1. Improvement by 1 std. dev. electricity: 0.89 pp (EGY to ESP) transportation: 1.24 pp (EGY to NOR) telecommunications: 1.26 pp (EGY to DEU) 2. Improvement from 25 th to 75 th percentile electricity: 1.23 pp (PHL to ITA) transportation: 2.05 pp (NGA to NZL) telecommunication: 2.08 pp (IND to PRT)

24 Infrastructure Expenditures

25 Figure 4. Infrastructure Investment in (a) Total Investment Egypt: (% of GDP) (b) Transportation (incl. SC) & Communications (c) Electricity Public Private

26 Figure 5. Infrastructure Investment in (a)transportation Egypt: (% of GDP) (b) Communications (c) Electricity Public Private

27 Figure 5 (continued). Infrastructure Investment in Egypt: (% of GDP) (d) Water (e) Suez Canal Public Private

28 Figure 6. Infrastructure Investment relative to log per capita GDP (average of , % of GDP) Total Infrastructure Inv nvestment (% of GDP) MNG KHM PAK VNM BOL IND (a) Total Investment IDN EGY JOR PHL PER COL TRK THA BRA CHL SA MEX ARG Public Infrastructure In nvestment (% of GDP) VNM MNG KHM PAK GEO BOL ARM IND IDN (b) Public Investment e ALB JOR UKR EGY BLR COL TRK LTU THA CHL MAR PHL LVASA DZA BRA PER MEX SVK HUN ARG SVN Log per capita GDP at year Log per capita GDP at year 2000 (c) Private Investment 4 astructure Investment (% %of GDP) 2 3 Private Infra 0 1 BOL IND PAK VNM MNG KHM IDN EGY JOR PHL PER CHL TRK THA COL BRA SA ARG MEX Data source: Calderón, Odawara, and Servén (2008) Log per capita GDP at year 2000

29 Infrastructure Expenditures and Progress in Infrastructure

30 Table 6. Electricity Exp. and Improvement Estimation i Method: Quantile regression Dependent variable: Change in Electricity Infrastructure Index [1] [2] [3] [4] Ratio of expenditure to labor force *** (expenditure on electricity per 100,000 workers) [5.00] Ratio of expenditure to labor force *** (expenditure on electricity i per 100, workers, in logs) [5.04] Ratio of expenditure to GDP *** (expenditure on electricity / 1,000 GDP) [6.84] Ratio of expenditure to GDP *** (expenditure on electricity / 1,000 GDP, in logs) [8.02] Constant *** *** *** *** [3.57] [3.89] [5.32] [7.39] Observations R-squared Notes: The dependent variable is smoothed by using the Hodrik Prescott filter. All the expenditure variables are the moving average of expenditures in the last three years. Numbers in brackets are the corresponding t-statistics. * significant at 10%; ** significant at 5%; *** significant at 1%

31 Table 7. Transport and Telecom. Exp. Estimation Method: Quantile regression and Improvement Ratio of expenditure to labor force *** (expenditure on transportation t ti & telecommunication ti per 100, workers) [14.22] Ratio of expenditure to labor force 0.038*** (expenditure on transportation & telecommunication per 100,000 workers, in logs) [9.46] Dependent variable: Change in Transportation & Telecommunication Infrastructure Index [1] [2] [3] [4] Ratio of expenditure to GDP 0.002*** (expenditure on transportation & telecommunication / 1,000 GDP) [5.08] Ratio of expenditure to GDP *** (expenditure on transportation & telecommunication / 1,000 GDP, in logs) [3.96] Constant *** *** ** *** [3.84] [6.16] [2.08] [3.16] Observations R-squared Notes: All the expenditure variables are the moving average of expenditures in the last three years. Numbers in brackets are the corresponding t-statistics. * significant at 10%; ** significant at 5%; *** significant at 1%

32 Projections

33 Project effect of Increasing infrastructure expenditures from 5 % of GDP to 6% of GDP or 8% of GDP Assuming high and low government burden

34 Figure 8: Projected Growth Improvement from Higher Infrastructure Investment Growth Improvement with respect to current infrastructure t spending of 5%GDP % Five-year periods Scenario 1: 6% GDP Scenario 2: 8% GDP

35 Figure 9: Projected Growth Improvement under Different Fiscal Burden % Growth Improvement comparing low and high government burden to increase infrastructure expenditure Five-year periods 6% GDP, Low Burden 6% GDP, High Burden

36 Conclusions

37 Some critical values for policy (I) 1. Fiscal multiplier for infrastructure 1 pp of GDP increase leads to Short run: small effects (time to build) Long run: 1.6 pp of GDP much larger than multiplier for gvt. consumption

38 Some critical values for policy (II) 2. Fiscal sustainability of infrastructure expenditures Assume tax revenues of 30% of GDP Short run: self financed portion is 35% of expenditure Long run: self financed portion rises to 75% will not pay for itself from general revenues

39 Some critical values for policy (III) 3. Increase in per capita GDP for the economy 1 pp of GDP increase leads to Net Present Value of 6 pp of GDP for first 25 yrs (assuming a discount rate of 5% over growth rate) clearly worth it from a social perspective

40 The mode of funding matters Positive effects can increase sharply, especially in the short run, if Infrastructure is built in coordination with the private sector for funding and efficiency Increase in infrastructure expenditure is accompanied by public expenditure reform ( subsidies)

41 A caveat on value of economic effects Full social welfare evaluation will take into account the direct benefits of infrastructure on the health and comfort of beneficiaries

42 Thanks

43 Additional slides

44 Table 2. Pair-wise Correlation 1. Infrastructure Components by Sector (a) Transport roads (in logs) paved roads q_roads q_railroads q_ports q_air roads (in logs) 1 paved roads ** 1 q_roads ** ** 1 q_railroads ** ** ** 1 q_ports ** ** ** ** 1 q_air ** ** ** ** ** 1 (b) Telecommunications ml (in logs) cell (in logs) telf wl ml (in logs) 1 cell (in logs) ** 1 telf ** ** 1 wl ** ** 01866* (c) Electricity egc (in logs) pl q_elec elec_access egc (in logs) 1 pl ** 1 q_elec ** ** 1 elec_access ** * ** 1 (d) Water & Sanitation water sanitation water 1 sanitation ** 1 Notes: ** denotes the significance level at 5 percent, and * at 10 percent.

45 Table 2. Pair-wise Correlation (continued) 2. The Representative Component from Each Sector roads (in logs) ml (in logs) egc (in logs) water roads (in logs) 1 ml (in logs) ** 1 egc (in logs) ** ** 1 water ** ** ** 1 Notes: ** denotes the significance level at 5 percent, and * at 10 percent.

46 Table 3. Variance by Sector Using Principal Component Analysis Sector Variance Transport Telecommunications Electricity it Transport & Telecommunications

47 Figure 3. Infrastructure Indices by Sector in Egypt ( ) 1 Infrastructure Indices by Sector (a) Components of Transport Index Transport & Telecommunications Electricity Roads, sqrt of 1000 workers x surface area (in logs) Paved roads (the ratio to total road length) (b) Components of Telecommunications Index (c) Components of Electricity Index Main lines per 1,000 workers (in logs) EGC per 1,000 workers (in logs) Power loss (% of output)

48 Figure 7-1. Infrastructure Investment across Countries (% of GDP) (a) Total Investment (b) Public Investment (c) Private Investment Data source: Calderón, Odawara, and Servén (2008). IND PAK IDN

49 Figure 7-2. Infrastructure Investment (a) Total Investment across Countries (% of GDP) (b) Public Investment (c) Private Investment Data source: Calderón, Odawara, and Servén (2008). EGY TRK SA

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