What is the causal effectiveness of large-scale infrastructure development in poverty reduction? On Friday 19th January, British International Investment (BII) hosted the latest Private Sector Development Research Network (PSDRN) seminar on ‘The Impact of Infrastructure on Development Outcomes’.
What insights do policy makers require in designing interventions that maximise the developmental impact of infrastructure? What is the role of the private sector? How is this dialogue addressed in the context of climate change?
These were the key questions addressed by Dr Stéphane Straub, Chief Economist for Infrastructure at the World Bank Group in conversation with Paddy Carter, Director of Development Impact Research and Policy at BII. Straub discussed the findings of his research on ‘The Impact of Infrastructure on Development Outcomes.’
The paper offers a comprehensive meta-analysis of infrastructure research across transport, energy, and digital sectors. The findings provide updated underlying parameters of interest, the “true” infrastructure elasticities, whilst accounting for publication bias and contextual heterogeneity. Particularly on policy relevant subsectors and developing countries.
The World Bank vision: A world free of poverty on a livable planet
The question of how infrastructure shapes our future was the overarching narrative of Stéphane Straub’s presentation. The World Bank’s vision is that of a world free of poverty, on a livable planet. Globally, 1 billion people are isolated from essential services: 700 million are without electricity; 2 billion lack safe drinking water; and nearly 3 billion are disconnected from the internet. Infrastructure gaps pose significant challenges, especially amidst a climate crisis. With this, the World Bank is working to ‘drive more investment into infrastructure to support high-quality, sustainable projects’ despite the constraint on resources.
Straub stressed the trade-offs created by infrastructure development. Every choice – whether that be policy, investment, or regulation – has a consequence. Research offers knowledge to policymakers, but there are still questions: how much should be invested in each sector? What projects yield a higher social, economic, or environmental return? How do governments ensure that choices are made for efficiency as well as their own normative development objectives?
Meta-analysis: a few key lessons
While infrastructure development continues to be hailed as an economic facilitator, Straub’s meta-analysis encourages the examination of nuanced realities. Despite the unequivocal positivity that dominates literature on infrastructure impact, the benefits of infrastructural development do not necessarily translate into equitable outcomes. There is a need to identify the intricacy between investment and returns, as well as dispel the myth of ‘one-size-fits-all’ solutions. It is not enough to simply invest in infrastructure development. The priority should be to optimise the social rate of return, and to understand where each investment resonates most for individual countries.
Why should we care?
Elasticities are key. Studies have shown that enhancing infrastructure in internet connectivity, transport, and energy in developing countries has a significant impact on jobs, agricultural markets, and more. Elasticities help to measure the increase in outcomes per unit increase in investment for infrastructure. The challenge is that elasticities are dependent on the scarcity of capital. Data is needed on infrastructure capital stock in different sectors to allow policymakers to better understand the social rate of return. Put simply, Straub summarised: “If I invest $1 million in extending an electricity network versus building a new rural road, what is the social rate of return in each of these different sectors?”
The investments needed far exceed available public and concessional resources. Directing scarce resources to the sectors and projects with the highest social return is fundamental for developing countries that rely on public and concessional financing. The question remains: why should we care?
Bridging the Financial Gap: With trillions needed to bridge the infrastructure gap, it’s important to understand how to allocate resources. The social rate of return acts like a map in guiding investments that promise not only growth, but also a cascade of positive externalities.
Attracting Private Capital: The private sector is crucial to development. Market and government failures are at the heart of a lack of private capital flows. Data on potential returns of investments across sectors will allow countries and policymakers to make informed choices on where to direct scarce public resources and attract private engagement.
Improving Project Design: Infrastructure projects are not created equal. A database of social rates of return coupled with information on generic rates of return can identify specific projects that have the potential for real impact. This will allow policymakers to engage with resources to attract private investors.
Capturing Externalities: The true impact of infrastructure development extends beyond balance sheets. For instance, some studies fail to account for carbon considerations. Externalities such as improved quality of life and climate change need to be prioritised. Designing a system where social and private rates of return are mapped is crucial to yielding benefits for both governments and the private sector.
Infrastructure development is the thread propelling growth, connecting societies, and shaping the future. The challenges include: tackling environmental challenges; ensuring private sector engagement; improving quality of life; considering institutional objectives; and more. A nuanced understanding of impact investment is essential to realising the World Bank’s vision of a world free of poverty, on a livable planet.
The next PSDRN ‘Gender Discrimination in Access to Capital: Experimental Evidence from Ethiopian SGBs’ will be hosted by the International Growth Center (IGC) on Friday 23rd February, 16:00 – 17:00 GMT.
About the seminar and the research
The paper discussed during this seminar presents a meta-analysis of the infrastructure research done over more than three decades, using a database of close to a thousand estimates from 201 papers conducted between 1983–2022, reporting outcome elasticities. The analysis casts a wide net to include the transport, energy, and digital or information and communications technology sectors and the whole set of outcomes covered in the literature, including output, employment and wages, inequality and poverty, trade, education and health, population, and environmental aspects. The results allow for an update of the underlying parameters of interest, the “true” underlying infrastructure elasticities, accounting for publication bias, as well as for heterogeneity stemming from both study design and context, with a particular focus on policy relevant subsectors and developing countries.
To learn more, read the blog by Dr Straub here, which is part of the #Infra4Dev Blog Series showcasing recent World Bank economic research that explores how Infrastructure is critical for development.
The complete paper can be found here.
All infrastructure related content by the World Bank can be found here.
About the Speaker
Dr. Straub is a Chief Economist for infrastructure at the World Bank Group since September 1st, 2023. Prior to that, he was a Professor of Economics at the Toulouse School of Economics, Université de Toulouse Capitole (2008-2023), where he remains an associate member. He has held academic positions in the US, the UK and France, and was president of the European Development Network (EUDN) between 2018 and 2023. Dr. Straub’s research focuses on issues of infrastructure, procurement, and more generally institutional development in the context of developing countries. Another part of his research focuses on infrastructure impact (e.g., roads, electricity etc.), and generally the way firms and households deal with the lack of / availability of such services.