Initiative for Infrastructure Integration in South America: Way Toward Regional Convergence

Abstract

This paper studies how the public provision of transportation infrastructure impact output convergence and trade integration in a two-country dynamic general equilibrium model in which the transportation cost between countries is endogenously determined by the stock of public infrastructure in both countries. Because of its particular conception, the so-called "Initiative for the Integration of Regional Infrastructure in South America (IIRSA)" serves as the case study. Data from Argentina and Brazil is thus used to solve the model. Two main results emerge. First, increasing public investment in infrastructure provides an impetus to commercial integration but does not necessarily generate output convergence. Second, the model shows that the only way for the two countries to achieve output convergence (in a win-win economic growth scenario) is to coordinate their increments on public infrastructure, as proposed by IIRSA.