Abstract
In this paper we construct a standard CGE model to explore the impact of scaling up infrastructure in six African countries. As the debate on the importance of scaling up infrastructure to stimulate growth and provide a push to African economies, some analysts raise concern on financing these infrastructures after construction and that external funding of these can create major distortion and have a negative impact on the trade balance of these countries. This study aims to provide insights into this debate. It draws from the infrastructure productivity literature to postulate positive productive externalities of new infrastructure and Fay and Yepes (2003) for operating cost associated with new infrastructure. We compare various infrastructure investments funded with different fiscal tools. These investments scenarios are compared to nonproductive investment that can be interpreted as a business as usual scenario. Our results show that foreign aid does produce Dutch disease effects but the negative impacts are strongly dependent on the type of investments performed. Moreover, growth effects contribute to attenuate the negative effects.
Highlights
For a number of years, economists have pointed out the existence of a positive relation between investments in public infrastructure and the productivity of the private sectors of the economy [1]
Since Aschauer [2] and Munnell [3] stressed the important role of the public sector in funding infrastructure to stimulate economic development, a vast literature has dealt with this issue
We introduce an additional element by imposing increases in public expenditure to maintain and repair the new public infrastructure as in Savard [20]
Summary
For a number of years, economists have pointed out the existence of a positive relation between investments in public infrastructure and the productivity of the private sectors of the economy [1]. For many international institutions and developing countries, the focus was directed at liberalizing trade, improving macroeconomic balances, and reacting to various external shocks. With improvements in these areas yet sluggish results in terms of poverty reduction in many countries, the end of the nineties saw major changes in development strategies by international financial institutions (IFI), development partners, and governments of developing countries
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