Public Infrastructure and Private Investment in the Middle East and North Africa

Abstract

This paper examines the impact of public infrastructure on private capital formation in three countries of the Middle East and North Africa: Egypt, Jordan, and Tunisia. The first part highlights various channels through which public infrastructure may affect private investment. The second part describes our empirical framework, which is based on a VAR model that accounts for flows and (quality-adjusted) stocks of public infrastructure, private investment, as well as changes in output, private sector credit, and the real exchange rate. We propose two aggregate measures of the quality of public infrastructure and use principal components to derive a composite indicator. The impulse response analysis suggests that public infrastructure has both flow and stock effects on private investment in Egypt, but only a stock effect in Jordan and Tunisia. But these effects are small and short-lived, reflecting the unfavorable environment for private investment in our sample of countries. Reducing unproductive public capital expenditure and improving quality must be accompanied by reforms aimed at limiting the investment to infrastructure capital that crowds in the private sector. At the same time, other improvements to the environment in which domestic investment operates are crucial to stimulate growth and job creation in the region.