Institutions, Infrastructure, and Economic Growth

Abstract

This paper develops a structural model of infrastructure and output growth that specifies the ways in which country characteristics and policies enter the infrastructure-GDP interactions and lead to heterogeneity of steady states and convergence rates across countries and over time. We show that the model can be specified as an identifiable recursive system. Cross-country estimates of the model indicate that the contribution of infrastructure services to GDP is substantial and in general exceeds the cost of provision of those services. By searching for the variables that account for the heterogeneity, we draw attention to the mechanisms through which various factors influence growth. The findings also shed light on the factors that shape a country's response to its infrastructure needs and offer policy implications for facilitating the removal of infrastructure inadequacies. Although lack of data limits the level of detail in which one can identify such variables, we find a number of relevant and important factors and show that the institutional context in which economic policies form plays an important role in infrastructure development.

JEL Classification: O4, O57, H54, L33, L9