RECOMENDACIONES

In thinking about the role of infrastructure at different stages of economic development, it is useful to provide a sketch of how an economy transitions from one income group to another. In a standard dualistic development model, low-income economies are able to reach middle-income status through sectoral shifts—primarily by moving workers out of low-productivity agriculture to higher-productivity manufacturing—and by adopting or imitating foreign technology. These sources of high growth tend to peter out, however, once upper- middle income is reached, as the pool of underemployed labor shrinks, causing wages to rise and competitiveness to decline.

Maintaining growth becomes increasingly difficult at middle income unless an economy finds other ways to raise productivity. This would require, for instance, strong investment in innovation that generates new ideas, processes, and technologies and a shift to industries with ever higher value added. Infrastructure may be central to this process. Agenor and Canuto (2015) argued that sufficiently large investments in advanced infrastructure such as high-speed communication

networks promote innovation and encourage additional human capital accumulation, which helps a developing economy to escape a middle- income slowdown.

One can draw from this a few hypotheses about the role of

infrastructure in development. One is that the infrastructure required would evolve as the economy progresses, with more rudimentary infrastructure such as for transport and for water supply and sanitation critical during the earlier stages of development and more sophisticated infrastructure required for industrialization and subsequently

innovation, such as reliable power supply and ICT, likely to be important in the later stages, particularly when an economy reaches middle

income.17 _{Another hypothesis is that economies that are better at} providing the necessary infrastructure tend to perform better.

This subsection documents stylized facts regarding infrastructure provision in the various income groups to allow a comparison of middle- income economies with others.18 _{All country-year observations in the} sample are initially classified in three income groups: low income, lower- middle income, and upper-middle income. As mentioned above, these income groups are based on income thresholds set by the World Bank and are applied to GDP data from the Penn World Table 9.0.

Within each income group, the economies are further classified based on geometric mean per capita GDP growth within a particular income group, with “top25” representing the fastest-growing quartile, “mid50” the middle 50%, and “low25” the slowest-growing quartile.

This is done to see if differences in infrastructure provision are associated with differences in growth performance within each income group.

Figure 2.4.1 shows a strong positive correlation between an economy’s stage of development and physical measures of infrastructure. This is not surprising and has been documented elsewhere (e.g., IMF 2014). The more novel finding is that economies that grow faster than their peers in the same income group tend to have more of certain types of infrastructure. This is true of transport and ICT. For electricity, water supply, and sanitation, however, there seems to be little or no association between growth performance and infrastructure provision.

While all types of infrastructure tend to increase as economies develop, their relative importance changes, as measured by their share in the overall stock of infrastructure. To explore this conjecture, different types of infrastructure are aggregated using unit costs of production drawn from Fay and Yepes (2003). Examining the patterns of provision of the different infrastructure types, it is evident that, as hypothesized, middle-income economies tend to switch their focus away from basic infrastructure such as for transport and toward more advanced infrastructure such as for ICT.

2.4.1 Infrastructure, income, and growth performance

A. Telephone mainlines B. Mobile cellular subscriptions C. Internet users D. Electricity generating capacity

Top25 Mid50 Low25 Top25 Mid50 Low25 Top25 Mid50 Low25 Low income Lower- middle income Upper- middle income 5 10 15 20 Per 100 people 0 10 20 30 40 50 60 Per 100 people 0 5 10 15 20 Per 100 people 0 10 20 30 40 50 60 Kilowatt hours per 100 people 0

E. Total roads F. Total rails G. Access to improved water H. Access to improved sanitation

Top25 Mid50 Low25 Top25 Mid50 Low25 Top25 Mid50 Low25 Low income Lower- middle income Upper- middle income 0.4 0.8 1.2 Kilometers per square kilometer

0 0.01 0.02 0.03 Kilometers per square kilometer

0 20 40 60 80 100 % of population

0 20 40 60 80 100 % of population 0

Note: Horizontal bars show median infrastructure stock in each quartile of each income group. Vertical lines show median infrastructure stock for a whole income group.

Figure 2.4.2 shows that, as income improves, the share of transport in total infrastructure stock declines while that of energy and ICT rises. The latter trend is particularly true for the fastest-growing middle-income economies (top25). The figure also shows that the share of water supply and sanitation drops as an economy reaches the upper middle- income phase. This is not surprising, as providing water and sanitation is a top priority when economies are starting to develop. As Figure 2.4.1 shows, by the time economies reach middle income, access to water is already high. The share of electric power supply climbs steadily as an economy progresses. This may reflect industrialization, as industry uses more power than agriculture, but it may also reflect higher energy consumption in homes. The results indicate that the power requirements of an economy remain relatively large even at higher income.

Figure 2.4.3 summarizes infrastructure stock by income group and mobility. It shows that economies moving successfully up the income ladder tend to have more infrastructure than their peers, just as they invest more in innovative activities and human capital. They have more of different types of infrastructure: telephone fixed lines, mobile telephones, internet, electricity, roads, railroads, water supply, and sanitation. Further, the differences between graduating economies and their peers are statistically significant in most cases (Table 2.4.1).

2.4.2 Shares of different types of infrastructure in total infrastructure stock

A. Electricity B. Transport C. Information and

communication technology D. Water and sanitation

Top25 Mid50 Low25 Top25 Mid50 Low25 Top25 Mid50 Low25 Low income Lower- middle income Upper- middle income 0 5 10 15 20 25 30 % of total infrastructure stock

0 20 40 60 80 % of total infrastructure stock

0 5 10 15 % of total infrastructure stock

0 10 20 30 40 50 % of total infrastructure stock

Note: Horizontal bars show median infrastructure shares in each quartile of each income group. Vertical lines show median infrastructure shares for a whole income group.

Source: Abiad, Debuque-Gonzales, and Sy, forthcoming.

2.4.1  Group mean t-test for differences in infrastructure across income-transition country groups

Infrastructure indicator Lower-middle income staying there versus lower middle rising to upper- middle income Upper-middle income staying there versus upper-middle income rising to high Telephone mainlines per 100 people * **

Mobile phone subscriptions

per 100 people ** **

Internet users

per 100 people **

Total roads per sq km * **

Total rails per sq km ** **

Electricity generating

capacity per 100 people ** **

Water access

(% of population) **

Sanitation access

(% of population) **

** = group mean t-test significant at 5%, * = group mean t-test significant at 10% level, sq km = square kilometer.

2.4.3 Infrastructure by income group and mobility, middle-income subgroups 0 20 40 Per 100 people 0 20 40 60 Per 100 people 0 20 40 Per 100 people 0 20 40 60 80 100 Per 100 people 0 20 40 60 80 100 % of population 0 20 40 60 80 100 % of population Upper-middle income rising to high

Upper-middle income staying there Lower-middle rising to upper-middle income Lower-middle income staying there

0 0.4 0.8 1.2 Kilometers per square kilometer

0 0.01 0.02 0.03 Kilometers per square kilometer

D. Electricity generating capacity

H. Access to improved sanitation

Upper-middle income rising to high Upper-middle income staying there Lower-middle rising to upper-middle income Lower-middle income staying there

C. Internet users

G. Access to improved water B. Mobile cellular subscriptions

F. Total rails A. Telephone mainlines

E. Total roads

Source: ADB estimates.

To examine differences in infrastructure investment, a measure of total infrastructure investment is computed that sums the ratios of public investment and private infrastructure investment as a share of GDP.19 _{From this} overall measure of infrastructure investment, it is evident that infrastructure spending does not differ substantially across income groups (Figure 2.4.4). Interestingly, though, faster-growing economies invest more in their infrastructure. Examining the breakdown of overall infrastructure

investment into public and private components, one can see that the public component is larger in fast-growing economies. Higher infrastructure investment is not driven by higher incomes, as the compared economies are in the same income group. There are two possible explanations for the positive association between infrastructure investment and growth performance. It could be that infrastructure investment enables or causes higher growth, or infrastructure investment could be simply responding to higher growth. The issue of causality is investigated more systematically below.