# DETERMINANTS OF PUBLIC EXPENDITURE ON INFRASTRUCTURE: TRANSPORTATION AND COMMUNICATION'

# **I.** WHY STUDY **THE DEirm[NANTS OF** PUBUC EXPEND1muRE **ON INFRASTRUCTURE?**

The scope for investment in infrastructure and public consumption goods to increase urban productivity and national economic development is the subject of renewed attention in developing and transitional economies. Recent studies document the fact that public investment in infrastructure, such as roads, communications, and utilities, stimulates private investment. Blejer and Khan (1984), using a cross-country data set, find that public investment in infrastructure complements private investment. Greene and Villanueva (1991), using a panel of 23 developing countries, and Serven and Solimano (1993), using a panel of 15 countries, similarly find that public investment in infrastructure "crowds in" private investment. Time-series studies from single developing countries, such as Musalem's for Mexico (1989), also document the positive link between public investment in infrastructure and private investment. The _World Development Report 1994,_ focussing on the link between infrastructure and development, expounds numerous ways in which policy can improve the _quality,_ not only the quantity, of infrastructure services in less developed countries.

Many infrastructure investments have characteristics of public goods -- non-exhaustive and non-exclusive in consumption -- and thus will be undersupplied by the private sector. Yet, infrastructure investments facilitate private investment by lowering private production costs and opening new markets, thereby creating new opportunities for profit. Roads reduce transportation costs. Ports reduce transactions costs and facilitate trade, reducing the cost of input supplies and exposing domestic firms to the innovative forces of international competition. Telecommunications networks reduce transactions costs by increasing the flow of information and, as noted by Leff (1984), have important side effects that make other economic institutions more efficient. Norton (1992), using pooled time-series, cross-national data from 47 countries from post-World War II to 1977, finds that telecommunications networks not only increase investment, but also increase the rate of economic growth. Aschauer (1989, 1990) finds that road building increased economic growth in the United States.

I This paper is the product of the research carried out by Susan Randolph, Zeljko Bogetic, and Dennis Heffley under the World Bank research project RPO-677-66 'Enhancing Urban Productivity: Determinants of Optimal Expenditure on Infrastructure, Human Resources and Public Consumption Goods". It is the product of the Country Operations Division, Department One, Europe and Central Asia Region of the World **Bank.** In the course of this research many World Bank economists and researchers provided invaluable advice, input and data for this project. Particularly, we want to thank Shantayannan Devarajan, William Easterly, Gregory Ingram, Marianne Fay, and Kyu Sik Lee for valuable discussions and for sharing several important draft papers on the subject. In addition, we would like to thank Matthew Baker, Fareed Hassan, Stephen Onyiwu, Sergey Rumyantsev, Fadel-Rahman Sesay and Hemsanta Kum Shrestha for their contributions to data input and table preparation. The authors are solely responsible for the final product.