trying to avoid. Ultimately, both types of investments are needed – those that clearly target economic growth in the short run and those that attempt to reduce poverty in the short run. The right combination as well as the level at which design and implementation take place is highly dependent on country level institutions, the policy makers’ objectives, and the economic characteristics of the infrastructures under consideration.

# 6.2.2 Infrastructure and Economic Growth

**Investment in infrastructure is accumulated in man-made capital formation and thus contributes to GDP growth.**<sup>**24**</sup> A significant number of micro and macro studies find a positive link between infrastructure investments and growth (see Straub, 2008), which holds for both long-run economic growth and specific factor outputs. For example, looking mostly at U.S. public capital stocks, the macrolevel literature finds very large estimates for the elasticity of infrastructure—between 0.20 and 0.40.

**Connective infrastructure, such as roads, is likely to have the greatest impact on economic growth.** Improved connectivity within a country and within a region increases firms’ access to markets for their goods and for cheaper inputs; assists businesses in developing competitive advantages; and provides workers, particularly those in lagging areas, with greater job and income opportunities. Transport typically facilitates agglomerations, which in turn promotes economic growth. For example, Njoh (2009) finds a strong positive relationship between transportation infrastructure and growth based on evidence from 24 West African countries. As countries develop, economic growth becomes more closely linked to a “principle of connectivity” (Biller and Nabi 2013).

**Other capital intensive infrastructures such as power are also closely related to economic growth via connectivity.** While not directly linked to connectivity (in terms of moving people, goods, and services), power facilitates information flows, thereby enabling agglomerations. More importantly, power is a key input in the production process, and power constraints have been identified as a major bottleneck for growth and job creation in SAR (World Bank 2011, and several business climate surveys). A good example can be found in Nepal. Over the past two years, Nepal has faced up to 16 hours of electricity load shedding in dry months – stalling the manufacturing sector and severely curtailing basic services (like health care), other services, and commerce. The economic loss of such a huge power outage must be tremendous. In transport, Nepal has similar constraints, being a mountainous landlocked country. Yet while geography may be more benign in other South Asian countries like Pakistan and India, connective infrastructure is also severely lacking and the existing ones are poorly used.<sup>25</sup>

**Substantial lock-ins exist in infrastructure investments, which in turn may constrain or incentivize future economic growth.** Much of the existing connective infrastructure in SAR has been built or initiated by former colonial powers, whose main goal may have been different from the current or future reality of the region’s output. Even after independence the region’s economy has changed significantly as indicated by Figure 5. For example, at independence, Sri Lanka had a reasonably welldeveloped road and rail network. At the time, priority was given to connecting the tea, rubber, and coconut plantations with the Colombo Port – the gateway to Great Britain. Electricity was available only in a few areas. Over time, the economy’s reliance on agricultural commodities diminished significantly

> 24 See for example Yoshino (2008), Calderón and Servén (2004), Estache and Fay (2010).

> 25 See Sanchez-Triana et al. 2013 for a detailed analysis on the potential of transport investment on economic growth in Pakistan.

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