# EXECUTIVE SUMMARY

Public infrastructure investment has the potential to open new markets, lower private production costs, reduce transaction costs, and increase competition. Recent studies document public infrastructure's stimulating impact on private investment. Along side this growing body of evidence substantiating the importance of public investment in infrastructure for development is an accumulation of evidence that infrastructure investment in LDCs is suboptimal. The primary objective of this study is to isolate the factors influencing public infrastructure investment. Pooled cross-national and time-series data covering 27 low and middle income economies over the 1980-1986 period are utilized to assess the relative influence of the internal features of an economy, government objectives, specifically the extent of commitment to poverty alleviation, and external assistance on observed infrastructure expenditures. Of particular relevance to Bank operations is the estimated influence of the level of foreign assistance and alternative forms of foreign assistance (official development assistance, commercial bank lending and direct foreign investment) on infrastructure expenditures.

The analytical framework guiding the estimations is a four-sector general equilibrium model consisting of urban households, urban producers, rural households and a single government. The model's solution determines the optimal level and mix of public expenditures on infrastructure, human resources and consumption public goods, and the optimal mix of taxes on wages, domestic output and property. The model generates a set of reduced form equations for several forms of government expenditures and taxes. The reduced form equation for infrastructure spending provides the departure point for the empirical analysis. The determinants of central government expenditures and consolidated government expenditures are estimated separately. The internal features of the economy considered include basic structural characteristics of the economy, including the existing stock of infrastructure, level of development, population density, urbanization, the ruralurban balance, the labor force participation rate, and institutional development; factors reflecting macro balance and strategy orientation including the size of the foreign sector, the government's budget balance, the external balance, debt obligations, and commitment to poverty redress; and external factors including terms of trade shifts, and foreign savings flows. Sensitivity analyses are undertaken to assess the robustness of the results to alternative definitions of each of these factors.

Most of the findings regarding the determinants of public infrastructure expenditures are broadly consistent regardless of whether central or consolidated budget expenditures are the focus of concern. The main findings are summarized below.

**_(1)_** _Per capita infrastructure expenditures respond most strongly to changes in the level of development, the urbanization rate and the labor force paricipation rate._ Elasticity estimates for these factors are all above 1.0 in absolute value at the sample mean. Of the three factors, the labor force participation rate has the strongest impact on infrastructure expenditures. Infrastructure expenditures increase with the level of development, as measured