I **POIICY RESEARCH WORKING PAPER** 1661

# **Summary findings**

Randolph, Bogetic, and Heffley empirically study factors that influence public investment in transportation and communication infrastructure. Using pooled crossnational and time-series data for 1980-86 for 27 lowand middle-income economies, they assess the influence on public infrastructure spending of a government's objectives (especially its commitment to poverty alleviation), the nature of the domestic economy, and the flow (and composition) of external assistance. Their findings:

* Per capita spending on infrastructure responds most strongly to changes in the level of development, the urbanization rate, and the labor force participation rate.

* Spending is greater in countries with large foreign sectors and is positively influenced by sectoral imbalances between rural and urban areas (reflected in migration rates). Moreover, as the stock of infrastructure increases, so does per capita spending on it.

D If total flows of foreign savings increase, there is a small positive response in per capita spending. The composition of foreign savings matters: when commercial bank flows represent proportionately more of such flows, infrastructure spending is greater.

* With higher population densities, consolidated government spending declines. Central government

spending increases initially, but decreases as population densities rise.

* Central budget spending is positively associated with improved institutional development, whereas consolidated budget spending falls as institutional development improves (when levels of institutional development are low).

> * The size of the budget deficit appears not to influence central budget spending but is positively associated with consolidated budget spending.

* Greater outward orientation is positively associated with increased consolidated budget spending but seems to bear no relationship to central budget spending on infrastructure.

* Governments that are not committed to alleviating poverty, or that are extremely committed to it, spend less from the central budget on infrastructure. Governments with only limited commitment to alleviating poverty adopt strategies to increase the productivity of the poor by investing in infrastructure. But as their commitment intensifies, their strategy shifts to improving human capital or strengthening the social safety net, and funding for those social programs competes with funding for developing infrastructure.

- - This paper a product of the Country Operations Division, Europe and Central Asia, Country Department I is part of a larger effort in the department to analyze public expenditure issues. The study was funded by the Bank's Research Support Budget under the research project "Enhancing Urban Productivity: Determinants of Optimal Expenditure on Infrastructure, Human Resources, and Public Consumption Goods" (RPO 677-66). Copies of this paser are available free from the International Monetary Fund, 700 19th Street NW, Washington, DC 20431. Please contact Zeljko Bogetic, room IS3-574, telephone 202-623-7292, fax 202-623-4022, Internet address zbogetic@imf.org. October 1996. (72 pages)

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