# **6. Results: Stylized facts and the effect of an increase in investment on growth**

- _6.1 Stylized facts on the infrastructure gap and the return to public/private investment_

It is often argued that there is a large public infrastructure gap in developing countries, with current public infrastructure falling far short of what is needed. From a human development perspective this is definitely true, based on figures like 700 million people without safe drinking water and 1.2 billion people without electricity (quoted in the Introduction). But does this public infrastructure gap mean that the return to new public investment in developing countries is much higher than that in developed countries? Put another way, are developing countries particularly short of public capital _relative to their level of development?_ What about if we adjust for the lower quality of public capital in developing countries? And are they short of public infrastructure relative to, say, private capital?

In this section we answer these questions through the lens of our calibrated model for representative countries at various stages of development based on the World Bank classification:<sup>29</sup>

- Low income (LI) ‐ GNI PC<$1,000

- Lower Middle Income (LMI):  $1,000< GNI PC<$4,000

- Upper Middle Income (UMI):  $4,000< GNI PC<$12,000

- High Income (HI): GNI PC>$12,000.

Parameters for each “representative country” are the within‐group medians (Table 5)<sup>30</sup> , taken from an overall sample of 108 countries with complete (non‐interpolated) data. A caveat here is that the sample of LI countries with complete data is quite small (only 12 countries), and so there is a chance that results for that group might change with better data. We report results using the default congestion setting (ζ=1) for essential infrastructure ( φ =0.17) – with robustness to other parameters reported in Appendix 3. In addition to answering the questions above, this also provides a guide to how the LTGM‐PC might be used in specific countries.

We find no evidence that _measured_ public capital is particularly scarce for LI or LMI countries relative to GDP. In fact, public capital as a share of output is relatively constant across various levels of development at around K<sup>Gm</sup> /Y =0.92 (±0.05), with LI countries having the highest K<sup>Gm</sup> /Y and LMI countries being in the middle of the group (Table 5 Panel A). If anything, it is HI countries that are relatively short of public capital, as their ratio of K<sup>Gm</sup> /Y =0.86 is the lowest.

How do we square this with the narrative of infrastructure gaps above? The first answer is that developing countries are short of productive public capital ( G�/Y�� , rather than measured public capital �K���/Y�� – an issue we revisit in Section 6.4. As argued in Keefer and Knack (2007), developing countries with poor institutions tend to have higher rates of public investment, which the authors argue are inflated to provide rents and kick‐backs.

The second answer is that developing countries have a shortage of public capital relative to their development aspirations, but not relative to their current development level. That is, people in low‐ income countries have many unmet needs, with public infrastructure capital being in just as short supply as everything else.

> 29 Cutoffs are expressed in GNI per capita (to 2 significant figures), calculated using the World Bank Atlas method.

> 30 Replication files for the main Tables and Figures are available from the authors upon request.

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