WPS3989

# Infrastructure and Growth in South Africa: Direct and Indirect Productivity Impacts of 19 Infrastructure Measures ∗

## Johannes W. Fedderke<sup>†</sup> and Željko Bogetić<sup>§</sup>

#### **Abstract**

Empirical explorations of the growth and productivity impacts of infrastructure have been characterized by ambiguous (countervailing signs) results with little robustness. A number of explanations of the contradictory findings have been proposed. These range from the crowd-out of private by public sector investment, non-linearities generating the possibility of infrastructure overprovision, simultaneity between infrastructure provision and growth, and the possibility of multiple (hence indirect) channels of influence between infrastructure and productivity improvements. This paper explores these possibilities utilizing panel data for South Africa over the 1970-2000 period, and a range of 19 infrastructure measures. Utilizing a number of alternative measures of productivity, the prevalence of ambiguous (countervailing signs) results, with little systematic pattern is also shown to hold for our data set in estimations that include the infrastructure measures in simple growth frameworks. We demonstrate that controlling for potential endogeneity of infrastructure in estimation robustly eliminates virtually all evidence of ambiguous impacts of infrastructure, due for example to possible overinvestment in infrastructure. Indeed, controlling for the possibility of endogeneity in the infrastructure measures renders the impact of infrastructure capital not only positive, but of economically meaningful magnitudes. These findings are invariant between the direct impact of infrastructure on labor productivity, and the indirect impact of infrastructure on total factor productivity.

Keywords: growth, productivity, infrastructure, Africa, South Africa JEL: O40, O14, O49, O55

### World Bank Policy Research Working Paper 3989, August 2006

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._ ∗ We wish to acknowledge the research assistantship support of Andrew Hill in the preparation and processing of the various data sets used for this paper. We also wish to acknowledge helpful discussions with Anton Eberhard, Mark Howels, Luis Guasch, David Canning and Ioannis Kessides. An earlier version of this paper was presented at the workshop on Infrastructure and Growth of Economic Research Southern Africa, May 29-31, 2005, Cape Town, South Africa.

†School of Economics, University of Cape Town, Private Bag, Rondebosch, 7701, Cape Town, South Africa, jfedderk@commerce.uct.ac.za §World Bank, 1818 H Street N.W., Washington D.C., 20433 U.S., zbogetic@worldbank.org