# **1. Introduction**

Despite recent rapid growth and poverty reduction, developing countries continue to experience a combination of uneven economic growth, population boom, increasing urbanization and sizeable infrastructure service gaps that together could jeopardize future progress. For example, the South Asia region (SAR) has the largest population below the poverty line of any region. Between 1990 and 2010, the number of people living on less than $1.25 a day decreased by only 18 percent,<sup>2</sup> while the population grew by 42 percent. At the same time, structural change has been slow, with urbanization (around 31 percent) lower than in any other developing region, despite economic growth rates that have exceeded most other regions over the past two decades. In effect, departing from similar points, South Asian countries are remarkably “under‐urbanized” when compared to East Asian countries over the past half century (income and urban population as percentage of total population). The result of these trends has been a dramatic rise in demands for infrastructure, but access to infrastructure services is generally poor – even below other developing regions, the only exception being Sub‐Saharan Africa.

Yet, as urbanization continues, there is a growing demand for infrastructure services that are already severely stretched. Latin America, which is the most urbanized developing region in the world, needs to increase its investments in infrastructure to meet the demand from firms and consumers. A recent study shows that Latin America would need to spend, on average, around 5.2 percent of GDP annually in order to maintain the infrastructure investment flows required to meet the needs of companies and consumers between 2006 and 2020 and it would need to spend 7.9 percent of GDP annually to reach the levels of the East Asian countries.<sup>3</sup> South Asia requires significant infrastructure investment (roads, rails, power, water supply, sanitation, and telecommunications) not only to ensure basic service delivery and enhance the quality of life of its growing population but also to avoid a possible binding constraint on economic growth owing to the substantial infrastructure gap. A mix of investment in infrastructure stock and the implementation of supportive reforms will allow SAR to close its infrastructure gap. Andres et al. (2014) estimates of the cost of doing so by 2020 give a lower bound of US$ 1.7 trillion and an upper bound of US$ 2.5 trillion at current prices. If investments are spread evenly over the years until 2020, SAR needs to invest between 6.6 and 9.9 percent of the regional gross domestic product (GDP) per year. These estimates represent an increase of up to 3 percentage points from the 6.9 percent of GDP invested in infrastructure by SAR countries in 2009.

But faced with this enormous demand for infrastructure investment and only limited available financial resources, it is critical for countries to prioritize infrastructure investment needs. How much financial resources should be allocated to infrastructure development, within infrastructure sectors and other sectors (such as health, education, public safety and national defense)? Given substantial lock‐ins associated with infrastructure investments, should a country continue attempting to fill current gaps or direct investments to infrastructures that are likely large bottlenecks in the medium term? How does one account for the social and environmental issues of these trade‐offs related to the directly impacted population? These are questions asked across the world, particularly in developing countries; but unfortunately, there is no rule to determine the investment allocations. It depends on a country’s priority, economic growth and welfare objectives. Considering that infrastructure is both a means to facilitate economic growth and development, and a measure of the former, one could expect that a higher share

> 2 The proportion of people living on less than $1.25 a day decreased from 54 to 31 percent (a 42 percent decrease), between 1990 and 2010, mainly due to the increase in population. 3 ECLAC (2011).

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