discusses fiscal risks in section VI. Section VII concludes, noting limitations and setting the stage for further analytical work.

# I. Literature Review

The impact of large debt-financed investments on debt sustainability depends critically on how these investments affect the economic growth. A large literature studies the contribution of infrastructure capital to productivity and output. Methodologies and estimates of this impact vary widely. Using panel data, research finds that output elasticities to aggregate measures of infrastructure investment range from 0.06 to 0.18 (Calderón, Moral-Benito and Servén, 2011) in developing countries. However, there is a recognition that different types of investment have different impact on growth (Calderon, 2009) and that the efficiency of investment spending may vary across countries. For example, the impact of the observed monetary measures of public investment tend to be overstated in many low-income countries with poor institutions (Keefer and Knack 2007) due to weakness in public investment management.

To identify the impact of BRI investment on growth in recipient countries this paper applies a theoretical approach and an empirical approach. Hence, it would address the two main issues which are identified in the literature. First, countries have different elasticities of investment on growth. Second, physical indicators for the stock infrastructure are better predictors of the impact of infrastructure investment on growth.

The theoretical approach, based on Devadas and Pennings (2018), uses a constant elasticity production function to derive the marginal productivity of BRI investments. This model assumes that the impact of additional investment on growth declines as the public capital stock rises. It assumes a constant investment spending efficiency over the medium-term. This model has the advantages of being based on data that are available for most countries and providing country-specific growth estimates based on the level of capital stock and amount of investment. However, it is calibrated using a measure of capital stock derived from real public fixed capital formation, which has been shown not to be a reliable indicator of the increased capital stock.

In the empirical approach, the contribution of physical infrastructure investment to medium-term growth is estimated. Drawing on Calderon (2009) and Calderon and Serven (2014), it estimates annual elasticities of public infrastructure investment on growth by country, using a dynamic panel data growth model, with an index of infrastructure quality top measure the effective infrastructure capital stock. However, these estimates are not robust to sensitivity analysis and should be interpreted with caution. The analysis does not take into account country-specific factors, e.g. degree of economic openness, exchange rate regime, public debt levels or fiscal and monetary policies, which have been found to alter how public investment affects economic growth.

To provide long-term estimates of indebtedness due to BRI investment, the paper uses the results of a structural general equilibrium (SGE) model, based on de Soyres et al. (2019). The SGE model builds on the framework by Caliendo and Parro (2015) – a Ricardian model with sectoral linkages, trade in intermediate goods and sectoral heterogeneity – to allow for changes in trade costs due to improvements in transportation infrastructure connecting multiple countries that are financed through domestic taxation.

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