ith donors anticipating large potential increases in Sub-Saharan African infrastructure financing, this report seeks to understand how such financing might be fiscally sustainable. W Our immediate priority is to buttress the flagship infrastructure study by highlighting investment. To what extent, we ask, are investments in infrastructure compatible with fiscal sustainability? We employ a computable general equilibrium (CGE) approach in an effort to compare the impact that higher spending on infrastructure might have in six African countries. As described in Adam and Bevan (2004), the literature shows that infrastructure investment can contribute to so-called Dutch disease (whereby one booming sector adversely affects that country’s other economic sectors—in particular, the non-booming tradable sector). Adam and Bevan show that the adverse effect can be attenuated if nontradable sectors also benefit from infrastructure investment externalities. They construct an aggregated model to verify this impact and apply their hypothesis to Ugandan data.

In this report, we drop the dichotomous classification of sectors as tradable and nontradable. In most African countries, some sectors are nontradable (such as the construction sector) and some are mostly tradable (such as rent agriculture). As a rule, however, sectors have a variable relative share of exports over total production. We extend the Adam-Bevan concept to differentiated externalities of infrastructure spending; a disaggregated model allows for a matrix of externalities among both the productive sectors and the type of infrastructure expenditure. For this exercise, we draw on Savard and Adjovi (1998), who analyze the externalities of health and education investment in different productive sectors.

Our model introduces an additional element by imposing increases in public expenditure to maintain and repair new public infrastructure. These increases are included in government budget constraints while funding options are investigated through fiscal policy and foreign aid. The model introduces different taxation modes to provide a solid basis for a comparative analysis of the various financing options.

A comparative analysis allows us to determine whether the case of Uganda set out in Adam and Bevan (2004) is a special scenario. The models are disaggregated into five to seven sectors. These sectors capture country differences according to their respective economic structures. We use the following seven sectors in all models: food crop agriculture, export agriculture, mining and oil, manufacturing, construction, private services, and public services.

# 1   The social accounting matrix for six countries

Geography, demographics, and economic structure were all considered in selecting the six African countries studied here (Tanzania, Uganda, Senegal, Mali, Benin, and Cameroon). These were chosen not only to maximize country coverage but also to ensure that varied economic realities were captured.

The analysis focuses on a number of items—among them the differential sectoral effects of investments, budgetary impacts, welfare changes for all agents of the model (households, government, firms, and rest of the world), and other macro and sectoral variables of the model. The choice of the macroeconomics of the models in part determines which variables are analyzed. The number of sectors and the reference year for each social accounting matrix (SAM) are furnished in table 1. Each SAM was aggregated to obtain a format that was close to uniform.