# **1 Introduction**

Infrastructure investments can support economic development through both capital accumulation and structural transformation.<sup>1</sup> Structural change—the movement of workers from lowerto higher-productivity employment—is essential to growth in low-income countries where there is a large share of employment in low productivity sectors. Trade, and economic integration more broadly, can be an important source of productivity gains and structural transformation. However poor infrastructures in low-income countries create transport and information frictions that increase the distance of economic agents relative to one another, limiting the economic specialization within and across neighboring countries. Transport improvements lead to faster journeys, making economic agents closer together, and may also trigger relocation of economic activity, increasing productivity and allowing workers to switch to more productive jobs. Electricity and Internet allow for the use of more modern productive technologies and complement transport infrastructure by boosting firm productivity.

The literature has studied specific infrastructure expansions as potential drivers of development, but little work has been done on the associated structural change or whether the combinations of different infrastructures create a big push development impact. This paper investigates how investments in electricity, Internet, and transport infrastructure and their interactions affect economic development through productivity gains and structural change in countries in the Horn of Africa.

This paper first uses reduced-form analysis to understand the relationship between past investments in electricity, Internet, and road infrastructure and sectoral structure of employment in Ethiopia and Kenya. Geo-identified data on the infrastructure expansion of roads and electricity for Kenya and Ethiopia are collected over time and across space, and linked with information on local economic activity based on household-survey data. Two instrumental variables are developed to overcome the endogeneity concerns for road and electricity investments. Following Moneke (2020), straight transmission lines connecting themain cities with newly opening hydropower dams in Ethiopia and all power plants in Kenya are used for electrification, the construction of an hypothetical least-cost network expansion using a minimum spanning tree algorithm is used for road expansion. Reduced-form results capture the localized effects in the areas that have been affected, but do not capture the general-equilibrium effects and spillovers due to the network nature of infrastructure such as roads. The paper then uses a spatial generalequilibrium model, based on Moneke (2020), to assess the aggregate and spatial impacts of planned infrastructure investments in the region. The general-equilibrium model captures the spillover effects that a localized investment has on the rest of the country and all the countries in the Horn of Africa and generates welfare estimates for the entire region and all its subregions.

> 1There are two approaches for explaining economic growth (McMillan et al., 2017). The first assumes that the accumulation of skills, capital, and broad institutional capabilities are needed to generate sustained productivity growth. The second assumes a dual economy in which long-run growth is driven by the flow of resources to modern economic activities, which operate at higher levels of productivity.

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