The Penalties of Inefficient Infrastructure

In most developing countries, irrigation, road, and power networks are not in good condition. In Latin America, for example, the effectiveness of such public infrastructure is only about 74% of that of industrialized countries. Low effectiveness imposes a cost on these countries in terms of forgone output. This paper develops a general–equilibrium model to study the long–run consequences of ineffective infrastructure. The model is solved numerically using parameters from seven Latin American countries. Results show that the long run penalty of ineffective infrastructure is about 40% of steady–state real GDP per capita. Raising effectiveness is shown to have sizable positive effects on income per capita, private investment, consumption, and welfare. Nevertheless, policymakers instead usually emphasize building new infrastructure. If effectiveness is low in the existing infrastructure network, new infrastructure investments can negatively affect per–capita income, private investment, consumption, and welfare.