The Social Rate of Return on Infrastructure Investments
The authors estimate social rates of return to electricity-generating capacity and paved roads, relative to the return on general capital, by examining the effect on aggregate output and comparing that effect with the costs of construction. They fi...
| Main Authors: | , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/07/436938/social-rate-return-infrastructure-investments http://hdl.handle.net/10986/19820 |
| Summary: | The authors estimate social rates of
return to electricity-generating capacity and paved roads,
relative to the return on general capital, by examining the
effect on aggregate output and comparing that effect with
the costs of construction. They find that both types of
infrastructure capital are highly complementary with other
physical capital and human capital, but have rapidly
diminishing returns if increased in isolation. The
complementarities on the one hand, and diminishing returns
on the other, point to the existence of an optimal mix of
capital inputs, making it very easy for a country to have
too much - or too little - infrastructure. For policy
purposes, the authors compare the rate of return for
investing in infrastructure with the estimated rate of
return to capital. The strong complementarity between
physical and human capital, and the lower prices of
investment goods in industrial economies, means that the
rate of return to capital as a whole is just as high in rich
countries as in the poorest countries but is highest in the
middle-income (per capita) countries. In most countries the
rates of return to both electricity-generating capacity and
paved roads are on a par with, or lower than, rates of
return on other forms of capital. But in a few countries
there is evidence of acute shortages of
electricity-generating capacity and paved roads and,
therefore, excess returns to infrastructure investment.
Excess returns are evidence of suboptimal investment that,
in the case of paved roads, appears to follow a period of
sustained economic growth during which road-building stocks
have lagged behind investments in other types of capital.
This effect is accentuated by the fact that the relative
costs of road construction are lower in middle-income
countries than in poorer and richer countries. As a rule, a
tendency to infrastructure shortages - signaled by higher
social rates of return to paved roads or
electricity-generating capacity than to other forms of
capital - is symptomatic of certain income classes of
developing countries: electricity capacity in the poorest,
paved roads in the middle-income group. To the extent that
such high rates of return are not detected by microeconomic
cost-benefit analysis, they suggest macroeconomic
externalities associated with infrastructure. |
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