World Bank Document

 
7. Conclusion 
Developing countries are facing a crucial question: what to prioritize when the financial 
resources needed for economic development are limited. Should they invest more in physical 
infrastructures, such as roads, rail, electricity supply systems, or should they focus on services, 
such as health care and education? Researchers have attempted to address this question through 
empirical analysis over the past three decades. This paper aims to review the literature and 
summarize the insights coming from the existing studies. Both types of studies -- those analyzing 
the impacts of public investment in general, and those examining the effects of physical 
infrastructure, in particular, are considered.

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Most of the existing studies use statistical/econometric techniques, although a few use 
structural modeling techniques, particularly the computable general equilibrium modeling. Earlier 
studies using the statistical methods have suffered from several limitations, such as spurious 
correlation, endogeneity, and reverse causality. These limitations are, however, addressed in more 
recent studies. Studies that investigate the impacts of public investment in general use monetary 
values for public investment as independent variables, whereas the studies that examine the impact 
of physical infrastructure use the stock of physical infrastructure. However, since physical 
infrastructures are measured using different units, most studies develop indices to combine various 
types of physical infrastructure.
The findings of studies analyzing public investments, in general, are mixed. Several studies 
find positive impacts of public investments on economic growth. In most of the cases, public 
investments are found to increase the productivity of private firms. Some studies, on the other 
hand, do not find a positive relationship or even report a negative relationship. Most studies 
examining the impacts of physical infrastructure on economic growth report a significant positive 
relationship between the possession of physical infrastructure and economic growth. The 
relationship is more prominent in low-income countries than that in high-income countries. Studies 
investigating the impacts of physical infrastructure on income inequality and poverty reveal that 
infrastructure investments help reduce inequality and poverty. 
Our review also identifies several research gaps in the literature. Some of these gaps are:
would investment in infrastructure be more productive in economies where access to infrastructure 
constrains economic development than in economies where access is not a problem? A similar 
question would be whether the marginal returns to infrastructure investment are diminishing. How 
to balance between the investment in physical infrastructures and social infrastructure or human 
capital is a crucial question, especially in developing economics that are constrained by limited 
financial resources. Studies empirically examining the role of infrastructure in poverty alleviation 
are highly limited, additional studies are needed on this issue. Overall, there exists a significant 
gap in the area of infrastructure investment, economic growth, and poverty alleviation; therefore, 
additional studies are necessary.