Apec 8703 Lecture #10 The Impact of Infrastructure in Developing Countries I. Introduction The term “infrastructure” is commonly used to include: 1. Transportation (roads, railroads, harbors/ports, waterways, air transport) 2. Communication (postal service, telephone, internet) 3. Utilities (electricity, public water supply, irrigation, waste disposal, perhaps natural gas) Sometimes it is used more broadly to include market institutions, legal institutions, etc. The World Bank (2004) and many economists argue that government provision of infrastructure is often inefficient and inequitable, and could be improved by privatization or by regulations that allow for competition among providers. Donors finance many infrastructure projects in developing countries. It is usually simple to calculate costs, but very hard to calculate the benefits. This lecture reviews 2 case studies of benefits: roads in Nepal and piped water in India. 1
II. Case Study 1: Rural Roads in Nepal (Jacoby, 2000) Roads in rural areas provide many types of benefits: 1. Increased access to markets, and thus lower prices for agricultural inputs and higher prices for agricultural products 2. Easier access to agricultural extension services 3. Better access to formal credit (and perhaps insurance) 4. Easier access to health and education institutions 5. Improved communications (e.g. postal service) Building roads to “remote” areas in most cases will equalize the distribution of income, because the people living in those areas are usually relatively poor. However, this distributional benefit may be small if land is unequally distributed, because benefits in terms of increased agricultural production will be unequally distributed. Much of the benefits of rural roads will take the form of increased farm profits, which in turn implies that the value of land (implicit or explicit) will increase. It is also likely that the marginal product of labor will increase, so benefits also come in the form of higher wages. 2
Theoretical Framework Assume that there is a per hectare production function: y = f(x, l ) where y is crop produced per hectare, x is fertilizer used per hectare, and l is labor used per hectare. Assume that. f x ′ ( ) > 0, f l ′ ( ) > 0, f xx ′′ ( ) < 0, f ll ′′ ( ) < 0 and f xl ′′ ( ) > 0. The prices in the model are: w = wage rate for l (agricultural labor) p ~ = “farmgate” price of one kg. of y (output) v ~ = “farmgate” price of one kg. of x (fertilizer) Define ρ as the maximized profit per hectare of land, which is a function of w, v ~ and p ~ : ρ (w, v ~ , p ~ ) = ( max x , l p ~ y - w l - v ~ x) Assume there are two methods of transporting any good (input or output). If roads exist, use truck transport. If no roads exist, someone has to walk. Denote h as the hours it takes to walk from the farm to the nearest market.
- Spring '14
- Economics, Household income in the United States, households, Jacoby