Introduction and Contribution

Economies critically depend on infrastructure: roads enable the movement of goods and workers, electricity powers businesses and factories, and communications technologies allow for the exchange of information and services. Yet poor and developing countries often lack reliable infrastructure, resulting in a trillion-dollar gap relative to rich, developed countries. Many now-developed economies benefited tremendously from large-scale infrastructure projects, such as the expansion of roads, dams, and rural electrification during the United States’ New Deal. As such, it is widely believed that investing in infrastructure in poor countries will generate significant economic growth, enrich foreign investors, and close the gap.

In “The Global Infrastructure Gap: Potential, Perils, and a Framework for Distinction,” Camille Gardner and Peter Blair Henry reject the received wisdom that developing economies simply need more investment to reach a desired level of infrastructure. Rather, infrastructure projects tend to generate short, often one-time economic boosts as opposed to sustained growth.

The authors show that only some poor countries and certain types of infrastructure are likely to yield high rates of return. Real-world investment patterns thus largely reflect economic incentives and equilibrium forces — investors understand that relatively few projects will deliver. However, these patterns also reflect political and institutional constraints, including a lack of coordination among investors as well as poor countries prioritizing projects to reward their supporters. Even after decades of financial globalization, then, very little capital flows into the infrastructure of poor countries.

Because not all infrastructure is created equal, building capacity in developing economies — and doing so in ways that encourage investors to keep spending — will require better data so that investments can be prioritized. Differences across sectors (e.g., roads vs. electricity), locations (urban vs. rural), and countries must be taken seriously to make progress in closing the infrastructure gap. 

Gardner and Henry deepen our understanding of when infrastructure investments are efficient and why poor countries have struggled to catch up. The problem is likely to become more acute as labor forces grow rapidly in poor countries, generating migration pressures. Effective investment can mitigate these risks while generating mutual gains for poor and rich countries alike.

When Infrastructure Investment Pays Off

The authors propose a simple test: public infrastructure is worth funding only if it yields higher returns than private investments (a) within the country and (b) in rich countries. Countries that clear both hurdles are deemed strong candidates for more investment. However, Gardner and Henry’s data show that very few poor countries meet these conditions: some have opportunities for high returns (especially for paved roads), while many others do not. In very few countries can the case be made for investing across multiple kinds of infrastructure, and for many countries there is no case to be made.
 

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Figure 4. The Dual-Hurdle Framework

Note: For a given poor country and type of infrastructure, the dual-hurdle framework sorts each country-infrastructure observation into one of four quadrants according to whether it clears the hurdle for efficient: (a) domestic investment, and (b) foreign investment.
 

To be sure, infrastructure investment is not generally inefficient. Indeed, worthwhile projects can yield much higher gains than are available from private investment in both poor and rich countries. This is because improvements in infrastructure raise productivity across the economy. The problem is that these high-return opportunities are difficult to identify. 

The authors argue that policymakers and investors cannot treat all capital the same. Private capital (e.g., factories and firms) behaves differently than public infrastructure, while different types of infrastructure vary in their impact depending on the context. For example, investments in electricity often yield low returns in rural settings but high returns in urban settings (where firms are concentrated and struggle due to unreliable power). By contrast, roads more often yield higher returns because they support market activity overall. Finally, the authors show that efficient infrastructure depends on complementarities, including private capital, human capital, and good institutions. This points to the limitations of simply building more infrastructure in isolation. 

Why Infrastructure Investment Does Not Flow

Gardner and Henry document extensive variation in terms of which infrastructure projects are funded across countries. This variation is driven not just by economic factors but by political ones, such as poor governance and predatory rulers. Specific projects in developing countries may be undertaken simply because they serve vested interests, suggesting that improving transparency and accountability is key to improving the efficiency of investment. 

The concept of “frozen capital” helpfully describes the outcome of problems facing prospective investors. For one, because infrastructure requires complementarities (e.g., electrifying an area requires that reliable roads already be in place), individual projects may be unprofitable unless others are simultaneously financed. This is a classic coordination problem among investors, which helps explain the freezing of capital and a lack of investment.  

Additionally, foreign investors may distrust the governments of the countries where they invest, or be wary of the quality of domestic firms tasked with completing a given project. Especially in poor autocracies or semi-democracies, governments may arbitrarily change the law, fail to honor contracts, or face political and social instability, leaving investors uncertain about the prospects for repayment and returns on their investments. Ultimately, there is great promise in infrastructure investment, but it must be approached with caution and informed by evidence. The challenge is not to invest more, but, as “The Global Infrastructure Gap” shows, to invest in the right infrastructure projects and in the right places.

*Brief prepared by Adam Fefer.