Abstract

We estimate social rates of return to electricity generating capacity and paved roads
by looking at their effect on aggregate output and comparing this to their costs of
construction. Our results are driven by our finding that both types of infrastructure are
highly complementary with physical and human capital, but have rapidly diminishing
returns if increased in isolation. This produces an optimal mix of capital inputs and makes
it very easy for a country to have too much, or too little, infrastructure.
For policy purposes, we compare the rate of return to investing in infrastructure
with our estimated rate of return to capital as a whole. The strong complementarity we
find between physical and human capital, and lower prices of investment goods in
developed countries, means that we calculate that rich countries have rates of return to
capital just as high as those in the poorest countries, though the highest rates of return to
capital are found in the class of middle income (per capita) countries.
We find that the rates of return to both electricity generating capacity and paved
roads are on a par with, or lower than, that on other forms of capital in most countries.
However, in a limited number of countries we find evidence of very acute shortages of
electricity generating capacity and paved roads, and large excess returns to infrastructure
investment. For electricity generating capacity these excess return countries tend to be low
income countries; for paved roads they are all middle income countries. These excess
returns are evidence of sub-optimal investment, that, in the case of paved roads, appear to
follow from a period of sustained economic growth during which road building stocks has
lagged behind investments in other types of capital. This effect is accentuated by the low
costs of road construction we find in middle income countries relative to poorer and richer
countries.

Keywords: Aggregate production function, productivity, transport networks, electricity.