Inter-American Development Bank
facebook
twitter
youtube
linkedin
instagram
Abierto al públicoBeyond BordersCaribbean Development TrendsCiudades SosteniblesEnergía para el FuturoEnfoque EducaciónFactor TrabajoGente SaludableGestión fiscalGobernarteIdeas MatterIdeas que CuentanIdeaçãoImpactoIndustrias CreativasLa Maleta AbiertaMoviliblogMás Allá de las FronterasNegocios SosteniblesPrimeros PasosPuntos sobre la iSeguridad CiudadanaSostenibilidadVolvamos a la fuente¿Y si hablamos de igualdad?Home
Citizen Security and Justice Creative Industries Development Effectiveness Early Childhood Development Education Energy Envirnment. Climate Change and Safeguards Fiscal policy and management Gender and Diversity Health Labor and pensions Open Knowledge Public management Science, Technology and Innovation  Trade and Regional Integration Urban Development and Housing Water and Sanitation
  • Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer

Ideas Matter

  • HOME
  • CATEGORIES
    • Behavioral Economics
    • Environment and Climate Change
    • Macroeconomics and Finance
    • Microeconomics and Competitiveness
    • Politics and Institutions
    • Social Issues
  • Authors
  • Spanish
crecimiento eficiencia infraestructura servicios America Latina Caribe-min

How We Measure the Productivity and Efficiency Gains of Improving Infrastructure Services

September 15, 2020 by Juan Pablo Brichetti - Eduardo Cavallo - Tomás Serebrisky Leave a Comment


Part of our “behind the scenes” series of posts for the 2020 flagship publication  From Structures to Services: The Path to Better Infrastructure in Latin America and the Caribbean

When we think about infrastructure’s contribution to the region’s economies, we look at the direct effects’ investment in bridges, airports, and power grids have on growth. A new highway can drive economic growth by increasing demand for construction materials, stimulating demand for vehicles to use it, and reducing travel times.

But infrastructure’s contribution to growth can also come from other channels. One of them is greater efficiency in the provision of water, power, and transportation services. In addition to the impact on growth, changes in the efficiency of the provision of services can also impact other economic outcomes, for example, income distribution. This is because consumption of these services is a significant component of family budgets, especially for the poorest households.

How can we quantify the potential economic gains of greater infrastructure efficiency? In the book From Structures to Services: The Path to Better Infrastructure in Latin America and the Caribbean, we use a computable general equilibrium (CGE) model. It’s like a map that replicates an economy at a scale that is manageable for researchers seeking to model reality as closely as possible. The structure we use consists of approximately 30 productive sectors on the supply side, including four infrastructure sectors: power, water and sanitation, transportation, and telecommunications.

On the demand side, there are five representative households (with different income levels), and the government. In each market, production and utility functions govern the behavior of producers and consumers, respectively, and determine how they interact. Producers and consumers exchange goods and factors of production. For example, companies purchase intermediary inputs from other sectors, receive revenue from their sales, compensate factors of production, and pay taxes. On the demand side, workers receive salaries—an important component of household income—and consume and invest. The government collects taxes and also consumes and invests. The model estimates the changes in relative prices needed to match supply with demand in the markets. These changes in prices then influence the trajectory of economic growth by redistributing resources among economic sectors. They also produce changes to the structure of the economy and the distribution of income.

The first step in calibrating the model in a country is to set up a social accounting matrix (SAM). The SAM shows the flow of all economic transactions taking place in an economy over the course of one year. It is basically a matrix representation of the national accounts—that is, a narrow description of how different productive sectors, households, and the government interact to generate the goods and services that the country produces. SAMs show a single year and provide a statistical snapshot of the economy..

The SAM for each country is used to obtain a starting point (or equilibrium) for the variables, providing a growth baseline with a time horizon of 10 years. In this solution for the model, the calibrated parameters governing the sectors’ productive functions (that is, the “efficiency” with which goods and services are produced) are determined by the corresponding SAM. In other words, the initial equilibrium is the “business as usual” scenario. This provides a baseline against which contrafactual scenarios can be compared. In the contrafactual scenarios, different equilibriums are simulated based on a variety of productive and technological shocks that alter the baseline scenario.

The advantage of CGE models is that they offer a general equilibrium framework that makes it possible to track the impact that simulated changes have while taking into account the interconnectedness of the different parts of the economy. With this tool in hand, we are able to study the potential impact of small improvements to the productivity and efficiency of services on economic growth and on the distribution of income, compared to what would have been the outcomes without the improvements.

For example, an efficiency improvement in the energy sector could be a thermal power plant that uses a more efficient technology that, as a result, uses less gas to produce the same amount of electricity. An improvement to productivity could be a redesigned plant that can produce the same amount of electricity using fewer factors of production—that is, less labor and/or capital. From a conceptual point of view, we capture improvements to productivity and efficiency assuming increases of 5% in the technical coefficients of the productive functions of infrastructure sectors as of the first year of the simulation.

The results indicate that relatively small increases to productivity and efficiency with which infrastructure services are supplied can have significant benefits (see Figure 1). On average, the selected countries see their growth rates increase by a cumulative 3.5 percentage points over a period of 10 years. Extrapolating across Latin America and the Caribbean, this would represent an increase in GDP of close to US$200 billion over a decade.

Figure 1. Impact of Infrastructure Productivity and Efficiency Gains on GDP Growth

Source:  From Structures to Services: The Path to Better Infrastructure in Latin America and the Caribbean
Note: The figure shows the cumulative change—in GDP percentage points—of the contrafactual scenario (that is, the scenario with efficiency improvements) minus the baseline scenario (that is, without changes to the parameters) over the course of 10 years.

The results also show that improvements to the productivity and efficiency of infrastructure services increase real incomes across the income distribution. At the country level, income increases range from 2.8 percentage points for the average citizen in Jamaica, to 5.4 percentage points in Bolivia (see Figure 2). But improvements to infrastructure productivity and efficiency benefit low-income households more than high-income households. For all the countries in the sample, except Jamaica and Ecuador, the incomes of the two poorest quintiles increase proportionally more than that of the two richest quintiles. The difference in relative growth is an average of about 28% in favor of the poorer quintiles. The effect is particularly noteworthy in Chile (where the increase in income for the bottom 40% of the population is 70% higher than that of the top 40%) and in Peru (40%).

Figure 2. Impact of efficiency gains on household income

Source:  From Structures to Services: The Path to Better Infrastructure in Latin America and the Caribbean.

Note: The figure shows the cumulative change—in real income percentage points—of the contrafactual scenario (that is, the scenario with efficiency improvements) minus the baseline scenario (that is, without changes to the parameters) over the course of 10 years.

Like all economic models, ours is not perfect. But the results are consistent and tell us that improvements to infrastructure productivity and efficiency would increase economic growth and reduce income inequality. Finding the public policies to encourage these improvements is therefore crucial for ensuring the region experiences sustained and inclusive economic development, especially considering the urgency of finding ways out of the crisis brought on by the COVID-19 pandemic. The opportunities are available, and they must be grasped without delay.


Filed Under: Macroeconomics Tagged With: #DIA2020, #infrastructure

Juan Pablo Brichetti

Juan Pablo Brichetti, a citizen of Argentina, holds a MA in Public Administration from the School of International and Public Affairs at Columbia University and a MA in Economics from Universidad de San Andres in Buenos Aires. He is an economist at the Infrastructure and Energy Sector of the Inter-American Development Bank. His main topics of interests infrastructure, macroeconomics and public policy. Juan Pablo Brichetti, ciudadano argentino, tiene una Maestría en Administración Pública de la Universidad de Columbia en Nueva York y una Maestría en Economía de la Universidad de San Andres en Buenos Aires. Es economista en el Sector de Infraestructura y Energía del Banco Interamericano de Desarrollo. Sus principales temas de interés son infraestructura, macroeconomía y políticas públicas.

Eduardo Cavallo

Eduardo Cavallo is Principal Economist at the Research Department of the Inter-American Development Bank (IDB) in Washington DC. Prior to joining the IDB, Eduardo was a Vice-President and Senior Latin American Economist for Goldman Sachs in New York. Eduardo had already worked at the IDB as a Research Economist between 2006 and 2010. Before that he served as a research fellow at the Center for International Development (CID), a visiting scholar at the Federal Reserve Bank of Atlanta, and a member of the faculty at the Kennedy School of Government's Summer Program. In Argentina he co-founded Fundación Grupo Innova. Eduardo’s research interests are in the fields of international finance and macroeconomics with a focus on Latin America. He has published in several academic journals, and is the co-editor of the books “Building Opportunities for Growth in a Challenging World” (IDB, 2019); “A Mandate to Grow” (IDB, 2018); “Saving for Development: how Latin America and the Caribbean can save more and better” (Palgrave, 2016) and “Dealing with an International Credit Crunch: Policy Responses to Sudden Stops in Latin America” (IDB, 2009). He holds a Ph.D. in Public Policy and an MPP from Harvard University, and a B.A. in Economics from Universidad de San Andres (UdeSA) in Buenos Aires, Argentina.

Tomás Serebrisky

Tomás Serebrisky es el Asesor Económico Principal del Sector de Infraestructura y Energía del BID. Sus áreas de especialización incluyen la economía de inversión en infraestructura, logística, asociaciones público-privadas, política de subsidios, regulación económica y derecho de la competencia. Tomás tiene numerosas publicaciones en revistas académicas y ha co-coordinado dos ediciones del informe insignia del BID, From Structures to Services y Saving for Development. Tomás es egresado de la Universidad de San Andrés (Argentina) y tiene un doctorado en Economía de la Universidad de Chicago.

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Follow Us

Subscribe

Search

Related posts

  • From Structures to Services: A New Vision for Infrastructure
  • How the Fall in Remittances During the Pandemic Threatens Regional Wellbeing
  • On the Macroeconomics of Covid-19 and the Risks That Will Be Left in its Wake
  • The Elusive Quest for Growth: The Role of Trust
  • Amidst the Pandemic, A Battle for Inclusion

About this blog

The blog of the IDB's Research Department shares ideas that matter on public policy and development in Latin America and the Caribbean.

Footer

Banco Interamericano de Desarrollo
facebook
twitter
youtube
youtube
youtube

Blog posts written by Bank employees:

Copyright © Inter-American Development Bank ("IDB"). This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives. (CC-IGO 3.0 BY-NC-ND) license and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC- IGO license. Note that link provided above includes additional terms and conditions of the license.


For blogs written by external parties:

For questions concerning copyright for authors that are not IADB employees please complete the contact form for this blog.

The opinions expressed in this blog are those of the authors and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent.

Attribution: in addition to giving attribution to the respective author and copyright owner, as appropriate, we would appreciate if you could include a link that remits back the IDB Blogs website.



Privacy Policy

Copyright © 2023 · Magazine Pro on Genesis Framework · WordPress · Log in

Banco Interamericano de Desarrollo

Aviso Legal

Las opiniones expresadas en estos blogs son las de los autores y no necesariamente reflejan las opiniones del Banco Interamericano de Desarrollo, sus directivas, la Asamblea de Gobernadores o sus países miembros.

facebook
twitter
youtube
This site uses cookies to optimize functionality and give you the best possible experience. If you continue to navigate this website beyond this page, cookies will be placed on your browser.
To learn more about cookies, click here
X
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Non-necessary

Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.

SAVE & ACCEPT