The Impact of Infrastructure Spending in Sub-Saharan Africa: A CGE Modeling Approach

Abstract

In this paper we construct a standard CGE model to explore the impact of scaling up infrastructure in six African countries. As the debate on the importance of scaling up infrastructure to stimulate growth and provide a push to African economies, some analysts raise concern on financing these infrastructures after construction and that external funding of these can create major distortion and have a negative impact on the trade balance of these countries. This study aims to provide insights into this debate. It draws from the infrastructure productivity literature to postulate positive productive externalities of new infrastructure and Fay and Yepes (2003) for operating cost associated with new infrastructure. We compare various infrastructure investments funded with different fiscal tools. These investments scenarios are compared to nonproductive investment that can be interpreted as a business as usual scenario. Our results show that foreign aid does produce Dutch disease effects but the negative impacts are strongly dependent on the type of investments performed. Moreover, growth effects contribute to attenuate the negative effects.