In the past three decades, developing countries have made significant economic and social progress, from improved infant mortality rates to higher life expectancy. Yet, 1.3 billion people continue to live in extreme poverty in the developing world, leading policymakers to place a renewed emphasis on policies that could promote economic efficiency and the productivity of the poor. How should these policies be sequenced and implemented to spur growth? Would a large, front-loaded increase in public infrastructure investment yield the desired growth-promoting effect? Taking a rigorous look at this kind of investment and its outcomes, this book explores the different channels through which public capital in infrastructure may affect growth and human welfare, and develops a series of formal models for understanding how these channels operate. Bringing together a vast amount of research in one unifying framework, Pierre-Richard Agenor finds that in considering investment in infrastructure, a variety of externalities need to be factored into analytical models and introduced in policy debates. Lack of access to infrastructure not only constrains the expansion of markets and private investment, it may also hinder the achievement of health and education targets. Ease of access, conversely, promotes innovation and empowers women by allowing them to reallocate their time to productive uses. Laying a solid foundation of economic facts and ideas, "Public Capital, Growth, and Welfare" provides a comprehensive look at the critical role of public capital in development
Introduction and Overview 1 1 Basic Channels 11 1 Background 11 1.1 Productivity and Cost of Private Inputs 11 1.2 Complementarity Effect on Private Investment 14 1.3 Crowding-Out Effects 15 2 The Economy 16 2.1 Households 17 2.2 Firms 20 2.3 Government 23 2.4 Market-Clearing Conditions 25 3 Equilibrium and the Balanced Growth Path 26 3.1 The Case Where ? = 1 27 3.2 The Case Where?<1 28 4 Growth Effects of Public Policy 32 5 Optimal Fiscal Policy 34 6 Extensions 37 6.1 Indirect Taxation 37 6.2 Complementarity Effect 38 6.3 Public Capital and Household Utility 39 6.4 Partial Depreciation and Maintenance 40 6.4.1 Partial Depreciation 40 6.4.2 The Investment-Maintenance Trade-Off 41 Appendix: Optimal Policy underWelfare Maximization 45 2 Public Capital and Education 49 1 Background 49 2 The Economy 51 2.1 Households 51 2.2 Production of Goods 52 2.3 Production of Human Capital 53 2.4 Government 54 2.5 Savings-Investment Balance 55 3 Equilibrium and the Balanced Growth Path 55 3.1 The Case Where ? = 1 57 3.2 The Case Where?<1 59 4 Sensitivity of Education Technology 62 5 Public Policy 63 5.1 Increase in Public Spending 63 5.2 Optimal Expenditure Allocation 64 6 Extensions 65 6.1 Endogenous Rearing Costs 65 6.2 Time Allocation and Infrastructure 66 6.3 Schooling Quality 67 Appendix: Stability Conditions and Steady-State Effects with?<1 69 3 Public Capital and Health 72 1 Background 73 1.1 Health and Economic Growth 73 1.2 Infrastructure and Health 75 1.3 Health Persistence 78 2 A Two-Period Framework 79 2.1 Households 79 2.2 Production of Goods 81 2.3 Health Status and Productivity 81 2.4 Government 83 2.5 Savings-Investment Balance 83 3 Time Allocation and Growth Dynamics 84 4 Public Spending, Growth, and Human Welfare 88 5 Optimal Spending Allocation 89 6 A Three-Period Framework with Endogenous Fertility 91 7 Endogenous Life Expectancy 100 8 Interactions between Health and Education 104 8.1 Impact of Health on Education 104 8.2 Impact of Education on Health 106 8.3 Magnification Effect 107 Appendix: Stability Conditions with Health Persistence 110 4 Public Capital and Innovation 111 1 Background 112 2 The Economy 113 2.1 Households 114 2.2 Production of the Final Good 114 2.3 Production of Intermediate Goods 116 2.4 Human Capital Accumulation 117 2.5 Research and Development Sector 117 2.6 Government 119 2.7 Savings-Investment Balance 119 2.8 Labor Market 119 3 Balanced Growth Path 120 4 Public Policy 121 4.1 Basic Intuition 121 4.2 Numerical Illustration 122 5 From Imitation to True Innovation 124 Appendix: Dynamic System and the Steady State 128 5 Public Capital and Women's Time Allocation 132 1 Background 133 1.1 Women's Time Allocation Constraints 133 1.1.1 Transportation 134 1.1.2 Water and Sanitation 134 1.1.3 Electricity 135 1.2 Intergenerational Health Externalities 136 1.2.1 Mothers' Health Status and Child Development 136 1.2.2 Mothers' Educational Status and Child Development 137 1.3 Analytical Implications 139 2 The Economy 139 2.1 Family's Utility and Income 141 2.2 Home Production 143 2.3 Market Production 143 2.4 Human Capital Accumulation 144 2.5 Health Status and Productivity 145 2.6 Government 146 2.7 Savings-Investment Balance 147 3 Women's Time Allocation and Fertility 148 4 The Balanced Growth Path 150 5 Public Policy 154 6 Women's Labor Supply and Development 156 7 Extensions 158 7.1 Public Capital and Gender Gaps 158 7.2 Nonunitary Household Framework 158 Appendix: Solution, Stability Conditions, and Steady-State Effects 163 6 Public Capital and Poverty Traps 174 1 Background 174 2 The Economy 177 2.1 Individuals 177 2.2 Firms 177 2.3 Government 178 2.4 Savings-Investment Balance 178 3 Balanced Growth Path 178 4 Network Externalities
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