Infrastructure and Economic Growth in Egypt - · PDF fileInfrastructure and Economic GthiE tGrowth in Egypt NVL WldBkNorman V. Loayza, World Bank ... BOL CHN SYR GTM JOREGY DOM SLV

Infrastructure and Economic G th i E tGrowth in Egypt

N V L W ld B kNorman V. Loayza, World BankRei Odawara, World Bank

MotivationMotivation

QuestionsQuestions

• How does Egypt compare internationallyHow does Egypt compare internationally regarding public infrastructure?

I E t i ti h i i f t t ?• Is Egypt investing enough in infrastructure?

• What are the economic effects of increasing ginvestment infrastructure in Egypt?– What can these effects be improved? p

OutlineOutline

• Status of InfrastructureStatus of Infrastructure

• Infrastructure and economic growth

• Investment expenditures and infrastructure

• Projections: Expenditures → Infrastructure → Growth

Status of Infrastructure in Egypt in International Context

Infrastructure Indicators vs. per capita GDPTransport

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OMN

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GEO

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KAZ

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URY

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TUR

ARG

RUS

MEX

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BWA

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POL

HUN

TTO

PRT

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ESP

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USA

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s (%

of t

otal

road

s)

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log

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oad

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6 7 8 9 10 11log of real per capita GDP

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24

Qua

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of ro

ads

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PER

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lity

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MOZTCD

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0


Infrastructure Indicators vs. per capita GDP Transport (continued)

PANMYSFINJPN

DEU

FRASWE

BELDNKHKGNLD

CANUSA

SGP

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s SLVTHA

ZAFMYS

CHLPRTKORISRNZL

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t

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Q6 7 8 9 10 11

log of real per capita GDP log of real per capita GDP

Infrastructure Indicators vs. per capita GDP Telecommunications

MDA ARMCHNEGYUKRBIH

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Infrastructure Indicators vs. per capita GDP Electricity

TJK GEOARMPRY UKRBIH KAZZAF

BGR

ROMRUS

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LTUSVKEST

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BRACRIURYPAN

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apac

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atts

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015

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02Q


Infrastructure Indicators vs. per capita GDP Water & Sanitation

NPL KGZVNMMDAINDPAK

PHL

GEOARM

SYR

GTMJORNAMEGY

DOMALBUKRCOL

BIH

JAMTUNECUTHAMKDBLR

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120

% o

f pop

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KHM

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ved

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ani



Figure 2. Infrastructure indicators over time T-- Transport

b.) Paved roads (the share to total roads)

0 70.80.9

0 40.50.60.7

0.10.20.30.4

0.0Egypt Developing countries

(40)World (60)

( )

Figure 2. Infrastructure indicators over time T l i i-- Telecommunicationc.) Main lines per 1,000 workers

300

350

200

250

300

50

100

150

0

50

Egypt Developing countries World (60)(40)

Figure 2. Infrastructure indicators over time El i i-- Electricity

d.) EGC per 1,000 workers(megawatts)(megawatts)

1.2

0 6

0.8

1.0

0 2

0.4

0.6

0.0

0.2

Egypt Developing countries World (60)(40)

Status of infrastructure in EgyptStatus of infrastructure in Egypt

• Egypt has a level of public infrastructureEgypt has a level of public infrastructure consistent with its income level

– The result of decades of purposeful investmentThe result of decades of purposeful investment• Notwithstanding this progress,

– Slowdown in electricity generation and transportationSlowdown in electricity generation and transportation in last decade

Infrastructure and Economic Growth

Empirical Approach (I)

• An empirical medium-term growth model:

' ,,2,11,01,, tiittititititi PICVyyy

• Sample: 78 countries, 9 non-overlapping five-year obs. per country, 1961-2005

• Methodology: Generalized Method of Moments• Methodology: Generalized Method of Moments (GMM) for models using panel data

Empirical Approach (II)Empirical Approach (II)

• Dependent variables: GDP Per capita growth rateDependent variables: GDP Per capita growth rate

• Variables of interest:– Indices of Electricity, Transportation & Telecomm.– Government expenditures (burden of taxation)p ( )– Initial GDP per capita (convergence)

• Control Variables: Regular growth determinants:– Initial Output/Value added, Educational Investment,

Financial Depth, Fiscal burden, Macro Volatility, Inflation, Trade Openness, TOT shocks, Period shifts

Econometric methodology• Estimation challenges:

– Joint endogeneity– Unobserved country factors– Dynamic equation

• Methodology: GMM for dynamic models of panel data (Arellano and Bond 1991, Arellano and Bover 1995) – GMM system estimator– Joint endogeneity: “Internal instruments” -lagged levels and differencesJoint endogeneity: Internal instruments lagged levels and differences– Unobserved country factors: Differencing and stationarity assumptions– Specification tests: Sargan and serial correlation tests

• Previous applications:– Growth: Levine, Loayza, and Beck (2000)– Saving: Loayza, Schmidt-Hebbel, and Serven (2000)– Crime: Fajnzylber, Lederman, and Loayza (2002)

GMM for dynamic models of panel dataGMM for dynamic models of panel data

• GMM system estimator: Combines regression in differences y gand regression in levels into one system

– Regression in levels:

• Instruments: lagged differences of the explanatory and lagged

tiitititi Xyy ,,1,, '

dependent variables

– Regression in Differences:

• Instruments: previous observations of the explanatory and lagged

)()(')( 1,,1,,2,1,1,, titititititititi XXyyyy

• Instruments: previous observations of the explanatory and lagged dependent variables in levels

Table 4. Economic Growth and Public Infrastructure – Individual Effects

Sample: 78 countries, 1961-2005 (5-year period observations)Estimation Method: System GMM

Dependent Variable: GDP per capita Growth[1] [2] [3] [4]

Infrastructure Variables:Electricity Index1 1.539 *** [6.436]Transportation Index2 2.45 ***

[5.631]Telecommunication Index3 1.476 ***

[6 687]

[1] [2] [3] [4]

[6.687]Transportation & Telecommunication Index4 2.81 ***

[7.171]

Control Variables:Initial GDP per capita -1.592 *** -2.072 *** -1.512 *** -2.688 *** in logs [-5.175] [-5.900] [-7.133] [-7.576]Education 0.949 ** 1.008 *** 0.239 0.367 secondary school enrollment rate, in logs [2.424] [2.973] [0.813] [1.186]Financial Depth 0.403 ** 0.719 *** 1.206 *** 1.075 *** private credit/GDP, in logs [2.114] [4.226] [7.165] [5.925]Crisis Volatility -1.876 *** -1.734 *** -1.937 *** -1.761 *** std dev of GDP per capita growth5 [-15.070] [-15.400] [-20.300] [-16.120]Government Burden -0.919 * -0.224 -0.274 0.102 government expenditure/GDP, in logs [-1.957] [-0.429] [-0.611] [0.213]Inflation -0.227 -2.033 *** -3.036 *** -2.841 *** 1+Growth rate of CPI, in logs [-0.362] [-3.189] [-5.071] [-4.561]Trade Openness 4.221 *** 2.062 *** 1.287 ** 1.586 *** (exports+imports)/GDP, in logs [9.487] [4.358] [2.432] [3.504]Growth rate of Terms of Trade 0.038 *** 0.035 *** 0.046 *** 0.045 *** log differences of terms of trade index [3.294] [2.942] [4.167] [4.019]Constant 0.733 16.826 *** 21.379 *** 26.997 ***

[0.208] [3.624] [5.036] [5.750]

Observations 522 522 522 522Number of Countries 78 78 78 78Number of Countries 78 78 78 78Number of Instruments 58 58 58 58Arellano-Bond test for AR(1) in first differences 0.000 0.000 0.000 0.000Arellano-Bond test for AR(2) in first differences 0.064 0.0517 0.134 0.072Hansen test of overidentifying restrictions 0.182 0.357 0.471 0.435

Numbers in brackets are the corresponding t-statistics. * significant at 10%; ** significant at 5%; *** significant at 1%Period fixed effects were included (coefficients not reported).

Table 4. Economic Growth and Public Infrastructure – Individual Effects

Sample: 78 countries, 1961-2005 (5-year period observations)Estimation Method: System GMM

Infrastructure Variables:

Dependent Variable: GDP per capita Growth[2] [3] [4][1]

fElectricity Index1 1.539 *** [6.436]Transportation Index2 2.45 ***



[7.171]

Observations 522 522 522 522Number of Countries 78 78 78 78Number of Instruments 58 58 58 58

ll d f ( ) i fi diffArellano-Bond test for AR(1) in first differences 0.000 0.000 0.000 0.000Arellano-Bond test for AR(2) in first differences 0.064 0.0517 0.134 0.072Hansen test of overidentifying restrictions 0.182 0.357 0.471 0.435

Table 5. Economic Growth and Public Infrastructure –Joint EffectsSample: 78 countries, 1961-2005 (5-year period observations)Estimation Method: System GMM

Dependent Variable: GDP per capita Growth

[1] [2]

Infrastructure Variables:Electricity Index1 0.749 *** 0.975 *** [5.353] [5.292]Transportation Index2 1.093 ***



[5.637]

Observations 522 522Number of Countries 78 78Number of Instruments 70 64Number of Instruments 70 64Arellano-Bond test for AR(1) in first differences 0.000 0.000Arellano-Bond test for AR(2) in first differences 0.170 0.107Hansen test of overidentifying restrictions 0.164 0.340

Growth EffectsGrowth Effects

1 Improvement by 1 std dev1. Improvement by 1 std. dev.• electricity: 0.89 pp (EGY to ESP)• transportation: 1.24 pp (EGY to NOR)transportation: 1.24 pp (EGY to NOR)• telecommunications: 1.26 pp (EGY to DEU)

2. Improvement from 25th to 75th percentile2. Improvement from 25 to 75 percentile• electricity: 1.23 pp (PHL to ITA)• transportation: 2.05 pp (NGA to NZL)p pp ( )• telecommunication: 2.08 pp (IND to PRT)

Infrastructure Expenditures

Figure 4. Infrastructure Investment in Egypt: 1960-2007Egypt: 1960-2007

(% of GDP)(a) Total Investment (b) Transportation (incl. SC) & Communications

8.010.012.014.0

5.06.07.08.09.0

0.02.04.06.0

1960 1965 1970 1975 1980 1985 1990 1995 2000 20050.01.02.03.04.0

1960 1965 1970 1975 1980 1985 1990 1995 2000 20051960 1965 1970 1975 1980 1985 1990 1995 2000 2005 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

5 06.0

(c) Electricity

1.02.03.04.05.0

0.01.0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Public Private

Figure 5. Infrastructure Investment in Egypt: 2003-2007Egypt: 2003-2007

(% of GDP)(a)Transportation (b) Communications

2.0

2.5

3.0

0 8

1.0

1.2

1.4

0.0

0.5

1.0

1.5

0.0

0.2

0.4

0.6

0.8

0.02003 2004 2005 2006 2007

0.02003 2004 2005 2006 2007

1 41.6

(c) Electricity

0.40.60.81.01.21.4

0.00.2

2003 2004 2005 2006 2007

Public Private

Figure 5 (continued). Infrastructure Investment in Egypt: 2003-2007Investment in Egypt: 2003-2007

(% of GDP)

0.6

(d) Water (e) Suez Canal

0.10

0.3

0.4

0.5

0 04

0.06

0.08

0.0

0.1

0.2

2003 2004 2005 2006 20070.00

0.02

0.04

2003 2004 2005 2006 20072003 2004 2005 2006 2007 2003 2004 2005 2006 2007

Public Private

Figure 6. Infrastructure Investmentrelative to log per capita GDPrelative to log per capita GDP

(average of 2000-05, % of GDP)(a) Total Investment (b) Public Investment

VNM

BOL

JOR

TRKCHL

68

10nv

estm

ent (

% o

f GDP)

( )VNM

ALB

JOR

HUN

46

8nv

estm

ent (

% o

f GD

P)

(b) ub c es e

MNGKHM

PAK

IND

IDN

EGY

PHL

PER

COL

THA

BRASA

CHL

MEXARG

EGY

24

Tota

l Inf

rast

ruct

ure

I nv

MNGKHM

PAK

GEO

IND

BOL

ARMIDN

EGY

MAR

ALB

PHL

UKR

PER

BLR

DZA

COL

THA

TRK

BRALVA

LTU

SACHL

MEX

SVK

ARG

SVN

EGY

02

4Pu

blic In

frast

ruct

ure

In

7 8 9 10Log per capita GDP at year 2000


BOLTRK

CHL

4%

of G

DP)

(c) Private Investment

PAKVNM

IND

EGY

PHLJOR

COL

THA

BRA SA ARGEGY

23

astru

ctur

e In

vest

men

t (%

MNGKHM

VNM

IDN

EGYPER

BRA SAMEX

ARGEGY

01

Priv

ate

Infra


Data source: Calderón, Odawara, and Servén (2008).

Infrastructure Expenditures and Progress in Infrastructure

Table 6. Electricity Exp. and ImprovementE i i M h d Q il iEstimation Method: Quantile regression

Dependent variable: Change in Electricity Infrastructure Index

[4][1] [2] [3]

Ratio of expenditure to labor force 0.006 ***(expenditure on electricity per 100,000 workers) [5.00]

Ratio of expenditure to labor force 0.051 ***( di l i i 100 000 k i l ) [5 04]

[4][1] [2] [3]

(expenditure on electricity per 100,000 workers, in logs) [5.04]

Ratio of expenditure to GDP 0.005 ***(expenditure on electricity / 1,000 GDP) [6.84]

Ratio of expenditure to GDP 0.079 ***(expenditure on electricity / 1,000 GDP, in logs) [8.02]

Constant -0.056 *** -0.094 *** -0.084 *** -0.206 ***[3.57] [3.89] [5.32] [7.39]

Observations 34 34 34 34R-squared 0.37 0.32 0.41 0.37

Notes:Notes:The dependent variable is smoothed by using the Hodrik Prescott filter.All the expenditure variables are the moving average of expenditures in the last three years.Numbers in brackets are the corresponding t-statistics.

* significant at 10%; ** significant at 5%; *** significant at 1%

Table 7. Transport and Telecom. Exp. and Improvement

Estimation Method: Quantile regression

Dependent variable:

Ratio of expenditure to labor force 0.002 ***( dit t t ti & t l i ti 100 000 k ) [14 22]

Change in Transportation & Telecommunication Infrastructure Index

[4][1] [2] [3]

(expenditure on transportation & telecommunication per 100,000 workers) [14.22]

Ratio of expenditure to labor force 0.038***(expenditure on transportation & telecommunication per 100,000 workers, in logs) [9.46]

Ratio of expenditure to GDP 0.002***(expenditure on transportation & telecommunication / 1 000 GDP) [5 08](expenditure on transportation & telecommunication / 1,000 GDP) [5.08]

Ratio of expenditure to GDP 0.061 ***(expenditure on transportation & telecommunication / 1,000 GDP, in logs) [3.96]

Constant -0.016 *** -0.076*** -0.036 ** -0.18 ***[3.84] [6.16] [2.08] [3.16]

Observations 45 45 45 45R-squared 0.47 0.44 0.19 0.22

Notes:All the expenditure variables are the moving average of expenditures in the last three years.Numbers in brackets are the corresponding t-statistics.

* significant at 10%; ** significant at 5%; *** significant at 1%

ProjectionsProjections

Project effect ofProject effect of…

• Increasing infrastructure expendituresIncreasing infrastructure expenditures – from 5 % of GDP– to 6% of GDP or 8% of GDPto 6% of GDP or 8% of GDP

• Assuming high and low government burden

Figure 8: Projected Growth Improvement f i h ffrom Higher Infrastructure Investment

Growth Improvementith t t t i f t t di f 5%GDP

3 50

4.00

with respect to current infrastructure spending of 5%GDP

2.50

3.00

3.50

1.00

1.50

2.00%

0.00

0.50

0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 40-45 45-50Five-year periods

Scenario 1: 6% GDP Scenario 2: 8% GDP

Figure 9: Projected Growth Improvement under Different Fiscal Burden

Growth Improvementcomparing low and high government burden to increase infrastructure expenditure

1.40

1.60

0 80

1.00

1.20

%

0.40

0.60

0.80%

0.00

0.20

0-5 5-10 10-15 15-20 20-25 25-30 30-35 35-40 40-45 45-50Five-year periods

6% GDP, Low Burden 6% GDP, High Burden

ConclusionsConclusions

Some critical values for policy (I)Some critical values for policy (I)

1 Fiscal multiplier for infrastructure1. Fiscal multiplier for infrastructure1 pp of GDP increase leads to• Short run: small effects (time to build)( )• Long run: 1.6 pp of GDP• … much larger than multiplier for gvt. consumption

Some critical values for policy (II)Some critical values for policy (II)

2 Fiscal sustainability of infrastructure expenditures2. Fiscal sustainability of infrastructure expendituresAssume tax revenues of 30% of GDP• Short run: self financed portion is 35% of expenditure p p• Long run: self financed portion rises to 75%• … will not pay for itself from general revenues

Some critical values for policy (III)Some critical values for policy (III)

3 Increase in per capita GDP for the economy3. Increase in per capita GDP for the economy1 pp of GDP increase leads to• Net Present Value of 6 pp of GDP for first 25 yrs pp y• (assuming a discount rate of 5% over growth rate)• … clearly worth it from a social perspective

The mode of funding mattersThe mode of funding matters

• Positive effects can increase sharply especiallyPositive effects can increase sharply, especially in the short run, if

– Infrastructure is built in coordination with the privateInfrastructure is built in coordination with the private sector … for funding and efficiency

– Increase in infrastructure expenditure is accompanied by public expenditure reform (… subsidies)

A caveat on value of economic effects

• Full social welfare evaluation will take intoFull social welfare evaluation will take into account the direct benefits of infrastructure on the health and comfort of beneficiariesthe health and comfort of beneficiaries

ThanksThanks

Additional slidesAdditional slides

Table 2. Pair-wise Correlation1. Infrastructure Components by Sector

(a) Transportroads (in logs) paved roads q_roads q_railroads q_ports q_air

roads (in logs) 1d d 0 2701** 1paved roads 0.2701** 1

q_roads 0.5106** 0.5382** 1q_railroads 0.5787** 0.5787** 0.7769** 1q_ports 0.5487** 0.4610** 0.8900** 0.7579** 1q_air 0.5506** 0.4737** 0.8565** 0.6957** 0.8690** 1

(b) Telecommunicationsml (in logs) cell (in logs) telf wl

ml (in logs) 1cell (in logs) 0.8223** 1telf -0.4902** -0.5916** 1wl -0 3950** -0 4665** 0 1866* 1wl 0.3950 0.4665 0.1866 1

(c) Electricityegc (in logs) pl q_elec elec_access

egc (in logs) 1pl -0.4230** 1

l 0 331** 0 6391** 1q_elec 0.7331** -0.6391** 1elec_access 0.8295** -0.2005* 0.6069** 1

(d) Water & Sanitationwater sanitation

water 1sanitation 0.8112** 1

Notes:** denotes the significance level at 5 percent, and * at 10 percent.

Table 2. Pair-wise Correlation (continued)Table 2. Pair wise Correlation (continued)

2 The Representative Component from Each Sector2. The Representative Component from Each Sector

roads (in logs) ml (in logs) egc (in logs) waterroads (in logs) 1roads (in logs) 1ml (in logs) 0.5727** 1egc (in logs) 0.6374** 0.8727** 1water 0.4902** 0.8644** 0.7785** 1

Notes:** denotes the significance level at 5 percent, and * at 10 percent.

Table 3. Variance by Sector UsingTable 3. Variance by Sector Using Principal Component Analysis

Sector VarianceSector VarianceTransport 0.7231Telecommunications 1.000El t i it 0 7330Electricity 0.7330Transport & Telecommunications 0.9018

Figure 3. Infrastructure Indices by Sector i (19 1 200 )in Egypt (1971-2005)

1 0

Infrastructure Indices by Sector (a) Components of Transport Index

0 0 0 9

-0.4-0.20.00.20.40.60.81.0

-1 2-1.0-0.8-0.6-0.4-0.20.0

0 30.40.50.60.70.80.9

-1.2-1.0-0.8-0.60.4

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

Transport & Telecommunications Electricity

-1.8-1.6-1.41.2

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 200400.10.20.3

Roads, sqrt of 1000 workers x surface area (in logs)Transport & Telecommunications Electricity , q ( g )Paved roads (the ratio to total road length)

(b) Components of Telecommunications Index

5 5

6.016.018.0

-0 2

0.0

(c) Components of Electricity Index

3 5

4.0

4.5

5.0

5.5

4.06.08.010.012.014.0

-1.0

-0.8

-0.6

-0.4

-0.2

3.0

3.5

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

Main lines per 1,000 workers (in logs)

0.02.0

-1.4

-1.2

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

EGC per 1,000 workers (in logs) Power loss (% of output)

Figure 7-1. Infrastructure Investment C iacross Countries (% of GDP)

(a) Total Investment (b) Public Investment

45678

2.53.03.54.04.55.0

01234

1981 1984 1987 1990 1993 1996 1999 2002 20050.00.51.01.52.0

1981 1984 1987 1990 1993 1996 1999 2002 2005


3.0

0.51.01.52.02.5

Data source: Calderón, Odawara, and Servén (2008).0.0

1981 1984 1987 1990 1993 1996 1999 2002 2005

IND PAK IDN

Figure 7-2. Infrastructure Investment across Countriesacross Countries

(% of GDP)(a) Total Investment (b) Public Investment

8101214

6

8

10

12

0246

1980 1985 1990 1995 2000 20050

2

4

6

1980 1985 1990 1995 2000 20051980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005

6


12345

Data source: Calderón, Odawara, and Servén (2008).01

1980 1985 1990 1995 2000 2005

EGY TRK SA

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Infrastructure and Economic Growth in Egypt - · PDF fileInfrastructure and Economic GthiE tGrowth in Egypt NVL WldBkNorman V. Loayza, World Bank ... BOL CHN SYR GTM JOREGY DOM SLV