How should a policy-maker prioritize interventions to improve the public infrastructure with which firms operate and how large are the benefits from doing so likely to be? To address these questions we use survey data on the obstacles arising from poor quality public inputs that managers face in running their firms. Our conceptual framework centres on the public input character of physical infrastructure and institutions, and uses an O-ring production function to model the impact of poor quality infrastructure on output. Using survey data from over 72,000 firms in 95 countries, we verify the consistency of the within- and cross-country variation in reported constraints with predictions of the model. We use the framework to construct estimates of the impact on output and productivity of improvements in the quality of public inputs and how these differ between rich and poor countries. We show how a policy-maker can use the country-level data and the benchmarks estimated from the cross-country data to prioritize public infrastructure investment in their country. Our results indicate that priorities vary widely among countries and suggest a degree of caution about donor policies tying development assistance to generic improvements in the business environment. The results also suggest that the benefits arising directly from such improvements are likely to be modest relative to the scale of impact implied by aggregate-level studies of the role of institutions in economic development.
|Publisher||Centre for Economic Policy Research (CEPR)|