How Inadequate Provision of Public Infrastructure and Services Affects Private Investment

Evidence from Uganda shows that poor public provision of infrastructure services - proxied by an unreliable and inadequate power supply - significantly reduces productive private investment. - Lack of private investment is a serious policy problem in many developing countries, especially in Africa. Despite recent structural reform and stabilization, the investment response to date has been mixed, even among the strongest reformers. The role of poor infrastructure and deficient public services has received little attention in the economic literature, where the effect of public spending and investment on growth is shown to be at best ambiguous. Reinikka and Svensson use unique microeconomic evidence to show the effects of poor infrastructure services on private investment in Uganda. They find that poor public capital, proxied by an unreliable and inadequate power supply, significantly reduces productive private investment. Firms can substitute for inadequate provision of public capital by investing in it themselves. This comes at a cost, however: the installation of less productive capital. These results have clear policy implications. Although macroeconomic reforms and stabilization are necessary conditions for sustained growth and private investment, without an accompanying improvement in the public sector's performance, the private supply response to macroeconomic policy reform is likely to remain limited. This paper - a product of Public Economics and Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to study public service delivery and economic growth. The authors may be contacted at rreinikka@worldbank.org or jsvensson@worldbank.org