Public Infrastructure and Structural Transformation

This study argues that public infrastructure is an important though previously neglected driving mechanism of the structural transformation process. To assess its significance quantitatively, this study first develops a multisector neoclassical growth model with heterogeneous firms, where public infrastructure contributes to firms' production and mitigates the barriers to firms' entry. The model is calibrated using data from Brazil, a country that has significantly expanded its infrastructure in recent decades, yet remains in deep need of further infrastructure improvements. The accumulation of infrastructure accelerates the structural transformation through generating higher returns and lowering entry costs in sectors with greater public capital intensity. In the simulations, public capital formation explains about 15 percent of the process. The paper also shows the effects of different barriers to public capital formation on the structural transformation and GDP per capita