Growth, Welfare, and Public Infrastructure: A General Equilibrium Analysis of Latin American Economies

Empirical studies have found infrastructure investment important for a country¡¯s economic performance, but have not provided clear guidelines for infrastructure policy or its effects on other macroeconomic variables. This paper develops a general equilibrium model of a small open economy to study the effects of public infrastructure on output, private investment and welfare. The model is parameterized and solved for three Latin American countries: Brazil, Mexico, and Peru. Results show that infrastructure can have positive effects on output, private investment and welfare. However, raising public infrastructure investment past a certain threshold can be detrimental. All three countries are shown to have under-invested in infrastructure in the 1970s and 1980s. The gains from optimal infrastructure policy are greatest for Peru, the country with lowest infrastructure expenditure.