The Role of Infrastructure in Mitigating Poverty Dynamics: The Case of an Irrigation Project in Sri Lanka

Although it is known that access to physical infrastructure enhances household welfare, there are hardly any micro-econometric studies that analyze the role of infrastructure in mitigating chronic and transient poverty. This paper aims to bridge this gap in the existing literature by evaluating the impact of a large-scale irrigation project implemented in Sri Lanka. We extend the seasonal consumption smoothing model of Paxson (1993) by introducing endogenous credit constraints. We collected unique household-level monthly panel data over a period of two years. According to the point estimates, with irrigation accessibility, per capita food and non-food consumption expenditures increase by around 20% and 45%, respectively, on average, and the probability of binding credit constraint is reduced by 5.6% during the dry season. The latter result implies that irrigation enhances households’ access to the credit market which, in turn, contributes to further reduction in transient poverty. These empirical results suggest that irrigation infrastructure has a positive impact on reducing both chronic and transient poverty. The structural estimation results support the validity of our theoretical framework.