Roads - A way out of poverty? A two region, general equilibrium model for Vietnam

There are good reasons to emphasise road investments in developing countries. Road infrastructures are directly or indirectly related to all eight Millennium Development Goals (MDG). Furthermore, the effective protection caused by the lack of roads is for many countries considerably higher than those caused by tariffs, hampering the empowerment of people to benefit from trade liberalisation and economic growth. In addition, earlier problems of infrastructure projects have been identified and a stronger emphasis on accountability, capacity building and decentralisation can be expected to contribute to more effective and efficient capital allocation. Infrastructure investments require comprehensive appraisal methods. Traditional tools, so far, have taken a project or sector perspective that did not capture economy-wide effects. In addition to these inter-sectoral effects, investments in infrastructure can have long-term impacts on national capital formation, the government budget and foreign trade balance. To address this research gap, this paper puts forward a tworegion computable general equilibrium (CGE) model with post-simulation poverty analysis. Two major results- one general and one country specific- emerge from this analysis. CGE models have the ability to incorporate several dimensions of infrastructure investments that are missed by traditional analyses. By comparing investments in urban and rural roads in Vietnam we find that especially rural road investments can contribute to economic growth and poverty reduction.