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In 2000, public spending on infrastructure in developing
countries averaged 9% of government
spending, or 1.4 % of GDP (IMF Statistics). Despite the
magnitude of such spending,
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and a widespread belief that infrastructure is integral to
development, evidence on how
investment in physical infrastructure affects productivity and
individual well-being remains
limited (Bank 1994). There is also very little evidence on the
distributional consequences of
such investment.
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In this paper we have
examined these questions in the context of large dam construction
in India. We have argued that any credible evaluation of large
dams must address the
endogeneity of dam placement, which depends both on the wealth
of different regions and the
expected returns from dam construction. This problem of
endogenous placement is central
to the evaluation of any large infrastructure project. Placement
will reflect both regional
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need and a complicated decision-making process (Gramlich
(1994)). While a growing cross-
country literature finds that productive government spending
enhances growth, most studies
are unable to convincingly control for unobserved heterogeneity
(see, for instance, Canning,
Fay, and Perotti (1994) and Esfahani and Ramirez (2003)). By
taking account of geographic
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suitability for infrastructure we provide a potentially
generalizable way of estimating returns
to investment. Our estimation strategy also allows us to examine
the relative importance
of different factors in driving infrastructure decisions. For instance, we
find that our 2SLS
results are, with a few exceptions, very similar to OLS results
when we restrict the comparison
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to districts within a state, with a few exceptions. This
suggests that while the overall number
of dams a state builds is endogenous, dam placement within a
state has possibly been driven
by cost considerations rather than political economy or rate of
returns concerns.
We have also
emphasized the importance of identifying who the beneficiaries of invest-
ment projects are, and who bears the costs. To return to the
example of the World Bank, in
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Spring 2005 the Bank announced 270 million dollars in grants and
guarantees for the Nam
Theun 2 dam in Laos. The New York Times (June 5, 2005) quotes a
bank official justifying
the return to dam lending as driven by the need to support infrastructure
development in a
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‘practical’ way since “You’re never ever going to do one of
these in which every single person
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is going to say, ’This is good for me”’ (Fountain 2005).
Implicit in this statement is the belief
that projects with an average positive return should be
undertaken, as it will be possible to
compensate the losers. We, however, find a strikingly unequal
sharing of costs and benefits of
large dam construction in India. The results on poverty suggest
that the government failed
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to compensate people living near the dam for the inherent
inequities in the gains and losses
associated with dam construction. Given that dams are at best
marginally cost-effective the
absence of redistribution may well have been required to
generate a political constituency
for large dams. We provide suggestive evidence that one reason
for the lack of compensation
relates to the institutional framework within which policy
decisions are made. In areas where
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the institutional structure favors the politically and economically
advantaged dams cause a
greater increase in poverty. We conclude that distributional
implications of public policies
should be central to any evaluation, and that more attention
should focus on understanding
the institutions, and power structures, that lead to the
implementation of marginally cost
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effective projects with significant negative distributional implications.
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