Infrastructure investment is among the highest-return investments available in low-income contexts. It is also among the most consistently misallocated.
Why Infrastructure Investment Has High Returns in Low-Income Contexts
The returns to infrastructure investment are highest where the existing stock is lowest — where the marginal unit of infrastructure investment closes a gap that prevents economic activity from occurring at all rather than simply making existing activity more efficient. The road that connects an isolated community to the nearest market enables economic activity — the sale of produce, the purchase of inputs, the access to services — that was not occurring without the road. The infrastructure paradox is the gap between these high potential returns and the actual returns that infrastructure investment in low-income contexts frequently produces. Roads are built to inappropriate specifications that make maintenance unaffordable. Power infrastructure is installed without the maintenance system that keeps it operational. Each investment fails not because the potential return was insufficient but because the institutional conditions required to realise the return were not in place when the infrastructure was built.
The Complementarity Problem
Infrastructure investment produces its potential returns only in the presence of the complementary investments that make the infrastructure economically useful. The infrastructure without the complements produces less than its potential return; the complements without the infrastructure produce less than their potential. Infrastructure policy that does not account for complementarity systematically underperforms its potential.
The infrastructure paradox is not that infrastructure investment has low returns in low-income contexts — it has high returns when conditions are right. The paradox is that the conditions that produce high returns are themselves the result of institutional investment that is as important as the infrastructure itself and consistently less funded.
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