Poverty & Equity Global Practice Working Paper 164 INFRASTRUCTURE, VALUE CHAINS, AND ECONOMIC UPGRADES Xubei Luo Xuejiao Xu August 2018 Poverty & Equity Global Practice Working Paper 164 ABSTRACT Infrastructure development is critical to delivering growth, reducing poverty, and addressing broader development goals. This paper surveys the literature on the linkages between infrastructure investment and economic growth, discusses the role of infrastructure in participation in global value chains and supporting economic upgrades, highlights the challenges that the least developed countries face, and provides policy recommendations. It suggests that addressing the bottlenecks in infrastructure is a necessary condition to provide a window of opportunity for an economy to develop following its comparative advantage. With the right conditions, good infrastructure can support an economy, particularly a less developed economy, to reap the benefits of participation in global value chains to upgrade the economic structure. This paper is a product of the Poverty and Equity Global Practice Group. It is part of a larger effort by the World Bank to provide open access to its research and contribute to development policy discussions around the world. The authors may be contacted at xluo@worldbank.org. The Poverty & Equity Global Practice Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. ‒ Poverty & Equity Global Practice Knowledge Management & Learning Team This paper is co-published with the World Bank Policy Research Working Papers. Infrastructure, Value Chains, and Economic Upgrades Xubei Luo1, Xuejiao Xu2 1. Poverty Global Practices, The World Bank, Washington D.C., USA, xluo@worldbank.org 2. Columbian College of Arts & Sciences, The George Washington University, Washington D.C., USA, xuejiaoxu@gwu.edu JEL classification: H54; O40, F14, F60 Keywords Infrastructure gap; economic growth; structural upgrades; least developed countries; global value chains Infrastructure, Value Chains, and Economic Upgrades  Xubei Luo and Xuejiao Xu*  . An  accessible,  affordable,  and  reliable  infrastructure  network  is  crucial  for  development.  It  is  necessitous  for  powering  business,  lowering  transactions  costs,  improving  market  access,  and  improving the efficiency of other productive factors; and it is prerequisite for providing people  with access to important services like education and health care, connecting workers to their jobs,  and  sharing  the  fruits  of  growth  in  an  equitable  manner.  In  the  global  arena,  infrastructure  is  essential for participation in value chains to upgrade economic structure.  As argued in the World  Bank Report Transformation through Infrastructure (2012a), infrastructure development is critical  to delivering growth, reducing poverty, and addressing broader development goals.1   This paper surveys the literature of the linkages between infrastructure investment and economic  growth, discusses the role of infrastructure in participation in global value chains and supporting  economic  upgrades,  highlights  the  challenges  faced  by  the  least  developed  countries,  and  provides  policy  suggestions.  It  suggests  that  addressing  the  bottlenecks  in  infrastructure  is  a  necessary condition to provide a window of opportunity for an economy to develop following its  comparative advantage. With the right conditions, good infrastructure can support an economy,  particularly a less developed economy, to reap the benefit through participation in global value  chains to upgrade the economic structure.   Infrastructure investment and economic growth  Infrastructure  includes  hard  (tangible)  infrastructure  and  soft  (intangible)  infrastructure.  Hard  infrastructure often refers to the transport system (such as roads, airports, port facilities, and rail),  public utilities (such as energy, water supply and sewer, and irrigation), communication network  (such  as  telecommunication  and  broadband),  and  social  infrastructure  (such  as  schools  and  hospitals). Soft infrastructure often refers to matters related to efficiency, such as institutions and  regulations.2   There  is  a  vast  literature  on  the  contribution  of  infrastructure  and  public  capital  to  aggregate  productivity  and  growth.  Arrow  and  Kurz  (1970)  examined  the  relationship  between  infrastructure investment and productivity using the Ramsey type exogenous growth model and  * Xubei Luo is an economist at the World Bank, Xuejiao Xu is a graduate from George Washington University. The authors would like to thank participants at the 4th New Structural Economics International Conference at Peking University for comments. Special thanks go to  Justin Lin, Yong Wang, Shang‐Jin Wei, Yanrui Wu, Jianye Yan, and Juzhong Zhuang, for useful discussions and suggestions. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 1  See World Bank (2012a). 2  See more from Lin (2011), Bottini, Coelho, and Kao (2012), and Ismail and Mahyideen (2015). 2    found  that  the  volume  of  public  investment  conditions  marginal  productivity.  Barro  (1990)  included pubic capital in the framework of the endogenous growth model and concluded that the  growth and savings rate increase initially with productive services, but subsequently decline, while  the  two  rates  were  negatively  associated  with  consumption  services.  Futagami  et  al.  (1993)  extended Barro’s method, by adding private capital stock into the endogenous growth model, and  showed that long‐run economic growth is maximized when the income tax rate equals the output  elasticity of public capital.  World Bank (2012a) showed a positive correlation between estimated  infrastructure investments (per capita) and the level of development (proxied by GDP per capita)  using data from 104 countries (Figure 1). WEF (2013) suggested that, if every country improved  border  administration,  transport  and  communications  infrastructure,  and  related  services  halfway  to  the  world’s  best  practices,  global  GDP  could  increase  by  US$2.6  trillion  (4.7%)  and  exports by US$1.6 trillion (14.5%).  Figure: 1 Infrastructure investment and economic development    Cited from World Bank (2012a), Transformation through infrastructure.   Note: Total investments in infrastructure consist of: (a) new investment resulting from the variation in infrastructure stocks between  2000 and 2005, valued at unit costs; and (b) requirements for maintenance, resulting from multiplying stocks of 200 by a  depreciation rate. Infrastructure sectors include paved and unpaved roads, rails, ports, electricity generation and electrification,  fixed and mobile communications, and water supply and sanitation. The curve is obtained by a three‐degree polynomial trend    There is an indication that infrastructure is closely associated with economic development,  while the empirical evidence of the causality between infrastructure and productivity growth  remains inconclusive and the marginal productivity of infrastructure varies across countries. De  la Fuente (2010) provided a survey of the literature with a thorough discussion of the  econometric complications. Aschauer (1989) found that the slowdown of the investment rate in  public infrastructure leads to the deceleration of private‐sector total factor productivity in the  U.S. since the early 1970s. Wylie (1996) used a similar approach as Aschauer's analysis and  found high returns of infrastructure investment to productivity in Canada’s goods‐sector, and  complementarity of infrastructure with goods‐sector capital and labor inputs during 1964‐1991.  Fernald (1999) accessed the links between road services and productivity and found that  industries that intensively used roads often witnessed a faster productivity growth increase  when the stock of roads increased, using industry data in the U.S. between 1953‐1989. Canning  and Bennathan (2000), using an aggregate production function, found that infrastructure, as  complementary to physical and human capital, enhances production capacity.  Röller and  Waverman (2001) found a positive causal link between telecommunication infrastructure and  economic development using data from 21 OECD countries spanning the years 1970‐1990 with a  micro‐model endogenizing telecommunication investment and a macro‐growth equation, after  3      controlling for country‐specific fixed effects and nonlinear effects caused by network  externalities. Albiman and Sulong (2016) showed that mobile phone and internet were main  economic growth drivers in the long run using data in 45 Sub‐Saharan African countries from  1990 to 2014.  Infrastructure can contribute to productivity and economic growth through several channels:   Infrastructure  can  lower  production  costs.  Seethepalli  et  al.  (2008)  found  that  telecommunications,  electricity,  roads,  water,  and  sanitation  have  significant  positive  impact  on  economic  growth  in  East  Asia,  after  controlling  human  capital  and  total  investment.  Similarly,  Straub  and  Terada‐Hagiwara’s  study  (2010)  showed  the  growth  rate of these infrastructure stocks promotes economic growth in most countries in East  Asia and South Asia. For production, electricity is often a major constraint in developing  countries.  Dollar  et  al.  (2005)  showed  that  the  inconsistent  power  supply  has  strong  negative impacts on productivity using firm level survey data. Firms often have to rely on  their own generators to supplement the unreliable public electricity supply. However, the  cost of maintaining a power generator is often high and burdensome, especially for small  and medium firms, where a large share of the poor and vulnerable are employed. Hallaert  et al. (2011) found electricity supply is a major constraint to trade expansion in developing  countries.      Infrastructure  can  lower  transactions  costs.  Limao  and  Venables  (2001)  showed  poor  infrastructure accounts for more than 40 percent of transport costs. Radelet and Sachs  (1998) found that a doubling of the shipping cost is associated with slower annual growth  of slightly more than half of one percentage point. Cordella and Simon (1997) found that  infrastructure can reduce transaction costs (including the costs for gathering information,  evaluating alternative options, negotiating, and contracting) by reducing time and cost in  communication and information exchange and by flattening the organizational structure  to reduce information flux and coordination needs.  Lakshmanan (2011) suggested that  time  and  cost  savings  due  to  transport  infrastructure  improvement  can  better  link  product  and  factor  markets,  promote  inter‐regional  trade  and  specialization,  increase  returns to scale, and reallocate economic activities.     Infrastructure can increase total factor productivity. Good infrastructure can increase  efficiency of conventional inputs (Duggal et al., 1999). Interconnections and  complementarities between infrastructures help improve service efficiency and support  innovative technologies adoption (Bottini et al., 2012). Based on a large‐scale firm‐level  survey data from China, Wan and Zhang (2017) explored the causality between  infrastructure and firm total factor productivity, and concluded that roads,  telecommunication servers, and cable promote firm productivity. In addition to the  conventional productivity effect, Fay et al. (2011) found that infrastructure is likely to  condition the efficiency of many key areas of productive factors, such as the costs of  investment adjustment, the durability of private capital, and both demand for and  supply of health and education services. Dam (2007) showed that the rule of law is  important to unlocking the developing world's full growth potential.     Infrastructure services can “crowd in” other productive inputs. Calderón and Servén  (2014) suggested an increase in infrastructure stock or improvement in infrastructure  4      can indirectly crowd in other inputs owing to the accompanying rise in their marginal  productivity, and this indirect effect may take place instantaneously (for variable inputs  in elastic supply) or over time (for fixed inputs such as human and non‐infrastructure  physical capital). Infrastructure, being a key element of the business environment,  conditions individual firms’ transaction and marginal return on investment.3  Wheeler  and Mody (1992) and Richaud et al. (1999) provided evidence that infrastructure can  crowd in foreign direct investment, an important element for growth in less developed  countries. Eden and Kraay (2014) found that an extra dollar of public investment can  raise private investment by roughly two dollars, and output by 1.5 dollars, based on data  from 39 low‐income countries.  The magnitude of contribution of infrastructure to productivity and output varies. Various  factors are at play. Calderón et al. (2015) found that the long‐run output elasticity of  infrastructure ranges from 0.07 to 0.1, using a synthetic index combining power, transport and  telecommunications infrastructure as one of the inputs in a production function, based on a  large data set covering 88 countries spanning the years 1960–2000. Their results suggest that  the marginal productivity of infrastructure is associated with the ratio of aggregate  infrastructure to output. Calderón and Servén (2008), drawing from data of 100 countries over  1960‐2005, found that infrastructure development makes, on average, a smaller contribution to  growth in Sub‐Saharan Africa than in other regions – just 0.7 percent per annum. This is related  to the severe deterioration of the quality of infrastructure services in the region ‐ while the  expansion in infrastructure stocks raises the growth rate by 1.2 percent per annum, the  deterioration of the quality of infrastructure services reduces the growth rate by 0.5 percent per  annum. Bottini et al. (2012) suggested that enhancing service efficiency and supporting  innovative technologies adoption can improve the contribution of infrastructure to total factor  productivity through better interconnection and stronger complementarities.   The relationship between infrastructure and economic growth is not linear. Hurlin (2006) found  that returns to infrastructure exhibit threshold effects and that the highest marginal  productivity of investment is found when a network is sufficiently developed but not completely  saturated. For example, road construction may have limited effects until it links several  locations. After the establishment of a minimum road network, the marginal productivity is high  for the new road construction extending the network before congestions kick in (Fernald, 1999).  Henckel and McKibbin (2017) pointed out that the economic benefit from transport  infrastructure is nonlinear because of network externalities, reflecting the decreasing benefits  from additional highway construction to an existing efficient transport network.  Telecommunications investment has strong externality. A subscriber’s welfare increases with  the increase of the number of people who have access to the network, until reaching the  saturation point. Röller and Waverman (2001) found that the impact of telecommunications  infrastructure on output is substantially higher in countries where penetration approaches  universal coverage.    Infrastructure and global value chains                                                               3  See Lin, J. Y. (2011).  5      Infrastructure development includes two main stages. The first stage is the development of  transport infrastructure. It significantly lowers transport costs and made it feasible to spatially  separate production and consumption. Production becomes specialized and clustered in large  scale (Florida, 2005). The second stage is the development of communication infrastructure. It  significantly lowers coordination costs and makes it feasible for firm specific knowledge and  know‐how to be shared across national borders (Baldwin, 2011).   In today’s world, with the drastic decline of transport costs and communication costs, the  potential contribution of infrastructure to productivity and growth is magnified. The  infrastructure improvement can not only contribute to growth through lowering production  costs and transaction costs, increasing total factor productivity, and crowding in other  productive factors, but also change the boundary of production and reshape the economy  (Lewis and Bloch, 1998; McCann and Shefer, 2004). Yu (2017) found that infrastructure  improvement plays a crucial role in the increasing economic cooperation and integration  between East Asian countries. The transportation and communication technology revolution has  redefined the function of time and distance.  The interconnectedness across firms or sectors  multiplies and intensifies. 4   The separation of stages of production, or tasks instead of the full products, which is profitable  due to the large differences of wages, land prices, and advantageous policies between  developed and developing countries, opens new doors for developing countries to specialize in  specific niches of the global value chains. It enables an economy to develop its comparative  advantages, including latent comparative advantages, potentially at an earlier stage through  focusing on a special niche in the global value chains.5 Countries become increasingly  interdependent through supply chain trade, as they specialize in tasks and business functions  rather than products. Products at different stages of value added may be imported, exported,  and re‐exported multiple times. In 2009, world exports of intermediate goods exceeded the  combined export values of final and capital goods for the first time, representing 51% of non‐ fuel merchandise exports (WTO and IDE‐JETRO, 2011).  Global value chain integration can increase domestic value added. As indicated by Kowalski et al.  (2015), global value chain participation can increase domestic value added embodied in a  country’s exports, enhance the sophistication of the export bundle, and improve diversification  of export products. Weinberger and Lumpkin (2007) stated that integrating into the horticulture  global value chain offers opportunities for the least developed countries to alleviate poverty by  increasing income and creating employment. Kummritz et al. (2017) found both backward and  forward global value chain participation can lead to growth of domestic value added, based on a  data set covering 61 countries and 34 industries between 1995 and 2011. Gonzalez (2016) found  that using foreign value added is one of the most important factors that contribute to growth in  domestic value added in exports. In ASEAN countries, the total domestic value added in exports  increased nearly four times during the period of 1995‐2011. According to the Global Value  Chains Development Report (World Bank et al., 2017), the information and communication                                                               4  See Gereffi and Luo (2015) for more discussion.  5 See Lin and Monga (2010) and Lin (2012b) for a thorough discussion on the identification of comparative  advantages. 6      technology industry in the U.S. and China has experienced an increased rate of return in labor or  capital by participating in the global value chains.   The participation in global value chains can be a window of opportunities for developing  countries to move up the ladder in the production structure by specializing in the niches where  they have comparative advantage. Following the metaphor of “ladder” instead of a “chain” used  in a recent joint report by OECD, WTO and World Bank Group, “the disaggregation of production  into separate stages allows their firms not only to find their place on the ladder, but to move up  the rungs as their capabilities improve”.6 Entering global value chains is a way to "denationalize  comparative advantages", and it has the potential to enhance developing countries’ export  opportunities and their competitiveness (Del Prete et al., 2017). It allows developing countries  to specialize in narrow niches without the need of first building an entire value chain from  scratch, as other countries, such as Japan and the Republic of Korea, experienced in the last  century. A small developing country with abundant unskilled labor can join the value chain of  garment manufacturing, specializing in only one small niche such as producing buttons before  they can have the entire assembly line.   Participation in global value chains can therefore encourage upward movement by providing the  platform to reward skills, learning, and innovation.  Gereffi and Fernandez‐Stark (2016) drew an  upgrading trajectory in a global value chain, in which countries follow the steps of entering the  value chain first by offering the most basic products or services, then providing more  sophisticated business, subsequently to knowledge activities, offering a large spectrum of  products or services, and finally specializing in vertical industries. Costa Rica has experienced  product upgrading in medical devices value chains, as shown by Bamber and Gereffi (2013), with  its higher tech medical devices accounting for more than half of total medical device exports in  2011, compared with 90% shared by low‐tech disposable devices in 2002. Simultaneously, the  country also witnessed significant growth of FDI in higher‐level technology medical devices  sectors.   The potential benefit of tapping in the benefit of structural upgrading through the participation  in the value chains is large.  Development is path dependent. Several economies, including  China, are moving up the value chain and releasing millions of labor intensive jobs (Lin, 2012a).  Seizing this opportunity to specialize in the niches following the latent comparative advantages  can set an economy on a right path of structural upgrades. Successful cases can be found in  countries such as Chile in exporting engineering services related to mining, India in exporting  pharmaceutical R&D, and Uruguay in exporting sophisticated expertise on cattle traceability  (Gereffi and Fernandez‐Stark, 2016).   Improving infrastructure, including hard infrastructure and soft infrastructure, is a necessary  condition for reaping the benefit of the participation in the global value chains to upgrade the  economic structure. Reliable infrastructure to connect supply, efficient movement of goods and  services across borders, fast and reliable information transfer, and sufficiently low coordination  costs are prerequisites for participating in global value chains.  Yi (2003) indicated that tariffs  have large and nonlinear impact on global trade, especially for semi‐finished goods in the value                                                               6 See OECD, WTO, & World Bank Group. (2014).  7      chains as they need to cross borders several times. A recent Brookings report (World Bank et al.,  2017) showed a clear relationship between better logistics performance and deeper  involvement in global value chains using the World Bank’s Logistics Performance Indicator.  While not all countries with good logistics are deeply involved in global value chains, no  countries with poor logistics performance are central to global value chains (figure 2). According  to World Economic Forum (2014), well‐developed infrastructure not only reduces the distance  between regions but also integrates national markets and connects them to other economies.  The proximity of industries and businesses favors cost reduction and productivity improvement,  allowing firms in the region to share a similar labor pool and enjoy knowledge spillovers, and  enables further clustering and agglomeration (Fujita et al., 1999; Fujita and Thisse, 2013).  Figure 2: Relationship between the Logistics Performance Index and a centrality measure of  country involvement in global value chains    Cited from World Bank et al. (2017), and Diakantoni et al. (2017).  Based on COMTRADE and World Bank data.  Note: The centrality indicator ranks a country’s centrality to global value chains, taking into account direct and indirect trade flows to  and from trading partners in the global production network.    Challenges for the least developed countries  Participating and competing in global value chains have become largely inevitable. Local firms  are collaborating directly or indirectly with foreign firms in the same industry or with their  upstream or downstream partners; at the same time, local firms are competing with a growing  number of foreign firms in the local as well as international markets.  As the natural barriers of  distance to trade are diminished, countries may benefit or lose in the new global arena. To  survive, they need to improve product quality and efficiency of operations. Infrastructure  required for firms in least developed countries, which mainly target local markets with small  amount of transactions, used to be rudimentary. However, when they attempt to join the global  value chains, where business transactions are often long distance and large in quantity and  value, more sophisticated and various types of infrastructures become necessary (Lin, 2011).  8      Countries with poor infrastructure and distant to the economic centers can be marginalized and  locked from the opportunity of participating in the global value chains and, consequently, the  opportunity of upgrading the economic structure.   Developing countries face daunting challenges, ranging from the accessibility and quality of  transportation, telecommunication, and water supply, to institutions and regulations to  facilitate trade. The large infrastructure gaps, particularly for the least developed countries,  might deprive them of the opportunity to upgrade their economic structure through  participation in global value chains. World Bank (2017) indicated that the performance of Sub‐ Sahara Africa’s infrastructure currently ranks below all other developing regions: road density  has declined over the past 20 years in Africa, and only 35% of the population has access to  electricity, with rural access rates less than one‐third urban ones. The report estimated that  closing the infrastructure quantity and quality gap in Sub‐Sahara Africa relative to the best  performers in the world could increase the growth of GDP per capita in the region by 2.6  percent per year, or 1.7 percent per year if it were to close the gap with the median of the rest  of the developing world.   Transport costs can be prohibitively high. Transport costs, according to developing‐country  suppliers, remain the main obstacle to entering, establishing, or moving up in global value  chains (OECD and WTO, 2013).  Transport prices for most African landlocked countries range  from 15 to 20 percent of import costs, approximately two to three times more than in most  developed countries (Teravaninthorn and Raballand, 2009). According to a recent IMF report  (IMF, 2015), the quality of infrastructure in Africa is about half that found elsewhere in the  world, credit‐to‐GDP ratios about a third of ratios elsewhere, and tariffs on average four times  higher than elsewhere. The slow and unpredictable land transport keeps most of Sub‐Saharan  Africa out of the higher value added segments of the value chains, including electronics (Christ  and Ferrantino, 2011).   Firms in the least developed countries are more likely to suffer from the burden of high  transaction costs. Besides conducive business environment and strong human capital, efficient  and reliable infrastructure services (including telecoms, internet, express service delivery, and  customs clearances) for coordinating the dispersed production become the essential condition  of the location choice in the production supply chain. With below‐average infrastructure quality  in most countries and the lack of regional co‐ordination of trade facilitation effort, South Asia  has the highest intra‐regional trade costs after the African regions (Kowalski et al., 2015).  Ahmed et al. (2010) noted high transaction costs are bottlenecks for South Asian countries to  promote regional or international trade, with 140 to 200 signatures required for trading  between India and Nepal, and over four days of waiting time for trucks to cross the border  between Bangladesh and India. Facilitating trade by focusing on publication of customs  information, notifications, advance rulings, documentation requirements, and international  standards can reduce trade costs mostly in less developed counties (Moïsé and Sorescu, 2013).   High logistic costs due to weak supply chains are often another barrier for the least developed  countries. Lacking reliable supply chains, firms in less developed countries encounter much higher  logistic costs and are virtually eliminated from just‐in‐time production. High inventory costs post  a double penalty for firms participating in global manufacturing value chains with extra logistics  9      costs on both inputs and exports. The inefficient and unreliable clearance processes could even  render  the  participation  in  global  value  chains  impossible.  As  a  result,  the  off‐shoring  and  industrialization  after  the  ICT  revolution  tend  to  concentrate  in  select  parts  of  the  developing  world, of which a significant share is in East Asia, followed by select countries in Latin America  and East and Central Europe.    Small and medium enterprises (SMEs) stand for the majority of firms in least development  countries. According to Gereffi and Fernandez‐Stark (2016), market access, training, and  collaboration and cooperation are major constraints for SMEs to sustainably enter value chains.  Infrastructure such as transportation and ICT conditions the linkages between producers and  buyers in value chains and affects the adoption of new technologies to meet the international  market requirements. Collaboration and cooperation refer to both horizontal coordination  between producers and vertical interaction between segments of the value chains, with the  former facilitating economies of scale and providing opportunities for more value added, and  the latter helping sharing knowledge along the chain and upgrading.   SMEs are even more vulnerable to supply chain inefficiencies compared with large firms. For  SMEs, related to their small scale, logistics costs are disproportionately higher—industrial firms  with fewer than 250 workers on average having logistics cost of some 15% of overall revenue for  the business unit, more than twice that of firms with over 250 workers (Straube et al., 2013).  Small exporters and importers tend to be more affected by a lack of transparency in clearance  processes. They have lower economies of scale, therefore higher inventory costs, which can be  punitively high in countries with poor logistics performance. Many of them are often forced to  confine their business activities to the geographical area close to their production site. For the  SMEs in remote areas, the lack of continuity of logistics services beyond the main gateway could  make access to global value chains prohibitive.   Evidence shows that insufficient infrastructure has put obstacles for less developed countries to  integrate into global value chains and upgrade to higher segments on the chains. According to  Gereffi (2015), in some Central American countries, inadequate infrastructure investment in wet  processing  plants  limited  the  abilities  of  small  producers  to  produce  premium  coffee,  consequently losing the opportunity to capture the price premiums in the global value chain. A  report  from  AfDB  et  al.  (2014)  suggested  that  many  African  countries  suffer  from  insufficient  infrastructure.  Lack  of  infrastructure  and  burdensome  border  procedures,  accompanied  with  geographical remoteness, mean that in countries in Sub‐Saharan African, on average it takes 38  days to import and 32 days for exporting across borders. As a result, firms face high costs and  uncertainty of supply (World Bank, 2012b; Kowalski et al., 2015). Poor infrastructure, especially  lack of access to energy, and inadequate skilled workforce are the main barriers for Burkina Faso  to participate in the global value chains.  In the Republic of Congo, the economy has not been able  to build on the comparative advantages in natural resources and move up the value chains due  to  the  lack  of  decent  infrastructure,  such  as  transport  and  energy,  as  well  as  the  lagging  technology,  less  qualified  labor,  and  uncongenial  business  environment.  In  Tunisia,  while  the  manufacturing sector has benefited from participation in the global value chain particularly, its  further  development  and  structural  upgrades  are  still  handicapped  by  logistics,  transport,  unbalanced  distribution  of  information  and  communication  technologies,  and  technology  transfers.   10      The less developed countries with underdeveloped infrastructure, low investment rates, and  low per‐capita incomes can experience a boost in trade flows and benefit from infrastructure  development. The development experiences in Africa and Asia, such as light‐manufacturing in  Ethiopia, horticulture in Kenya, readymade garments in Cambodia, and textiles in Pakistan have  already highlighted these countries’ tremendous potential for productive job creation, providing  they tackle the “hard” and “soft” infrastructure constraints to help realize this latent  comparative advantage.    Conclusions  Improving  infrastructure  to  meet  the  demand  in  today’s  economy  is  a  must.  The  demand  for  infrastructure includes not only the traditional facilities but also the new ones that better respond  to  the  rapidly  evolving  needs  and  provide  quicker  and  more  reliable  services.  While  the  “traditional”  infrastructure,  such  as  roads,  railways,  electricity,  water  and  sanitation,  is  still  fundamental, “new” infrastructure, such as highways, high‐speed trains, and broad‐band internet  has become necessary for an economy to fully participate in the global value chains and to move  up the ladder of the economic structure.   Infrastructure is not everything, but without good infrastructure, most potential will be limited.  Improving infrastructure is not only important for growth by boosting firm performance, but also  facilitating public services delivery and contributing to inclusiveness and long‐term development.  The lack of access to basic services undermines living standards for poor people and limits their  ability to materialize their full potentials. The inequality of opportunity and inequality of outcomes  intertwine  and  perpetuate  and  prevent  poor  people  from  accessing  infrastructure  services.  Alesina  et  al.  (1999)  argued  that  more  unequal  societies  devote  less  effort  to  the  provision  of  public  goods,  including  infrastructure.  Estache  et  al.  (2002)  showed  that  income  inequality  adversely  affects  access  to  the  internet,  which  aggravates  the  information  asymmetry  and  deprives  the  poor  from  equal  opportunities.  Some  studies,  for  example  Gonzalvez  (2016),  suggested that participation in global value chains can be an engine of job creation: forward global  value chain jobs—domestic jobs linked to the production of intermediate products traded within  value chains—have grown over six times faster than total jobs in 1996‐2011.  Infrastructure is a necessary but not sufficient condition for growth. The extent to which  infrastructure improvement contributes to growth of a specific industry or location depends on  their specific characteristics and the business environment that they are in. To the extent that  suboptimal infrastructure investment constrains other investment, it constrains growth  (Newbery, 2012). More infrastructure may not necessarily cause more growth if the binding  constraints lie elsewhere or the type or quality of infrastructure investment does not match the  demand.7 Building a bridge to nowhere will not add any value.   The constraints of infrastructure, or the benefit from the improvement of a specific type of  infrastructure, vary across industries and firms as well as across regions in the same country. For  example, a new expressway linking two locations might benefit one more than the other                                                               7  See more discussions in Canning, D., & Pedroni, P. (2008).   11      depending on their production and geo‐economic structures. Improvement in connectivity and  market accessibility might lead to stronger clustering and agglomeration, which tends to favor  the economic centers more than the periphery. Similarly, simplification of the customs  clearance might benefit firms specializing in foreign trade or the economy in general, but at the  same time raise the competition for those engaging in import substitution industries or focusing  on the domestic market.   Infrastructure  is  not  a  sufficient  condition  for  benefiting  from  participation  in  the  global  value  chains,  and  participation  in  the  global  value  chain  is  not  a  sufficient  condition  for  structural  upgrades. The “smile curve” is deep as value added is high at the pre‐ and post‐manufacturing  stages.  Based  on  a  sample  of  more  than  2  million  firms  in  the  European  Union  in  2015,  the  empirical results from Rungi and Del Prete (2017) confirmed a nonlinear U‐shaped relationship at  firm‐level between the value added generated and position on a productive sequence. Developing  countries, given the mix of their factor endowment, often enter global value chains first at the  low value‐added stage (assembly or production stage) and subsequently seek to move towards  higher value‐adding activities. To what extent they can increase their domestic value‐added and  move up the ladder depends on a variety of factors. With good infrastructure, opportunity is there  but success is not guaranteed; however, without good infrastructure, the economy will certainly  be deprived of the opportunity to materialize its latent advantage at the global scale early on.   The public‐good nature of infrastructure calls for support from the governments, and partnership  between  the  public  and  private  sectors  in  many  areas  is  essential.  When  the  infrastructure  investment crosses national borders, regional and global collaborations are essential. Concerted  efforts between national governments and regional or international development agencies can  play a crucial role. With the right conditions, infrastructure investment and economic growth can  reinforce each other: good infrastructure investments can accelerate growth, while growth itself  can generate greater demand for, and usually supply of, infrastructure.   Infrastructure is expensive and requires extensive maintenance. The fiscal burden can be high,  particularly for the less developed countries that face multiple challenges and at the same time  have the most urgent needs. Focusing the investment in infrastructure in special economic zones  or  industrial  parks  can  be  a  useful  approach  to  jump  start  the  process  with  limited  resources.  China has spent over 5 percent of GDP over the past decades in infrastructure investment, cutting  transport costs and helping connect production centers to domestic and international consumers  (Huang, 2017). By substituting domestic for imported materials, China has been increasing the  domestic content of its exports (Kee and Tang, 2015), and has become the world’s factory from a  largely agrarian economy. The successful experience in China in the past decades shows that well‐ planned  and  well‐managed  special  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An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. This series is co‐published with the World Bank Policy Research Working Papers (DECOS). It is part of a larger effort by the World Bank to provide open access to its research and contribute to development policy discussions around the world. For the latest paper, visit our GP’s intranet at http://POVERTY. 1 Estimating poverty in the absence of consumption data: the case of Liberia Dabalen, A. 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