International Productivity Differences, Infrastructure, and Comparative Advantage

This paper provides an empirical analysis of the effect of infrastructure on industry-level productivity and international specialization, as suggested by Clarida and Findlay’s (1992) model. Attempting to control for simultaneity with a three-stage least squares estimation strategy, we find that public infrastructure helps to explain patterns of comparative advantage and international specialization. “Before we can place much faith in the hypothesis of systematic technological differences [between countries], we will need a lot more work to determine the source of these differences. Is it infrastructure? Is it organization forms? Or what?” (Leamer and Levinsohn, 1995, p. 1360) Introduction There is a substantial body of evidence that “productivity” differs between countries at the industry level. A number of studies have documented large and persistent sectoral differences in labor productivity between countries (e.g. Van Ark and Pilat, 1993). More recently, several studies have shown that there are also large international disparities in total factor productivity (TFP) (e.g. Bernard and Jones 1996, Hall and Jones 1999, Harrigan 1999). Other studies have shown that sectoral productivity differences across countries in turn affect international specialization in standard Ricardian and neoclassical models of international trade (Harrigan 1997, Golub and Hsieh 2000). In this paper, we investigate two related questions: 1) the extent to which differences in TFP across countries at the sectoral level can be attributed to differences in the availability of physical infrastructure, and 2) the effects of infrastructure on international specialization of production. While an affirmative answer to the first question implies an affirmative answer to the second one, the latter is also worth investigating because there may be channels of causation from infrastructure to international specialization beyond those operating from relative productivity, as well as problems of measuring relative productivity that could obscure the relationship. Casual observation in developing countries suggests that poor infrastructure contributes to low productivity. Power outages, weak telecommunications systems, lack of adequate roads are impediments to investment, growth, and poverty alleviation in these countries. (World Bank 2002, Chapter 8) A number of studies have examined the effect of infrastructure on aggregate