Introduction

The 1994 World Development Report defines infrastructure in a narrowly way as "long lived engineered structures, equipment and facilities, and the services they provide that are used in economic production and by households" World Bank (1994). Ahmed and Donovan (1992) however, took issue on the definition of "infrastructure" showing how the concept has evolved since the work of Arthur Lewis and that of Albert Hirschman. Ahmed and Donovan (1992) recognize that with the increasing importance of the role of agriculture in economic development, the literature started including agricultural research, extension services, financial institutions or/and irrigation as part of a much broader concept of infrastructure.

At the more conceptual level, the conventional theories on public goods, starting from the seminal article written by Samuelson (1954) recognize that public infrastructure are goods that are typically technical indivisible, have low excludability, long life and are rarely traded.

These characteristics have made them the kind of goods that are typically provided by the public sector.

Fosu et al. (1995) building in the definition laid out by Wharton (1967) distinguished the following 11 components of agricultural infrastructure: (1) irrigation and public water facilities; (2) transport facilities; (3) storage facilities; (4) marketing and export facilities; (5) processing facilities; (6) utilities; (7) agricultural research and extension services; (8) communication and information services; (9) soil conservation services; (10) credit and financial institutions; and , (11) education and health facilities.

Although we may agree with the above list, we think that it should be listed under the name of rural instead of agriculture infrastructure, because as Fosu et al. (1995) recognize, it includes items that facilitate not only agricultural but also non-agricultural (waged or independent) income generating activities. Our study looks at rural infrastructure using as a starting point this broad definition as it encompasses a range of public goods and services that have low excludability, have long life and are rarely traded. Although from chapter to chapter the specific focus of analysis narrows down to a specific infrastructure service or a combination of them, we believe that all analytical and methodological conclusions are applicable to most if no all infrastructure services listed above.

The aggregate linkages between poverty and rural infrastructure have been extensively discussed in the literature. See, for example World Bank (1994), Lipton and Ravallion (1995), Jimenez (1995), Van De Walle (1996), among many others. For sector specific discussions

(like the role of rural roads or electricity in poverty reduction) see for example Howe and Richards (1984), Binswanger, et al. (1993), Jacoby (1998) or Lebo and Schelling (2001).

Most of these studies recognize that infrastructure investment has indeed, a powerful impact in rural income. The specific linkages and the causal chain that brings about this outcome, however, are usually not studied. The problem with this lack of understanding of the causal relationship between public infrastructure investment and income generating opportunities and welfare improvement is that there is little room for policy recommendation other than suggesting an overall increase in public infrastructure investment. The possibility of easing key bottlenecks that affect this causal chain is undermined.

In a world with scarcity of financial resources, like the one that prevails in most developing countries, knowing the relative profitability of each type of public infrastructure is critical; that is, knowing where and in what type of infrastructure investment should each additional dollar be spent. In addition, as critical as knowing which type of infrastructure will render the higher return in terms of growth poverty or income distribution, it is also critical to understand the causal pathways through which these impacts occur. This is especially important if we are interested in devising policy recommendations that may maximize the welfare impact of rural infrastructure development. In this context, some of the challenges in this area are:

! Identifying investment opportunities that generate a multiplier effect by attracting additional public and private investments to rural economies

! Understanding the complementarities between different types of public infrastructure and between public infrastructure and private asset endowments (human capital physical and financial capital or social capital) that are already in the hands of rural dwellers so as to maximize the impact of public infrastructure development

! Understanding what bottlenecks (physical or institutional) undermine the full potential of public infrastructure investment.

To meet these challenges we need to understand fully the causal links between public infrastructure investments, rural market development and changes in rural household behavior.

In order to attain this, our conceptual framework is rooted in the recent literature on livelihood strategies¹. As can be seen in Figure 2.1, the livelihood base may include the infrastructure services a rural household has access to. If there is a positive shock to this livelihood base, for example through some kind of infrastructure investment (i.e. a new or improved road, access to electricity, rural telecommunication, water or sanitation facilities), this will affect household livelihood strategies. How livelihood strategies change because of this policy shock will depend on the context where such investment takes place, which may include not only the characteristics of the physical environment where this household is located (something that we refer as

1 See for example Carney (1998)or Ellis (2000)

Figure 2.1

"geography"), but also the social and institutional setting, the macro policy and the international trends and finally, any other shock that the household may be subject to.

As an infrastructure investment changes the livelihood base, its impact will be reflected in an improved access to services, in changes in the utilization of labor and other factor markets, in changes in marketing decisions and ultimately in changes in livelihood diversification strategies.

In turn, these diversification strategies, depending on the asset base, will help cope with or reduce vulnerabilities or will be used as a search mechanism for new market opportunities that would enhance the asset base and allow these rural households to escape from poverty.

Following this conceptual framework, this study looks at the different paths through which infrastructure investment may affect rural market development and, ultimately, the livelihood of the rural poor. As we have seen in Chapter 1, in particular in Figure 1.1, we envisage that infrastructure investments may have macroeconomic and microeconomic impacts.

At the macroeconomic level, improved access to new infrastructure services may change the marginal rate of return of the main infrastructure we may be evaluating, but it may also affect the marginal rate of return of other public infrastructure as well as the returns to those private assets that are already in the hand of the poor. Thus from changes in infrastructure endowments and the rate of returns of public and private assets we may trace the impact of infrastructure investments on rural income growth.

On the other hand, microeconomic effects can be traced through changes in market specific relationships or household specific behavioral changes. In the first case, market specific impacts can be related to the reduction of transaction costs or the improvement of market integration, affecting in this way market efficiency and the structure of relative price a rural household will face. Microeconomic effects can also be traced at the household specific level, as infrastructure investments changes factor markets, affecting input choice and mix, as well as labor allocation. All these impacts can be summarized, as we show in Figure 1.1, in changes in wealth indicators (income and assets) enhancing livelihood security of the rural poor.

In order to put in perspective our research questions and the conceptual and methodological contributions of this study, in the remaining sections of this chapter we go through what the literature has said about the different pathways through which infrastructure development affects market development, and through it, rural livelihood security.