causality which we suspect to be just as great for investment in physical and human

capital as for infrastructure.

A major difference between the results in this paper and those in Canning (1999) is
that here we base our approach not on a Cobb-Douglas production function but on a translog specification. The Cobb-Douglas production function imposes a declining marginal
product of each type of capital as the capital-labor ratio rises. This virtually imposes a
finding of a high rate of return to all capital goods in lower-income countries and a low
rate of return in high-income countries, which is greatly at odds with observed private rates
of return on physical and human capital and the pattern of capital flows between countries
(Lucas (1990)). The trans-log specification, on the other hand, allows for flexibility in the
pattern of rates of return across countries.
A further major reason for adopting this specification is to allow us to examine the
pattern of complementarity and substitutability between inputs into the production
function. We find that each type of infrastructure, on its own, has rapidly diminishing
returns, which implies little support for a policy of purely infrastructure led growth.
However, infrastructure is found to be strongly complementary with both physical and
human capital, giving it an important role in a process of balanced growth and the
possibility of acute infrastructure shortages if investment in other types of capital takes off
but infrastructure investment lags behind. We explain these relationships in sections 2.2
and 2.3 below. Together with the cost of infrastructure (section 3 below) these productivity
relationships enter into the determination of the social rates of return to infrastructure
(section 4 below).
For many countries, across the whole range of income levels, we estimate rates of
return to infrastructure that are in line with, or actually lower than, those found for physical
capital as a whole. Given the extra costs caused by the distortions involved in raising taxes
to fund public infrastructure projects, this gives little support for a general policy of
increasing infrastructure stocks.
However, the rate of return to infrastructure is found to be highest in countries with
infrastructure shortages, that is low levels of infrastructure relative to their levels of human