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  3. 2027
  4. Preliminary Program
  5. Private Capital Meets Productive Arbitrage: Economic Development and Infrastructure as an Asset Class
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Private Capital Meets Productive Arbitrage: Economic Development and Infrastructure as an Asset Class

Paper Session

Sunday, Jan. 3, 2027 2:30 PM - 4:30 PM (EST)

Marriott Marquis Washington DC
Hosted By: American Economic Association
  • Chair: Peter Blair Henry, Stanford University

The Last Arbitrage?

Monroe Gamble
,
Massachusetts Institute of Technology
Peter Blair Henry
,
Stanford University

Abstract

In 1985, legal restrictions prohibited foreign investors from owning stocks of publicly traded corporations in “Third World” nations whose average P/E ratio at the time was 8, versus 14 for the S&P 500. When the Berlin Wall fell, restrictions were liberalized, capital flowed from rich-country mutual fund managers to poor-country stock exchanges, P/Es equalized on a risk-adjusted basis, and investing in emerging market equity, now a $1.5 trillion industry, was born from scratch. The flow of capital and revaluation of assets in the aftermath of liberalization gainsay the conclusions of Lucas (1990). Moreover, the current differential between the (social) rate of return on public capital in poor countries and private capital in rich countries is four times larger than the differential between the (financial) rate of return on private-poor and private-rich capital that existed before the fall of the Wall. Taken together, these facts suggest that creating emerging market infrastructure as an asset class has the potential to generate large private and social returns in the future.

The Social Rate of Return on Road Infrastructure Investments

Yanru Lee
,
Stanford University
Pablo Ariel Picardo
,
Central Bank of Uruguay

Abstract

A billion people live more than two kilometers from an all-season road, the vast majority of whom reside in emerging-market and developing economies (EMDEs), where the absence of paved roads hinders growth and development. Consistent with this shortage, we estimate that the median social rate of return to installing an additional kilometer of two-lane highway in EMDEs is 55 percent—roughly eight times the social rate of return on private capital in the US. The size and precision of the estimates vary widely across countries. But the eightfold excess social return on roads is, nevertheless, five times larger than the excess financial return on stocks in 2 developing countries that once catalyzed the creation of emerging market equity as an asset class. The absolute and relative magnitudes of these excess returns thus suggest the possibility of substantial unrealized welfare gains from reallocating developed-country savings toward public capital formation in EMDEs. We document these facts using a production function approach to estimate each country’s marginal product of public capital (MPX). We then pair these estimates with country-specific, hedonic road-construction prices (Px) from the Roads Cost Knowledge System to compute social rates of return (Rx). Because macro-level estimates of social rates of return face well-known identification and measurement challenges, we interpret our findings alongside complementary evidence on micro-level estimates of social and financial rates of return.

Financial Returns to Infrastructure Investments in Emerging-Market and Developing Economies

Anusha Chari
,
University of North Carolina-Chapel Hill and NBER
Paolo Mauro
,
International Finance Corporation
Peter Mugemancuro
,
Stanford University

Abstract

Despite the scarcity of infrastructure in emerging-market and developing economies (EMDEs), in the absence of readily accessible data on the historical performance of EMDE infrastructure as an asset class, private investors are reluctant to finance infrastructure projects in these countries. We begin to fill this information gap by computing the financial returns from equity investments in primarily unlisted firms in EMDEs made by the International Finance Corporation, the private-sector arm of the World Bank Group. The public market equivalent of 266 equity investments in core infrastructure by the IFC, with starting dates from 1961 to March 2020, was 1.17 using the S&P 500 as a benchmark, and 1.26 using the MSCI Emerging Markets Index. On average, over the past six decades, equity stakes in emerging-market infrastructure backed by the IFC thus delivered higher returns than investments in portfolios of publicly listed equities. Data from the full sample of IFC equity investments reveal that, on average, a diversified portfolio of investments in infrastructure-related sectors, and indeed, in all sectors more generally, generated significant positive financial returns, albeit with variation across decades.

Discussant(s)
Laura Alfaro
,
Inter-American Development Bank
Liliana Rojas Suarez
,
Center for Global Development
JEL Classifications
  • G0 - General
  • O0 - General