Deficit versus Balanced Budget Financing of ICT Infrastructure and Export Quality

Abstract This paper examines whether and how provision of better quality of ICT infrastructure by the government incentivizes quality upgrading of exports of IT-enabled services of a small dependent economy that displays a diversified export basket. The central idea of the analysis is that infrastructure development has both benefits and costs, and thus may not necessarily improve quality of service exports.Method of financing the ICT infrastructure is also important. We show that if the skill-productivity augmenting effect of better quality of ICT dominates its adverse wage-cost effect, then the quality of the export of ITeS will be upgraded if the government switches from deficit financing to balanced budget financing (through an input tariff) of its expenditure on ICT development. An exogenous increase in expenditure on ICT development raises the quality of service exports regardless of how it is financed, though raises it by a larger magnitude when financed through an increase in the input tariff. Thus, when the primary objective is to incentivize upgrading of quality of exports, balanced budget financing of infrastructure development seems to be the more preferred policy.