Infrastructure, Economic Growth and Regional Connectivity: Spatial Econometric Analysis

Abstract

While there is little consensus that infrastructure is an integral part of economic growth and development, much of the research on the relationship between infrastructure and economic growth has focused on describing access to various infrastructure services and reporting on the macroeconomic impact of infrastructure. The issue with the highly aggregated infrastructure-growth analysis is that, although it is useful to show the positive effects of infrastructure on economic growth, it has not exposed the specific underpinnings to connect infrastructure investment with an inter-sectoral component of economic growth and because of which infrastructure affects total economic growth. Impact of infrastructure varies significantly among different economic sectors; it is more crucial for some sectors of the economy than others. This thesis adds to the literature on the contribution of infrastructure to aggregate and sectoral output, using an infrastructure augmented neoclassical production function approach. The study addresses several limitations of the earlier literature related to Pakistan. This research uses the multidimensional concept of infrastructure, combining power, road and telecommunication infrastructure into a synthetic index, constructed through a principal component analysis. The quality dimension of infrastructure has also been taken into account in the empirical analysis. In this study, we also make a comparative analysis of the different composition of infrastructure investment, including public versus private investment and infrastructure investment in sub-sectors, such as power, road and telecommunication. This segregation aims to know the most productive form of infrastructure investment. The empirical approach involves estimation of production function, relating output per worker to noninfrastructure capital stock, labor, human capital and infrastructure input. Our empirical estimates are based on time series data from 1972-2016 for Pakistan. Marginal contribution of road and electricity infrastructure to real GDP per worker is positive and statistically significant, while the marginal contribution of telecommunication infrastructure to real GDP per worker is negative. The marginal contribution of road infrastructure is highest in the agriculture sector (0.51) than in the industrial sector (0.36) and in the service sector (0.20). Marginal contribution of electricity generation is positive and statistically significant for industrial and services sector, while it is negatively associated with the agriculture sector. The highest contribution of power generation infrastructure is in the industrial sector (0.50) than in the services sectors (0.25). Telecommunication infrastructure is positive only for the agriculture sector while it is negatively associated with industrial and services sectors. Regarding the impacts of public and private infrastructure investments, positive and statistically significant effects are obtained in the case of public sector infrastructure investment both for aggregate as well as for subsector of the economy. In the case of private infrastructure investment, statistically significant and positive estimates are obtained for industrial and agricultural sectors, while it is negative for services sectors. The marginal contribution of investment in road & telecommunication is higher than the marginal contribution of investment in the energy sector in correspondence sector, except for the services sector. Impact of investment in electricity and gas distribution has the highest elasticity in the industrial sector (0.13) than in aggregate economy (0.09), while these elasticities are very small in agricultural (0.04) and services sector (0.05). Similarly, the elasticity of road and telecommunication investment is higher in the industry (0.22) than in agriculture (0.14) and in service sector (0.03). Dynamic effects of public and private infrastructure investment on aggregate and subsector of the economy show that: (i) for aggregate as well as sub-sector of the economy, a shock to the public and private investment in infrastructure tends to have a significant positive impact on employment. (ii) In all different cases, public and private capitals are long-run complements. (iii) Shock to private sector investment in infrastructure tends to have a significant positive impact on output for all cases. However the same is not true for public sector investment in infrastructure. Spatial econometric analysis confirms the positive spillovers effects of road infrastructure and supports the idea that the effects of investment in road infrastructure are not limited to the territory in which an infrastructure project is situated. Human capital has a prodigious effect on economic output because of direct and spillover effects, which endorse the nature of human capital intensity in the regional economy.