Infrastructure Investment and Economic Growth

 Growth in real GDP per worker and five types of infrastructure per worker

 

There is a new paper from three World Bank researchers on the relationship between infrastructure and economic growth, a difficult topic they tackle with some sophisticated econometric techniques using data from the World Bank and the Penn tables. Disentangling the economic effects of infrastructure from the effects of other macroeconomic factors requires long time periods and a method to extract estimates from the data.  The researchers use a pooled mean group estimator to compare differences between countries in growth of real GDP per worker and investment in five types of infrastructure per worker between 1992 and 2017.

 

Because other factors like population growth, education levels, openness to trade and type of exports have significant effects on economic growth, any measured effect of infrastructure investment will be small by comparison. This research estimated the strength of the relationship between real GDP per worker and infrastructure investment by the size of the infrastructure coefficients, shown in the table below. While the coefficient values are indeed small they also show clearly that higher investment in each of the five types of infrastructure leads to higher real GDP per worker, as shown in the figures below.  

 

This is an important result. Their model credibly finds larger effects for infrastructure investment on economic output than previous studies, and found the effects of infrastructure were higher in the three decades after 1991 than the two before. There are separate estimates for a group of low- and middle-income countries and another group of high-income countries. Infrastructure has more effect in the group of developing countries compared to industrialised countries.

 

The paper starts by reviewing previous research on the impacts of infrastructure investment on economic growth and development. Some studies showed a strong positive relationship between infrastructure development and economic growth, others found a mildly positive relationship or no relationship. The author’s note “Many factors are responsible for these varying results, such as differences in methods, differing approaches to measuring infrastructure development, the varying development stages of countries included in the sample, varying time periods, and geographical factors such as high or low population density.” 

 

Their study evaluates the contributions to growth in a panel of 87 countries over the period 1992 to 2017 of three main categories of infrastructure: transport, electricity, and telecommunications. The main estimate uses a pooled mean group estimator to estimate their effect on growth, and finds larger effects for infrastructure investment on economic output than found by previous studies. They also find the effects of infrastructure are higher in the three decades after 1991 than the two before. 

 

Although other studies have shown a strong positive relationship between infrastructure and economic growth in less developed countries lacking adequate infrastructure, whether this finding holds for industrialised economies remains an open question because other research has not found a significant effect. Is there a threshold level of economic development (measured in terms of per capita GDP or human development indicator) below which the relationship between the infrastructure and economic growth is stronger, and is the relationship is weak or absent above the threshold? 

 

The paper has separate estimates for 48 low- and middle-income countries and 39 high-income economies. Infrastructure has larger effects in the group developing economies compared to industrialised economies. Theinfrastructure coefficients that measure the effect are smaller in the developed country sample than the developing country sample, in Table 11. Railways essentially have a zero effect on both groups, unlike their effect in the earlier period 1970-91.  Compared to 1970-91 developing country coefficients for roads, electricity and mobile phones and particularly telephones are all higher.

Their Figures plot the relationship between real GDP per worker and the different infrastructure indicators in the 87-country panel from 1992 to 2017, with higher infrastructure per worker associated with higher real GDP per worker. This relationship is notably strong for electricity generation capacity (r = 0.77) and the telecommunications variables (r = 0.52 and r = 0.67 for mobile and fixed line telephones, respectively).

Figures 1 - 5. Real GDP per worker and various infrastructure variables, 1992-2017 country means

Timilsina,Govinda R.; Stern,David S.; Das,Debasish Kumar. How Much Does Physical Infrastructure Contribute to Economic Growth An Empirical Analysis. Policy Research working paper, WPS 9888 Washington, D.C.: World Bank Group. 

 

https://documents.worldbank.org/en/publication/documents-reports/documentdetail/553061639760111979/how-much-does-physical-infrastructure-contribute-to-economic-growth-an-empirical-analysis