Academic journal article Journal of Economic Development

On the Economic Effects of Public Infrastructure Investment: A Survey of the International Evidence

Academic journal article Journal of Economic Development

On the Economic Effects of Public Infrastructure Investment: A Survey of the International Evidence

Article excerpt

This paper provides a survey of the significant literature on the effects of public infrastructure investment on economic performance and therefore constitutes a comprehensive reference for academic researchers and policy makers alike. It presents a comprehensive discussion of the empirical research regarding the impact of public infrastructure investment on economic performance in terms of both the methodological approaches followed and respective conclusions. It includes an integrated discussion of the methodological developments that successively have led to the estimation of production functions, cost and profit functions and, more recently, vector autoregressive models. Finally, it identifies some important areas for future research and highlights the natural convergence of this literature with the macroeconomic literature on the effects of fiscal policies.

Keywords: Public Investment, Infrastructure, Economic Performance, Evidence for the US, Regional Evidence, Industry-Specific Evidence, International Evidence

JEL classification: C01, E62, H54, O57

1. INTRODUCTION

The economic impact of public investment in infrastructure has been at the center of the academic and policy debate for the last two decades. Infrastructures generate positive externalities to the private sector, contributing to the well-being of households and the productivity of firms. Therefore, it is hardly surprising that in many countries development strategies have been based on infrastructure investment while in others the failure to achieve adequate growth has been attributed to the lack of adequate infrastructures. The slowdown in productivity growth in many OECD countries during the 1970s and 1980s, for example, has often been attributed to deteriorating infrastructures due to fiscal consolidation policies or benign neglect. In the 1990s, less developed European Union countries, such as Greece, Ireland, Portugal and Spain, pursued development strategies based on large public infrastructure investment projects while the economic recovery of many Eastern European countries seemed to depend to a large degree on the revamping of obsolete infrastructures. In Africa the absence of infrastructure networks seems to condemn the entire continent to poverty. More recently in the late 2000s, fiscal stimulus packages to address the ongoing recession included, in many countries, a very significant public investment component.

Aschauer (1989a, 1989b) serves as a seminal work that has spawned a substantial literature on the effects of public investments in infrastructures on economic performance. Using a production function approach relating output, employment, and private capital as well as public capital, Aschauer (1989a, 1989b) estimated the elasticity of output with respect to public capital to be between 0.34 and 0.39. These estimates were interpreted as implying an annual marginal productivity of public capital of about 70 cents on the dollar and that public capital would pay for itself close to three times in the form of additional tax revenues (see Reich, 1991).

Aschauer's work led to an explosion in this literature. Subsequent analyses applying the same methodology to international, regional and sector-specific data, however, failed to replicate such large effects and, indeed, often failed to find meaningful positive effects. In addition, the approach used in Aschauer's work and most of the earlier literature was challenged on econometric grounds. It was observed, for example, that OLS estimation of static, single-equation production functions suffer from simultaneity bias and that, even if this bias is corrected, conclusions about causality still cannot be drawn. These concerns generated a body of literature that branched out into a multivariate static cost-function approach and ultimately into a dynamic multivariate vector autoregressive (VAR) setting considering private sector employment, investment and output in addition to public capital. …

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