Estimating the contribution of infrastructure to national productivity in Europe

Chris Thoung,Rachel Beaven,Peter Tyler

doi:10.1186/s40551-015-0008-5

Chris Thoung, Rachel Beaven + Show 1 more

Open Access

https://doi.org/10.1186/s40551-015-0008-5

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Abstract

Abstract While there is much interest in understanding the contribution that investment in different types of infrastructure can make to the economic development of cities, regions and nations, such research is constrained by various methodological difficulties. Following the approach of Égert, Kozluk and Sutherland (2009), this paper seeks to identify whether countries might be over- or under-investing in infrastructure relative to other forms of capital investment, from the point of view of raising productivity. While subject to various limitations (and also highlighting the continuing data constraints in this area), such an analysis provides a consistent and comparable basis on which to assess whether countries might benefit from additional infrastructure investment or, conversely, whether they might in fact stand to gain from alternative forms of fixed capital formation. The article analyses five types of infrastructure in the 27 Member States of the European Union (prior to 2013), Norway and Switzerland. We find some evidence of over-investment in electricity-generation capacity (investment in other forms of capital would likely yield higher productivity returns) and under-investment in roads, motorways and telephone infrastructure (there is potential for greater productivity growth from investing in these infrastructures). The evidence of a relationship between rail investment and productivity is less clear. While the results suggest that countries might stand to improve their national productivity by shifting the balance between infrastructure and other capital, higher productivity is not a country’s only objective. Resilient infrastructure provision and/or upgrades with a view to pursuing other objectives such as climate-change mitigation may take precedence, necessitating at least some degree of ‘non-optimal’ investment.

Highlights

There is much interest by policy makers in understanding how investment in infrastructure can influence economic growth (Aschauer 1989, Esfahani and Ramírez 2003, Calderón and Servén 2004, Canning and Pedroni 2004, Romp and de Haan, 2005, Égert et al 2009, Sahoo, et al 2010)
Whilst it is clear that investment in infrastructure is essential to stimulate economic growth much remains unknown about the size of the contribution it can make and how this varies by type of infrastructure
The remainder of this section goes on to discuss the results by individual infrastructure type, with a focus on their relative contribution to national productivity and whether there might be any evidence of over- or underinvestment with respect to the objective of raising productivity

Summary

Introduction

There is much interest by policy makers in understanding how investment in infrastructure can influence economic growth (Aschauer 1989, Esfahani and Ramírez 2003, Calderón and Servén 2004, Canning and Pedroni 2004, Romp and de Haan, 2005, Égert et al 2009, Sahoo, et al 2010). As Romp and de Haan (2005) remarked in their extensive review article the issue had received ‘only scant attention’ at that time, they did present findings from some fifty studies. They cited Holz-Eakin and Lovely’s earlier observation that a somewhat surprising feature of the existing literature was ‘the noticeable absence of formal economic models of the productivity effects of infrastructure” (1996, p 106)

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