How Does Infrastructure Investment Affect Macroeconomic Performance? Evidence from Portugal

Abstract

We use the industry-specific effects of 12 different types of infrastructure investment in Portugal to highlight the mechanisms through which such investments affect economic activity. Our main findings are as follows: first, demand-side effects are over 60 per cent of total effects for airport investments, ports, refineries and water, and over 45 per cent for national roads, municipal roads, telecommunications, health and education. Second, site-location effects are also very significant, in particular for national roads, highways and railroads, with 30, 35 and 64 per cent of the total effects, respectively. Site-location effects are negative for water and electricity, and statistically insignificant for municipal roads, airports and refineries, and marginally positive for ports, that is, all these are cases in which we would expect adverse or small location effects. Third, the macroeconomic effects are driven primarily by the effects of these investments on non-traded goods and service industries. The functional channel relating to internationally traded goods is much less significant while the functional effect affecting non-traded industries is much more relevant as it accounts for more than 30 per cent of the effects in the cases of municipal roads, airports and refineries, and in excess of 20 per cent for highways, railroads, telecommunications, health and education. Naturally, these results cannot be automatically generalised, as the nature of the effects of infrastructure investments crucially depends on the level of development of the country in question, on the maturity of its existent infrastructure systems, and on the rigour of all decisions pertaining to infrastructure investment. Nevertheless, they establish that, as infrastructure investments are concerned, the dominance of virtuous supply-side effects is not a foregone conclusion and, conversely, the relevance of Keynesian effects cannot be dismissed. JEL Classification: C32, E22, H54, L90, L98, O52