Output Effects of Infrastructures in East and West German States

Abstract

This paper addresses the question if physical infrastructure and personnel infrastructure (i.e. human capital) are positively related to economic output. Relevant theoretical literature provides a variety of arguments concerning a positive impact of infrastructure endowment on economic out-put. First, infrastructure is a production input and raises productivity of firms or reduces their marginal costs. Second, an advanced and efficient infrastructure endowment is a competitive asset and helps to improve factor allocation. Third, the New Economic Geography points out that infrastructure has the potential to reduce disparities among regions by the diffusion of knowledge spillovers. Marginal output effects are likely to decrease, regarding an increasing infrastructure endowment. The effect will be negative if there is an overinvestment in physical infrastructure, as is the case for transport infrastructures in Germany. Empirical results concerning the relationship between physical infrastructure endowment and economic output are ambiguous. A shortfall of most infrastructure studies is their missing solution to the problem of endogeneity. This paper presents a way to address the problem of endogeneity more properly. Using data on 16 federal states in Germany an empirical analysis of infrastructural output effects based on a Panel Vector Autoregression Model (PVAR) is conducted for the period from 1993 to 2005. This analysis offers practical benefits for economic policy. With respect to the recently ratified economic stimulus package and the vast infrastructure investments of the last 20 years in East Germany it is fundamentally important to observe if the expansion of physical infrastructure will further contribute to economic growth and if the infrastructure endowment of East Germany causes larger output effects than they would in West Germany. As a result of this analysis the last question can be answered with yes. While total transport infra-structure (throughout all states) causes negative output effects and implies an overinvestment, transport infrastructures in East Germany have a positive impact. Contrarily, human capital causes larger output effects in West German than in East German States.