Abstract
This study investigates the relationship between infrastructure investment and economic growth at the aggregate and sectoral levels, namely, the industrial, agriculture, and services sectors for Pakistan over the period from 1972 to 2015. In contrast to earlier literature, we make a comparative analysis of the different composition of infrastructure investments, including public versus private investment and infrastructure investment in sub-sectors such as in power, roads, and telecommunication sectors. The long-run relationship is estimated using fully modified ordinary least squares (FMOLS) to address the problem of reverse causality. The main conclusion of this study is that both public and private infrastructure investments have positive but different effects on economic growth. In other words, the marginal productivities of private and public infrastructure investments differ across the different sectors of the economy. In most of the cases, public infrastructure investment has a larger impact on economic growth than private infrastructure investment. Two important policy implications emerge from this study, as follows: (1) The different elasticity estimates can be used by policy makers to quantify the impact of policies targeted at the specific sector and (2) the government should develop an enabled policy environment to attract private investment, with the consideration of structural characteristics of the various sectors. The involvement of the private sector in the provision of infrastructure would help to control the tight budgetary situation.
Highlights
The economic impact of infrastructure has been at the center of the academic and policy debate for the last three decades
The remainder of the paper is structured along the following lines: In Section 2, we present a theoretical relationship between infrastructure and economic growth
The analysis of the data started with augmented Dickey–Fuller (ADF) and Phillips–Parron (PP) unit root tests
Summary
The economic impact of infrastructure has been at the center of the academic and policy debate for the last three decades. A well-functioning system of infrastructure reduces transaction costs and facilitates the mobility of goods and labor and the realization of economies of scale. Investment in public sector infrastructure affects the overall economic development through a number of channels [1]. These include, (1) that direct investment in economic infrastructure facilitates the production process and stimulates economic activities in the country, (2) it improves competitiveness by reducing transaction and trade costs, and (3) it generates employment opportunities to the poor [2]. The relationship between infrastructure investments and economic growth seems to vary across countries, as well as within different sectors of the economy
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