Abstract
The purpose of this paper is to incorporate the role of public infrastructure investment on economic takeoff process in underdeveloped and emerging economies in a dynamic general equilibrium model. We use a two-period overlapping generations model, and consider two types of technologies (traditional and modern) that are used to produce the final output of firms. This paper confirms that economic takeoff is possible only when the capital per labor unit exceeds a certain threshold level. Thus, the takeoff process depends on the productivity race between traditional and modern technologies with increasing public infrastructure investment, while public infrastructures foster the productivity of both technologies. Similarly, an effective tax rate supports the takeoff process by stimulating the wage rate which in turn increases the capital per labor along with the saving rates. Hence, we clarify the conditions required for succeeding in the takeoff of an economy. In addition, we review some empirical evidence related to the output elasticity of public infrastructures.
Highlights
It is widely recognized that infrastructure is a crucial ingredient of economic growth and development
The takeoff process depends on the productivity race between traditional and modern technologies with increasing public infrastructure investment, while public infrastructures foster the productivity of both technologies
An effective tax rate supports the takeoff process by stimulating the wage rate which in turn increases the capital per labor along with the saving rates
Summary
It is widely recognized that infrastructure is a crucial ingredient of economic growth and development. The difference is that East Asia and the Pacific region is near to get the position of the middle-income region, while South Asia is not These situations significantly validate the role of infrastructure investment for expelling countries out of poverty and leading into a new era of development. Industrialization, modernization and infrastructure development have been historically taken as the attributes of the take-off stage.3 These studies elaborated only the basic features of takeoff but the role of public capital in the process has not been shown precisely. In line with Galor and Moav (2004), this paper primarily investigates the role of public infrastructure capital on the takeoff process.6 Taking this into account, this paper develops an overlapping-generations (OLG) model for evaluating the possibility of takeoff in underdeveloped and emerging economies.
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