Transport Infrastructure and Macroeconomic Performance in European Countries

Abstract

The share of investment in transport infrastructure of the gross domestic product (GDP) has risen substantially in central and eastern European countries, and the effectiveness of public investment in transport infrastructure to improve economic performance is receiving increasing attention. This paper explores the dynamic impact of transport infrastructure on employment, GDP, exports, and industry production in European countries. With the use of data from 1995 to 2010, the paper analyzes the causality among variables in a dynamic panel framework. The results reveal that transport infrastructure and macroeconomic indicators are cointegrated and a significant unidirectional causal relationship exists from public investment in transport infrastructure to economic performance. The findings of this paper support the traditional notion that an increase in government spending on transport infrastructure contributes to economic growth. More specifically, the paper finds that transport infrastructure is a forcing variable of economic output and exports of European countries. Examination of the economic impacts of transport infrastructure between developed and developing economies shows that economic performance of central and eastern European countries is more sensitive to a change in investment in transport infrastructure than that of Western European countries. A major policy implication of these findings is that expanding transportation infrastructure could be an effective fiscal policy tool to boost economic performance of developing European economies.