public infrastructure investment and economic growth a study at lang giang district

i

MINISTRY OF FINANCE
ACADEMY OF FINANCE
FACULTY OF FOREIGN LAGUAGES
------------------

GRADUATION THESIS
PUBLIC INFRASTRUCTURE INVESTMENT AND
ECONOMIC GROWTH. A STUDY AT LANG GIANG
DISTRICT

NGUYỄN THỊ HẠNH
CQ47/51.03

Hanoi 2013
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


ii

MINISTRY OF FINANCE
ACADEMY OF FINANCE
FACULTY OF FOREIGN LAGUAGES
------------------

PUBLIC INFRASTRUCTURE INVESTMENT AND ECONOMIC
GROWTH. A STUDY AT LANG GIANG DISTRICT

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS
FOR THE DEGREE OF BACHELOR OF ARTS IN ENGLISH FOR
FINANCE & ACCOUNTING

Student: Nguyen Thi Hanh
Class: CQ47/51.03
Supervisor: MA. Truong Thi Minh Hanh

Hanoi 2013
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


i

DECLARATION
Signed hereby, certify hereby that that is my own research. The content
and figures presented in the thesis reflected a fair and true situation of the
internship organization.
Hanoi, April, 27th 2013

Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages

ii

ABSTRACT
This paper attempted to investigate the impact of public infrastructure
investment on economic growth in Lang Giang. The paper also utilized threestage least squares technique to capture the transmission channels through which
public infrastructure promote growth. The research covered 3 years (2010, 2011
and 2012). The finding shows that infrastructure investment has a significant
impact on growth of the economy directly through increasing in GDP and
productivity, indirectly through improving the competitiveness of economy. The
results also show the management of investment in public infrastructure at
district authorities. The paper recommended increased investment in
infrastructure. Also, the financing options for closing Lang Giang’s
infrastructure gaps should focus on broadening of finance and a better allocation
of public resources.

Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


iii

ACKNOWLEDGEMENT
I would like to express my sincere gratitude to my supervisor, Mrs.
Truong Thi Minh Hanh. She gave me her valuable advices and kindly directions.
Her wide understanding, logical way of thinking and personal guidance provide
me a good basic for my thesis.
I am deeply grateful Mr. Dang Van Them, director of Division Of Finance
And Planning at Lang Giang district; Mrs. Nguyen Thi Kim Thoa, Vice-director

of Division Of Finance And Planning at Lang Giang district; Mrs. Nguyen Thi
Hien, the investing officer and Mr. Nguyen Tuan Anh, the budgeting officer of
Division Of Finance And Planning at Lang Giang district for giving chance to
work with them and facilitating me in the internship period.
I warmly thank to my family and my friends who have supported me in
completing my thesis. Their encouragement and knowledge offset and complete
my lack of understanding.
Without their support, I could not finish my own research.

Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


iv

LIST OF TABLES
Table 2.1: Capital for infrastructure development from the budget for the
peoriod 2010-2012 in Lang Giang district...........................................................25
Table 2.2: Structure investment in the infrastructure in sectors .........................26
Table 2. 3: GDP of Lang Giang district during 3 years: 2010, 2011, 2012........29
Table 2. 4: ICOR of Lang Giang in the peoriod 2010-2012...............................30
Table 2.5: The production capacity of a number of products Lang Giang district.
..............................................................................................................................34

Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages

v

LIST OF ABBRIVIATIONS
GDP

: Gross Domestic Product

GNP

: Gross National Product

DPC

: District People’s Committee

WB

: World Bank

OECD

: Organization for Economic Cooperation and Development

TFP

: Total Factor Productivity

ODA

: Official Development Assistance

PPP

: Public Private Partnership

BT

: Build -Transfer

BOT

: Build - Operate - Transfer

ICOR

: Incremental Capital Output Ratio

Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


vi

TABLE OF CONTENTS
DECLARATION ............................................................................................ i
ABSTRACT................................................................................................... ii

ACKNOWLEDGEMENT ............................................................................ iii
LIST OF TABLES........................................................................................ iv
LIST OF ABBRIVIATIONS..........................................................................v
TABLE OF CONTENTS.............................................................................. vi
INTRODUCTION ..........................................................................................1
CHAPTER 1: LITERATURE REVIEW ..............................................................3
1.1. Public infrastructure .......................................................................................3
1.1.1.Definition ...............................................................................................3
1.1.2.Types......................................................................................................4
1.2. The economic growth.....................................................................................5
1.2.1.The definition.........................................................................................5
1.2.2.The economic growth and the economic development ........................5
1.2.3.Measurement of economic growth ........................................................6
1.3. The relationship between the public infrastructure investment and the
economic growth ...................................................................................................9
1.3.1.Increase in GDP ...................................................................................10
1.3.2.Rise in market productivity..................................................................13
1.3.3.Improvement in the regional competitiveness....................................19
CHAPTER 2: THE STUDY ..............................................................................20
2.1. Brief introduction about Langgiang district.................................................20
2.1.1.Geographical location and potentially economic development .........20
2.1.2.The structure of Lang Giang DPC .....................................................21
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


vii

2.1.3.Lang Giang Division Of Finance and Planning ................................23
2.1.3.1. .The structure of Lang Giang Division Of Finance And Planning
............................................................................................................23
2.1.3.2. . The duties and powers of Lang Giang Division of Finance and
Planning ..................................................................................................23
2.1.3.2.1.Economic planning and investing ...................................23
2.1.3.2.2.Managing revenues and expenditures .............................24
2.1.3.2.3.Managing price ................................................................24
2.2. Investment in the public infrastructure of Langgiang in period 2010-201224
2.3. The impacts of the public infrastructure investment on the economic ........28
2.3.1. The public infrastructure development contributes to increase in
GDP of Langgiang ...................................................................................28
2.3.2. The public infrastructure development contributes to rise in market
productivity .................................................................................................31
2.3.3. The public infrastructure development contributes to improve the
competitiveness of Langgiang.....................................................................35
2.4. Mini conclusion............................................................................................36
CHAPTER III: RECOMMENDATIONS..........................................................38
3.1. The development orientation .......................................................................38
3.1.1. Developing infrastructure of transport ..............................................38
3.1.2. Developing infrastructure of power supply ......................................39
3.1.3. Developing infrastructure of irrigation and coping with climate
change..........................................................................................................40
3.1.4. Developing urban infrastructure .......................................................40
3.1.5. Developing infrastructure of industrial parks and economic zones..41
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Faculty Of Foreign Langguages

viii

3.1.6. Developing commercial infrastructure..............................................42
3.1.7. Developing infrastructure of information sector...............................42
3.1.8. Developing infrastructure of education and training, science and
technology ...................................................................................................43
3.1.9. Developing infrastructure of health sector........................................44
3.2. Some suggestions for enhancing the effectiveness of the investment in the
public infrastructure ............................................................................................45
3.2.1. Improving the quality of construction and implementing the plan of
public infrastructure development..............................................................45
3.2.2. Using effectively capital to develop infrastructure systems ............46
3.2.3. Improving effectiveness and efficiency of state management of
infrastructure investment.............................................................................48
3.3. Proposals ......................................................................................................49
3.3.1.Proposals to the State .........................................................................49
3.3.2.Proposals to the Lang Giang DPC and relevant agencies..................50
CONCLUSION ...................................................................................................51
REFERENCE ......................................................................................................52
APPENDIX........................................................................................................53

Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


1

INTRODUCTION
Rationale
Public infrastructure investment is the government spending for basic physical
and organizational structures needed for the operation of a society or
enterprise, or the services and facilities necessary for an economy to function.
The public infrastructure development plays a major role in promoting growth
and equity and through both channels helps to reduce poverty. Especially, the
public investment in infrastructure has impacts on the economic growth as:
creating the jobs, enhancing the economy’s performance, improving the
economy’s competitiveness…This study examines the relationship between the
public infrastructure development and the economic growth at the level of region
- Lang Giang district. This dissertation provides the readers an opportunity to
review the effects of the public infrastructure investment on the economic
growth of Lang Giang’s economy.
Aims of the study
The aim of this dissertation is to assess the importance of public infrastructure
investment in Lang Giang and how this has impacts on the long-term sustainable
growth of the Lang Giang economy given the current economic constraints.
Scope of the study
Because of the limited time and the scale of the research, and for the
thoroughness of what is done, this research only focuses on the public
infrastructure investment made by Lang Giang district over a period of 3 years
(2010, 2011, 2012) and its impacts on the economic growth in the town.
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


2

The study attempts to answer the following questions:
 How has the public infrastructure investment contributed to increase in
GDP and improved the competitiveness of Lang Giang over a period of
3years (2010, 2011, and 2012)?
 What should Lang Giang do in order to enhance the effectiveness of
investment in the public infrastructure?
Methodology
Relevant literature, publications and studies are reviewed in order to get in-depth
information on the relationship between public infrastructure investment and
economic growth. The study employs a combination of questionnaires, telephone
interviews and face-to-face discussion to gather information for analysis.
Organization of the study
Apart from the INTRODUCTION, CONCLUSION, REFERENCES and
APPENDIXES the research paper is divided into three chapters as follows
Chapter 1 LITERATURE REVIEW:

This chapter gives a general

overview of public infrastructure investment, economic growth and their
relationship to form the theoretical framework.
Chapter 2 THE ACTUAL STUDY on the relationship between the public
infrastructure development and economic growth at Lang Giang.
Chapter 3 RECOMMENDATIONS: This chapter summarizes the
findings of the study and suggestions for Lang Giang development orientation
and the solutions.
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages

3

CHAPTER 1: LITERATURE REVIEW
1.1. Public infrastructure
1.1.1. Definition
Public infrastructure is basic physical and organizational structures needed for
the operation of a society or enterprise, or the services and facilities necessary
for an economy to function. It can be generally defined as the set of
interconnected structural elements that provide framework supporting an entire
structure of development. It is an important term for judging a country or
region's development.

The term typically refers to the technical structures that support a society, such
as roads, bridges, water supply, sewers, grids, telecommunications, and so forth,
and can be defined as "the physical components of interrelated systems
providing commodities and services essential to enable, sustain, or enhance
societal living conditions."

Viewed functionally, infrastructure facilitates the production of goods and
services, and also the distribution of finished products to market, as well as basic
social services such as schools and hospitals; for example, roads enable the
transport of raw materials to a factory. In military parlance, the tern refers to the
buildings and permanent installations necessary for the support, redevelopment,
and operation of military forces. To make it simple, infrastructure in anything
that is needed every day, an everyday item.
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03

Faculty Of Foreign Langguages


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1.1.2. Types
The public infrastructure is divided into two types. They are hard public
infrastructure and soft public infrastructure. In this article, "hard" public
infrastructure refers to the large physical networks necessary for the functioning
of a modern industrial nation, whereas "soft" public infrastructure refers to all
the institutions which are required to maintain the economic, health, and cultural
and social standards of a country, such as the financial system, the educational
system, the health, the system of government, and law enforcement, as well
as emergency services.

Infrastructure

systems

include

both

the fixed

assets,

and

the control

systems and software required to operate, manage and monitor the systems, as
well as any accessory buildings, plants, or vehicles that are an essential part of
the system. Also included are fleets of vehicles operating according to schedules
such as public transit buses and garbage collection, as well as basic energy or
communications facilities that are not usually part of a physical network, such
as oil refineries, and television broadcasting facilities.
Soft infrastructure includes both physical assets such as highly specialized
buildings and equipment, as well as non-physical assets such as the body of rules
and regulations governing the various systems, the financing of these systems, as
well as the systems and organizations by which highly skilled and specialized
professionals are trained, advance in their careers by acquiring experience, and
are disciplined if required by professional associations (professional training,
accreditation and discipline).
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


5

Unlike hard infrastructure, the essence of soft infrastructure is the delivery of
specialized services to people. Unlike much of the service sector of the economy,
the delivery of those services depend on highly developed systems and large
specialized facilities or institutions that share many of the characteristics of hard
infrastructure.
1.2.The economic growth
1.2.1. The definition
Economic growth is the increase in the amount of the goods and services

produced by an economy over time. It is conventionally measured as the percent
rate of increase in real gross domestic product, or real GDP. Growth is usually
calculated in real terms, i.e. inflation-adjusted terms, in order to obviate the
distorting effect of the inflation on the price of the goods produced. In economy,
"economic growth" or "economic growth theory" typically refers to growth
of potential output, i.e., production at "full employment".

As an area of study, economic growth is generally distinguished from economic
development. The former is primarily the study of how countries can advance
their economies. The latter is the study of the economic aspects of the
development process in low-income countries.
1.2.2. The economic growth and the economic development
Economic development generally refers to the sustained, concerted actions
of policymakers and communities that

promote

the standard

of

living

and economic health of a specific area. Economic development can also be
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages

6

referred to as the quantitative and qualitative changes in the economy. Such
actions

can

capital, critical

involve

multiple

areas

including

infrastructure, environmental

development

of human

sustainability, social

inclusion, health, safety, literacy, and other initiatives. Economic development
differs from the economic growth. Whereas the economic development is
a policy intervention endeavor with aims of economic and social well-being of
people, economic growth is a phenomenon of market productivity and rise
in GDP. Consequently, as economist Amartya Sen points out: “economic growth

is one aspect of the process of economic development.”
1.2.3. Measurement of economic growth
Economic growth is measured as a percentage change in the Gross Domestic
Product (GDP) or Gross National Product (GNP). These two measures, which
are calculated slightly differently, total the amounts paid for the goods and
services that a country produced. As an example of measuring economic growth,
a country which creates $9,000,000,000 in goods and services in 2011 and then
creates $9,090,000,000 in 2012, has a nominal economic growth rate of 1% for
2012.

In order to compare per capita economic growth among countries, the total sales
of the respected countries may be quoted in a single currency. This requires
converting the value of currencies of various countries into a selected currency,
for example U.S. dollars. One way to do this conversion is to rely on exchange
rates among currencies. Another approach is to use the purchasing power
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Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


7

parity method. This method is based on how much consumers must pay for the
same "basket of goods" in each country.

The inflation or the deflation can make it difficult to measure economic growth.
If GDP, for example, goes up in a country by 1% in a year, was this due solely to
rising prices (inflation), or because more goods and services were produced and
saved? To express real growth rather than changes in prices for the same goods,

statistics on economic growth are often adjusted for inflation or deflation.

There are at least three different ways to measure growth of real GDP. It is
important to know which is being used, and to understand the differences among
them. The three most common ways to measure real GDP are:


Quarterly growth at an annual rate



The four-quarter or "year-over-year" growth rate



The annual average growth rate

Quarterly growth at an annual rate shows the change in real GDP from one
quarter to the next, compounded into an annual rate. (This process is often called
"annualizing.") For example, in the second quarter of 2012, the economy grew
0.1 per cent from the first quarter. If the economy had grown at that pace for an
entire year, the annual growth would be 0.4 per cent. So the quarterly growth at
an annual rate was reported at 0.4 per cent.
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


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This measure is often used by the media. It does a good job of showing recent
economic developments. But it also tends to be volatile. This is because the
effects of any one-time-only factors during the quarter, labor disputes for
example, become compounded when the rate is annualized.
The four-quarter, or "year-over-year" growth rate, compares the level of
GDP in one quarter to the level of GDP in the same quarter of the previous year.
For example, in the second quarter of 2012, GDP was 2.1 per cent above that in
the second quarter of 2011. This measure is popular among businesses, who
generally present their own quarterly earnings results on that basis to avoid
seasonal variations.
The year-over-year growth rate tends to be somewhat less volatile than quarterly
growth at an annual rate. That is because the effect of any special factors does
not get compounded. But it is also less timely, since it looks at what happened to
the economy over the entire previous year, not just the past three months.
Finally, the annual average growth rate is the average of year-over-year
percentage changes reported during a year. The November Monetary Policy
Report indicates that the Bank expects the annual average growth rate for 2012
to be about 1.5 per cent. For the first half of 2012, the year-over-year growth
rates as published by Statistics are 2.5 per cent in the first quarter and 2.1
per cent in the second quarter. For the third and fourth quarters, a profile that is
consistent with the expectations described in the November Report (say -0.5 per
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


9

cent and 0 per cent, respectively at annual rates) yields year-over-year growth of
0.9 per cent in the third quarter and 0.5 per cent in the fourth quarter. Averaging
the four year-over-year growth rates in 2012 gives the annual average growth
rate of 1.5 per cent.
Each measure has strengths and weaknesses. But mixing up the measures can
lead to results that may look confusing at first glance.
1.3.The relationship between the public infrastructure investment and the
economic growth
World Bank (WB) research has examined this issue from several angles. Recent
research shows that every 10 percent increase in infrastructure provision
increases output by approximately 1 percent in the long term. Improved
infrastructure quality accounted for 30 percent of growth attributed to
infrastructure in developing countries. The impact on growth varies by country.
In Egypt, for example, an increase in infrastructure expenditures from 5 to 6
percent of Gross Domestic Product would raise the annual GDP per capita
growth rate by half a percent in a decade’s time.

For the World Bank Chief Economist Justin Lin, a global infrastructure initiative
is needed as a growth-lifting strategy. Scaling up infrastructure investment in
developing countries can help generate a virtuous cycle in support of a global
recovery. These investments require capital goods, many of which are produced
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Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


10

in advanced economies, and can help support their manufacturing sector. In

addition, as growth in developing countries is lifted, their demand for products
produced in advanced economies would increase further, possibly triggering a
virtuous circle of mutually reinforcing growth.

A strategy for global growth must fully engage developing countries that have
been the engine of global demand. Channeling surplus global savings to growthenhancing investments in developing countries, especially in infrastructure,
would promote development but also have positive spillovers for global growth
and rebalancing.
1.3.1. Increase in GDP
Over the last 30 years there have been various economic models developed to
help in the research of the impact of infrastructure investment on the economy.
The in-depth empirical studies have mainly utilized macro-economic level data,
which includes cross-state and cross-country data. (Straub, 2007) Edinburgh
paper
According to the studies carried out by Aschauer (1989) he states that when
analyzing the importance of public investment to the economic growth, added
weight must be attributed to the public investment decisions made by the
Government. Furthermore, the study indicates increased growth in the economy
by investing in areas such as highways, sewers, streets, and water systems.

Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


11

To ascertain these findings, Aschauer took the average annual growth rates of
total factor productivity and the non-military public capital stock in America

over the period 1950-1985; Aschauer’s data indicated a close relationship
between level of investment in non-military infrastructure and growth.
Further research in the United States carried out by Munnell (1990) analyzed the
impact of the stock of public capital on economic activity at the regional and
state levels. In conclusion, Munnell found that the US states that had invested in
infrastructure had greater output, increased levels of private investment, and high
levels of employment growth.
The study highlighted above, Aschuer (1989) estimated an elasticity of output
with respect to public infrastructure capital in the United States during 19501985 of between 0.38 and 0.56. These results have been shown to be
econometrically suspected and subsequent work suggests the elasticity is much
smaller. The average elasticity across OECD countries for the period 1960-2001
has recently been estimated to be 0.2 (Kanps, 2004). Aschauers paper has,
however, proved very fruitful in terms of subsequent research, which it
stimulated. (Crafts & Leunig, 2005)
A number of empirical studies have looked at the relationship between all public
infrastructure investment and GDP growth. On average these studies seem to
indicate a positive elasticity of output to public capital of around 0.20. Put
another way, a ten per cent increase in public capital stock increases GDP by
around 2 per cent. (Eddington report 2006)
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


12

The Eddington report suggests that there are limitations to these empirical
studies and the results should be viewed with caution. OECD (2003) argues that
early empirical work on the link between infrastructure investment and economic

performance overstated the magnitude of the impact on GDP and productivity
growth (The sources of economic growth in OECD countries, OECD, 2003) In
particular, studies that focus on public investment in capital and infrastructure in
a broad sense, rather than on transport specifically, do not really distinguish
between types of investment in terms of new build, upgrade, maintenance etc
although some do make specific conclusions about the value of transport
infrastructure investment.
Later studies using more complex modeling suggest a positive, albeit weaker
relationships between infrastructure and GDP. These include: Kocherlakota and
Yi (1997), Demetiades and Mamuneas (2002), O’Fallon (2003), and Nijkamp
and Poot (2004).
In 1993, Easterly and Robero carried out further research to expand on the work
in this field. Called Fiscal Policy and Economic Growth: An Empirical
Investigation, it details several conclusions that support the findings expressed
by Aschauer’s research in 1989. It tackled areas such as the rate of growth and
the level of development by employing historical data and recent cross-section
data.
The main findings outlined that there is a strong relationship between a countries
fiscal structure and the development level and that investment levels in
communication and transport is consistently correlated with growth. This
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


13

therefore indicates that infrastructures are important in the economic prosperity
of a nation (Easterly, Robelo 1993). Put in reference Eisner (1991) highlighted

that public infrastructures not only serve as an intermediate good in physical
goods production, they can also be final consumption goods. For example, water
and sewage systems benefit environment, better transportation saves time spent
on travelling, public parks give people pleasure, etc. Canning, Fay, and Perotti
(1994) found substantial effects of physical infrastructure on economic growth
based on the international data set.
The strategy for national infrastructure also states, “The majority of empirical
research indicates that there is positive relationship between infrastructure and
economic growth” (strategy for national infrastructure, 2010).
1.3.2. Rise in market productivity
Economists have viewed infrastructure as a key ingredient for productivity and
growth since at least Adam Smith. Conceptually, infrastructure may affect
aggregate output in two main ways: first, directly because infrastructure services
enter production as an additional input, and second, because they raise total
factor productivity by reducing transaction and other costs thus allowing a more
efficient use of conventional productive inputs.

How big is the contribution of infrastructure to aggregate economic
performance? The answer is critical for many policy decisions – for example, to
gauge the growth effects of fiscal interventions in the form of public investment
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Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


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changes, or to assess if public infrastructure investments can be self-financing.
The empirical literature aimed to offer such quantitative assessments took off

with the seminal work of Aschauer (1989) on the effects of public infrastructure
capital on U.S. total factor productivity (TFP). Using time-series data, he found
an extremely (and, for most observers, implausibly) large effect.

Subsequent empirical research has employed a variety of data, empirical
methods and infrastructure measures. The approaches most frequently used
involve the estimation of (i) a production function (or its dual, the cost function)
defined at a suitable level of aggregation (national, regional, etc), including
measures of infrastructure along with conventional productive inputs, and (ii)
empirical growth equations, relating output or productivity growth to different
indicators of infrastructure performance together with other controls, typically in
a cross-country (or cross-state or province) setting. For these exercises,
infrastructure is variously measured in terms of physical stocks (e.g., km of
roads or number of telephone lines) or pecuniary stocks constructed by
accumulating spending flows. The underlying assumption is that the flow of
productive infrastructure services is directly related to the size of the stock of
infrastructure assets, analogously to what is routinely assumed about the services
of human and physical capital.

For the most part, this literature focuses on quantifying the impact of
infrastructure on aggregate performance, and is silent about the specific channels
Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages


15

through which the impact occurs. Its findings are far from unanimous, but a

majority of studies reports a significant positive effect of infrastructure on output,
productivity, or their growth rate. This is mostly the case with studies using
physical measures of infrastructure stocks; in contrast, results are less conclusive
among studies using pecuniary measures such as public investment flows or their
accumulation into public capital. There is a good reason for this, namely the lack
of a close correspondence between public capital expenditure and the
accumulation of public infrastructure assets or the provision of infrastructure
services, owing to inefficiencies in public procurement and outright corruption –
issues that are likely more important in developing economies than in more
advanced ones (Pritchett 2000).

Empirical estimates of the magnitude of infrastructure’s contribution display
considerable variation across studies. Overall, however, the recent literature
tends to find smaller (and more plausible) effects than those reported in the
earlier studies (Romp and de Haan 2007), likely as a result -- at least in part – of
improved methodological approaches. Thus, in a production-function setting, the
mid-point estimate from recent studies of the elasticity of GDP with respect to
infrastructure capital lies around 0.15 for developed countries (Bom and Ligthart
2009). This means that a doubling of infrastructure capital raises GDP by
roughly 10 percent. Estimates from recent studies using broader country samples
are not very different. However, this captures only the direct effect of
infrastructure on output, given the use of other productive inputs; there may be

Supervisor: MA Truong Thi Minh Hanh

Nguyen Thi Hanh, 47/51.03
Faculty Of Foreign Langguages