The Direct Productivity Impact of Infrastructure Investment: Dynamic Panel Data Evidence From Sub Saharan Africa

19 September 2012
Publication Type: Working Paper

The paper aimed at isolating the direct productivity of economic infrastructure using a production function approach. Based on an extension of endogenous growth theory with public finance, infrastructure could have either a negative or positive effect on economic growth. The empirical analysis utilises a panel of 19 countries from Sub Saharan Africa (SSA). With SSA infrastructure being less developed both in terms of quantity and quality, the a priori expectation was that all types of infrastructure have a positive and signifcant e¤ect on aggregate income level. It is found that, like static estimation techniques, dynamic panel data (DPD) estimation techniques could also produce counterintuitive results if endogeneity of infrastructure is not accounted for. Positive and significant direct productive effects of infrastructure (total roads, electricity generation capacity, and telephones) were obtained using the Pooled Mean Group (PMG) estimator (a form of DPD analysis) after instrumentation for infrastructure. Representing infrastructure with an index constructed from the three infrastructure types also produced similar results. The results are confirmed with the use of the System General Method of Moments (SYS GMM) which constructs instruments for infrastructure using appropriate lags of the variables in first differences and in levels. Thus, it would appear that the negative and counterintuitive productivity results that are sometimes obtained in the literature could be partly due to limitations in methodologies that do not appropriately account for time varying fixed effects and the endogeneity of infrastructure in the economic growth process, especially for developing countries. Control variables for the macroeconomic environment and level of political and civil rights are also found to have a positive and significant effect on aggregate output.

Series title: Working Paper 048
1 March 2007
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