By: Alicia H. Munnell and Leah M. Cook
Abstract
This paper is a consideration of an article authored in 1990 by Munnell A. and Cook L.in the Journal titled How Does Public Infrastructure Affect Regional Economic Performance. The article evaluates the relationship between public capital investments and private economic activity. This analysis is done by investigating the effect of public capital on output, employment growth, and private investment within the country and at the regional level. Firstly, the paper addresses the development of the data used and its distribution by state or region. Secondly, the paper evaluates whether the positive relationship between output and public capital holds up for individual states and regions. Lastly, the analysis examines whether variations in public capital by the state have had any effect on state-by-state employment growth.
The Problem Addressed
This study aims at showing the relationship between public infrastructure and the performance of the regional economy in a country[1]. The paper seeks to investigate the economist’s claims that investments in the public capital have a direct contribution to national productivity, growth, and global competitiveness. The economist’s conclusions were based on observed cycles of a country’s spending on public infrastructure and various measures of economic performance. However, some critics had cautioned the experimental work had made the comparison between public investments and a country’s output to be obscure.
For this paper to establish the correlation between public capital and economic growth, data has to be collected for the analysis. Firstly, the initial issue to be addressed is the estimate of the public and private wealth by state and region. In spite of the availability of data published by the U.S. Bureau of Economic Analysis since 1925, this information had been left out in the analysis of national productivity. Secondly, the role of public infrastructure investment in the production process has to be investigated. This investigation involves the building of mathematical models to establish the relationship. Lastly, the impact of the public infrastructure on private investments has to be created. The impact can be regarding private investment growth in a particular period. This relationship can also be concerning the relationship between public capital and the creation of employment or the establishment of new businesses.
Methodology Used
This paper mainly relies on previous research done on the significance that public capital investments have on national productivity. In the late 1980s, the failure of public infrastructure such as bridges ignited debates around the national capital investment policies in the United States. At the same time, economists asserted that public infrastructure development had a recognizable contribution to the country’s output. One of the economists is Aschauer[2] who based his conclusions on observed trends in national investments in public infrastructure and the various indicators of economic performance.
The study uses an empirical analysis since there is a lack of a certain measure of public infrastructure available at the state level. This article is focused on exploring the influence of public capital on output, employment growth, and private investment at the state and regional levels. Firstly, the study concentrates on the building of data that shows the distribution of the wealth indicators by state and region. The paper goes further to utilize this data to formulate a production function, which is used to establish the positive relationship between output and public capital documented at the state level. The production function seeks to determine whether the relationship between output and public capital is the same for both the state and regions. Eventually, the paper explores the correlation between public investments and private investments by determining the extent of their effects on the nation’s productivity.
Author’s Main Conclusion
The author’s most important conclusion in this article was that the states and regions that have invested heavily in infrastructure are usually associated with higher outputs in productivity. These areas have also been observed to be associated with more private investments and higher growth in employment. The author’s conclusion on this topic is also supported by the results from other studies that had been done earlier. The experimental study has also shown that public infrastructure is a requirement for the economic activities in a country to pick up. The study also suggests that apart from the earlier studies that show the relationship between public investments and the performance of the economy, much more has to be done to link the two in every economy-related policy in various states in the country.
Articles Citing this Article
The National Research Council of the U.S. has cited this study in the report titled “Macroeconomic analysis of the linkages between transport investments and public performance”[3]. This research report shows an improvement of the methodology employed by Alicia Munnell in this paper to estimate the level of public investments in a particular country. The study applies the FHWA evaluation method, which is an improvement of the methodology used in this paper and is based on data that has been accumulated over an extended period to apply the PIM of accumulated past investments. The methods utilized in this article mix data from various sources other than those provided by the state.
This paper has also been cited in the works of César Calderón and Luis Servén[4] titled “The effects of infrastructure development on growth and income distribution”. This cited paper supports the empirical methodology adopted in this article that shows a positive impact on infrastructure leads to an improved aggregate in the national output. The report indicates that there is a large output effect of telecommunications infrastructure in the industrial nations. This large output is supported by a policy that controls for the possible similarity of infrastructure accumulation.
Assessment of Significance
The improvements to infrastructure, which include road networks, air transport, railways, ports, and logistics result to increased trade flows. The increased trade flows are due to the reduced distances between regions and the integration of national markets. The economies that have adequate and efficient infrastructure services have higher productivity growth than those with poor and inefficient infrastructure services[5].
This paper shows that a country that has invested in infrastructure has the potential for higher economic growth than a country with less public capital investments. The quality of infrastructure is as important as the quality. The poorly performing infrastructure may create obstacles for economies to meet their full growth potential[6]. The conclusions in this paper confirm that the quality of infrastructure is vital to economic prosperity. However, the creation of quality public capital performs better in creating efficient output and thus has greater impacts on sustainability in economic growth.
References
- Aschauer, David Alan. 1988. Does public capital crowd out private capital? Chicago: Research Dept., Federal Reserve Bank of Chicago.
- César Calderón, Luis Servén. 2004. The effects of infrastructure development on growth and income distribution. Washington D.C.: World Bank Publications.
- Ismail, Normaz Wana, and Jamilah Mohd Mahyideen. 2015. The impact of infrastructure on trade and economic growth in selected economies in Asia. Tokyo: Tokyo Asian Development Bank Institute.
- Munnell, Alicia Haydock, and Leah M Cook. 1990. “How does public infrastructure affect regional economic performance?” Is there a shortfall in public capital investment? Massachusetts: Federal Reserve Bank of Boston. 12-33.
- National Research Council, Transportation Research Board. 1997. Macroeconomic analysis of the linkages between transportation investments and economic performance. Research, Washington, D.C.: National Academy Press.
- World Bank. 2014. World development indicators 2014. Washington D.C.: World Bank Publications.
- Munnell, Alicia Haydock, and Leah M Cook. 1990. “How does public infrastructure affect regional economic performance?” Is there a shortfall in public capital investment? Massachusetts: Federal Reserve Bank of Boston. 12-33.
- Aschauer, David Alan. 1988. Does public capital crowd out private capital? Chicago: Research Dept., Federal Reserve Bank of Chicago.
- National Research Council, Transportation Research Board. 1997. Macroeconomic analysis of the linkages between transportation investments and economic performance. Research, Washington, D.C.: National Academy Press.
- César Calderón, Luis Servén. 2004. The effects of infrastructure development on growth and income distribution. Washington D.C.: World Bank Publications.
- World Bank. 2014. World development indicators 2014. Washington D.C.: World Bank Publications.
- Ismail, Normaz Wana, and Jamilah Mohd Mahyideen. 2015. The impact of infrastructure on trade and economic growth in selected economies in Asia. Tokyo: Tokyo Asian Development Bank Institute.