Is Infrastructure Capital Productive?
A Dynamic Heterogeneous Approach

Abstract

An adequate supply of infrastructure services has long been viewed by both academics and policy makers as a key ingredient for economic development. This paper offers an evaluation of the contribution of infrastructure to real output. Drawing from a large data set of infrastructure stocks covering 88 countries and spanning the years 1960-2000, the paper’s empirical strategy is based on estimation of a long-run aggregate production function relating GDP to human capital, physical capital, and a synthetic measure of infrastructure given by the first principal component of infrastructure endowments in the power, transport and telecommunication sectors. Tests of the cointegration rank allowing for different dimensions of the cointegration space across countries reveal a common dimension with a single cointegrating vector, which we interpret as the long-run production function. The estimation of its parameters is performed using the pooled mean group (PMG) estimator (Pesaran et al. 1999), which allows for unrestricted short-run parameter heterogeneity across countries while imposing the (testable) restriction of long-run parameter homogeneity. The estimations show that the long-run elasticity of output with respect to the synthetic infrastructure index is around 0.10, and the marginal productivity of infrastructure exceeds that of other physical capital. These results are robust to the use of alternative dynamic specifications and infrastructure measures. Furthermore, homogeneity tests reveal little evidence of long-run parameter heterogeneity across countries, whether heterogeneity is unconditional, or conditional on the level of development, population size, or infrastructure endowments.

JEL Classification: H54, E23, O40.
Keywords: Infrastructure, Panel Cointegration, Parameter Heterogeneity.