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Journal of Economic Research

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Research Article

IMPACT OF INFRASTRUCTURE ON ECONOMIC GROWTH OF


PAKISTAN
Armughana Tanveer1, Natasha Manan1
1
Department of Economics, University of Gujrat, Pakistan

Correspondence should be addressed to Natasha Manan

Received July 30, 2015; Accepted October 01, 2015; Published February 23, 2016;

Copyright: 2016 Armughana Tanveer et al. This is an open access article distributed under the Creative
Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium,
provided the original work is properly cited.

Cite This Article: Tanveer, A., Manan, N.(2016). Impact of Infrastructure on Economic Growth of Pakistan. Journal
of Economic Research, 2(1).1-12

ABSTRACT

The paper investigates the impact of infrastructure on economic growth of Pakistan using Jarque-Berra, White test and
Breusch-Godfrey techniques for the period (1974-2011). Overall the result reveal that Gross Domestic Product, Gross Fixed
Capital Formation, Per Capita Health Expenditures, Total generation of electricity (Hydel + Thermal + Nuclear),Total Road
Lengths ,Total Telephone Lines and CPI play an important role in economic growth in Pakistan. More importantly the
study finds that infrastructure development in Pakistan has significant positive contribution to growth. The experience from
Pakistan suggests that it is necessary to design an economic policy that improves the infrastructure as well as gross fixed
capital formation for sustainable economic growth in developing countries.

KEYWORDS: Gross Domestic Product, Gross Fixed Capital Formation, Per Capita Health Expenditures, Total generation
of electricity, Total Road Lengths ,Total Telephone Lines

INTRODUCTION nations who witness more and more low rates of return on
such infrastructure investments.

I nfrastructure is basic physical and organizational


Nevertheless, infrastructure yields indirect benefits through
the supply chain, land values, small business growth,
structures needed for the operation of a society consumer sales, and social benefits of community
or enterprise or the services and facilities necessary for development and access to opportunity. The most
an economy to function. It can be generally defined as the common classification of developing countries is based on
set of interconnected structural elements that provide economic indicators such as the Gross National Product
framework supporting an entire structure of development. per Capita. Income is indeed an important distinguishing
It is an important term for judging a country or regions criterion with the respect of development issue. Low-
development. Investment in infrastructure is part of income levels show a high correlation with among others,
the capital accumulation required for economic high population growth rates, high infant mortality rates,
development and may have an impact on socioeconomic high total fertility and low life expectancy. However it 1
measures of welfare. The causality of infrastructure and should be noted that the average, says nothing at all about
economic growth has always been in debate. In developing the distribution of income within a country. Transport
nations, expansions in electric grids, roadways, and infrastructure investment lead to changes in generalized
railways show marked growth in economic development. transport costs, via shorter distances or high speeds, which
However, the relationship does not remain in advanced give rise to reductions in fuel, capital, and labor costs. Such

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changes will have impacts in the transport system in the integration. The focus is on price convergence and changes
form of mode choice, choice of time of day and the in the relative price of factors along the lines predicted by
generation and attraction of trips per zone. It is widely trade models. Their results suggest that transportation
believed that the reduction in generalized transport costs infrastructure favors greater price convergence and that
lead to an increase in productivity in firms. However it is factor prices shift in the direction as predicted by trade
not always clear if the firms located in the investing theory. Sahoo, Natraj and Dash (2010) investigate the role
country, province, district or other geographical area will of infrastructure in promoting the economic growth in
benefit from the improved transport system. We investigate China. Overall results reveal that infrastructure stock, labor
how telecommunications infrastructure affects economic force, public and private investments have played an
growth. This issue is important and has received important role in economic growth in China. More
considerable attention in the popular press concerning the importantly they find that infrastructure development in
creation of the "information superhighway" and its China has significant positive contribution to growth than
potential impacts on the economy. Telecommunications both positive and public investments. Further they check
infrastructure investment can lead to economic growth in the unidirectional casualty from infrastructure to economic
several ways. Most obviously, investing in growth that justifying the high spending by China on
telecommunications infrastructure does itself lead to infrastructure development. Fontenla and Noriega (2005)
growth because its products cable, switches, etc. lead to studied the impact of public infrastructure on output level
increases in the demand for the goods and services used in in Mexico and also check the optimality with which the
their production. In addition, the economic returns to level of infrastructure have been set. They are basically
telecommunications infrastructure investment are much concerned to look at the long-run effect of shock to
greater than the returns just on the telecommunication infrastructure to real output. Their results suggests that
investment itself. Where the state of the telephone system long-run derivatives of kilowatts for electricity, roads and
is rudimentary, communications between firms is limited. phone lines, and finds that shocks to infrastructure have
The transaction cost of ordering, gathering information, positive and significant effects on real output for all three
searching for services are high. As the telephone system measure of infrastructure. For electricity and roads, the
improves, the cost of doing business fall, and output will effect become significant after 7 and 8 years, respectively,
increase for individual firms in individual sector of the whereas for phones, the effects on growth in significant
economy. If the telephone does have an impact on only after 13 years. These effects on infrastructure on
nations economy, it will be through the improvement of output are in agreement with growth models where long-
the capabilities of managers to communicate with each run growth is driven by endogenous factors of production.
other rapidly over increased distances [Hardy (1980). However, their results indicate that none of these variables
seem to be set at growth maximizing levels. Esfahani and
OBJECTIVES Ramirez (1999) made cross-country analysis by using
identifiable recursive system, and estimates the structural
The objective of this working paper is that: model of infrastructure and economic growth and the
model indicate that the contribution of infrastructure to
i. To check the impact of infrastructure on economic GDP is substantial and in general exceeds cost of provision
growth of Pakistan. of those services. Schiffbauer (2007) analyzes the impact of
ii. To check the Positive and significant impact of infrastructure capital on different sources of economic
infrastructure on Economic growth of Pakistan. growth. The literature on infrastructure and economic
growth mainly focuses on the private and public capital
HYPOTHESIS investments, but here they also demonstrate the link
between (telecommunication) infrastructure capital and
endogenous technological change in the context of the
i. Infrastructure has positive effect on the economic
dynamic panel estimation applying the aggregate country
growth of Pakistan.
as well as US firm level data. By using the different
ii. Infrastructure contributes significantly and
dynamic panel techniques they examine the coherence
positively in economic growth of Pakistan.
between infrastructure variables and different sources of
economic growth. The main empirical finding is that the
LITERATURE REVIEW increase in telecommunication infrastructure during the
last 30 years enhanced R&D investments but did not affect
Infrastructure development, both economic and social is the accumulation of physical and human capital in our
one of the major determinants of the economic growth sample. R&D growth model also emphasizes on cost-
particularly in developing countries like Pakistan. Direct reducing features of infrastructure capital and demonstrate
investment on infrastructure creates production facilities, the potential link between the levels of infrastructure
stimulates economic activities, reduces the transaction & capital and endogenous technological change. Boopen
trade costs improvising competitiveness and provides (2006) Studied about the Empirical evidences on the
employment opportunities to the poor. In much of the importance of transport capital development in fastening
literature, Donaldson (2008) studies the effects of railroad productivity and economic development for panel sets,
2 construction in 19th century India using a difference-in- particularly for African countries and island state cases,
difference approach. And Keller and Shue (2008) use a have been very scare in the literature. This study analysis
similar approach to look at the opening up of railways the transport capital to growth for two different sets of data
between regions of Germany. All these papers start from a namely for sub Saharan African countries and also for a
trade framework where the effect of transportation developing states (SIDS) using both cross-sectional and
infrastructure is studied from the point of view of market
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panel data analysis. By using simple OLS techniques and relation. This exercise proved to be useful as data fits the
auto regressive technique and GMM methods, they model reasonably well.
concluded that transport capital has been a contributor to
economic progress of these countries. So this analysis ESTIMATION RESULTS
further reveals that in SSA case, the productivity of
transport capital stock is superior as compared to that of All the coefficients are statistically significant even at 1%
overall capital. But in case of SIDS where the transport level of significance and their signs are according to priori
capital seen to have the average productivity level of expectations. Adjusted R2 is 0.80 showing the high
overall capital stock. explanatory power of the model and Durbin Watson
statistic is very close to 2 nullifying the existence
DATA AND SOURCE autocorrelation in the residual terms.

The variables used for empirical analysis in this study are Additional tests are also applied to check for various
as follows: dimensions of model reliability and adequacy. Jarque-Berra
test for the normality confirms error terms to be normally
DEPENDENT VARIABLES distributed. Breusch-Godfrey serial correlation LM test
confirms no serial correlation and White test indicate
i. Gross Domestic Product (GDP). homoskedasticity.

INDEPENDENT VARIABLES Stability of coefficients is checked through Remsy RESET


and confidence ellipse test. More formal Wald test for the
i. Gross Fixed Capital Formation (GFCF). collective significance of coefficients is applied.
ii. Per Capita Health Expenditures (PCHE).
iii. Total generation of electricity (TGOE) (Hydral + Results suggest that 1% increase in Gross Fixed Capital
Thermal + Nuclear). Formation causes GDP to rise by 0.44%.
iv. Total Road Lengths (TRL).
v. Total Telephone Lines (TTL). While 1 unit proportionate increase in Per Capita Health
vi. CPI. Expenditure and Total Generation of electricity causes
GDP to surge upward by 0.27% and 0.043% respectively.
Data sources of these variables are World Development
Indicators (WDI) and State Bank of Pakistan (SBP).
Sample period includes 35 years from 1974 to 2011. Per
Capita Health Expenditures is converted in dollars ($) by
dividing it with the average quarterly exchange rate of
2000. Quarterly exchange rate takes into account the
fluctuations and averaging dampens the effect of these
fluctuations thus making this series more reasonable. One
missing value of Total Generation of electricity was
generated through forward extrapolation.

METHODOLOGY

All the variables in the model are used in log forms as log
form shows relative growth and also to run a double-log
model and check for the elasticity of GDP with respect to
all independent variables. An additional benefit of double-
log model is that it makes interpretation of results more
objective and meaningful. GFCF, TGOE and PCHE are
used as proxies for infrastructure. Through our empirical
analysis, we are going to check the impact of infrastructure
on the economic growth of Pakistan.

But almost all the economic variables are non-stationary at


their level form. So we check for the stationary of the
variables through correlograms and more rigorous
augmented dickey fuller test and Philips Peron test at level
form. Results suggest that all the variables follow unit root
process. So we go for appropriate transformation. Iterative
mining suggest that TGOE and GFCF are I(1) while GDP 3
and PCHE are I(2) at level form. So neither Co integration
is applicable because the order of integration is not same
nor the ARDL as dependent variable is I(2). Thus we used
Ordinary least Squares method in the framework of
multiple regression analysis to approach a deterministic
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(Descriptive Statistics and Jarque-Bera Test)

Test 2 resu1lt: (Granger Causality tests)

Pair wise Granger Causality Tests

Sample: 1974 2011

Lags: 2

Null Hypothesis: Obs F-Statistic Prob.

LGFCF does not Granger Cause LGDP 35 0.02109 0.9791

LGDP does not Granger Cause LGFCF 4.35940 0.0218

LPCHE does not Granger Cause LGDP 35 1.29369 0.2891

LGDP does not Granger Cause LPCHE 11.3217 0.0002

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LTGOE does not Granger Cause LGDP 35 1.75099 0.1909

LGDP does not Granger Cause LTGOE 3.05351 0.0621

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LPCHE does not Granger Cause LGFCF 35 3.69733 0.0367

LGFCF does not Granger Cause LPCHE 2.00461 0.1524

LTGOE does not Granger Cause LGFCF 35 4.59051 0.0182

LGFCF does not Granger Cause LTGOE 4.20019 0.0246

LTGOE does not Granger Cause LPCHE 35 0.69961 0.5047

LPCHE does not Granger Cause LTGOE 4.08204 0.0270

Test 3 result: (OLS)

Variable Coefficient Std. Error t-Statistic Prob.

C 14.07944 2.330674 6.040930 0.0000

LGFCF 0.437514 0.100309 4.361644 0.0001

LPCHE 0.268831 0.043500 6.179984 0.0000

LTGOE 0.043450 0.015486 2.805762 0.0087

AR(1) 0.611012 0.135973 4.493619 0.0001

MA(1) 0.507549 0.177257 2.863358 0.0076


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R-squared 0.806611 Mean dependent var 24.58235


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Adjusted-R 0.806046 S.D. dependent var 0.534708

squared

S.E. of regression 0.033623 Akaike info criterion -3.796225

Sum squared resid 0.033914 Schwarz criterion -3.532306

Log likelihood 74.33206 Hannan-Quinn criteria. -3.704110

F-statistic 1764.394 Durbin-Watson stat 2.022002

Prob(F-statistic) 0.000000

Inverted AR Roots .61

Inverted MA Roots -.51

Test 4: (Breusch-Godfrey Serial Correlation LM Test)

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 0.668333 Prob. F(2,28) 0.5205

Obs*R-squared 1.638846 Prob. Chi-Square(2) 0.4407

Presample missing value lagged residuals set to zero.

Variable Coefficient Std. Error t-Statistic Prob.


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C 0.011603 2.380381 0.004874 0.9961

LGFCF -6.46E-05 0.102435 -0.000631 0.9995

LPCHE -0.006368 0.044490 -0.143138 0.8872

LTGOE -0.000581 0.015668 -0.037058 0.9707

AR(1) -0.121835 0.215044 -0.566557 0.5755

MA(1) 0.754894 0.684987 1.102057 0.2798

RESID(-1) -0.631933 0.632767 -0.998682 0.3265

RESID(-2) 0.534704 0.481941 1.109478 0.2767

R-squared 0.045523 Mean dependent var -0.000197

Adjusted R-squared -0.193096 S.D. dependent var 0.031128

S.E. of regression 0.034001 Akaike info criterion -3.731748

Sum squared resid 0.032369 Schwarz criterion -3.379855

Log likelihood 75.17146 Hannan-Quinn criteria. -3.608928

F-statistic 0.190779 Durbin-Watson stat 1.991681

Prob(F-statistic) 0.985022

Test 5: (Heteroskedasticity Test: White)

F-statistic 1.386810 Prob. F(27,8) 0.3285

Obs*R-squared 29.66251 Prob. Chi-Square(27) 0.3295

Scaled explained SS 12.97645 Prob. Chi-Square(27) 0.9894

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Variable Coefficient Std. Error t-Statistic Prob.

C 5.945761 2.679558 2.218933 0.0573

GRADF_01 -228.2123 108.0098 -2.112885 0.0676

GRADF_01^2 832.2272 425.4178 1.956259 0.0862

GRADF_01*GRADF_02 -11.21155 22.83678 -0.490943 0.6367

GRADF_01*GRADF_03 12.11357 8.312635 1.457248 0.1832

GRADF_01*GRADF_04 -48.87087 27.87784 -1.753037 0.1177

GRADF_01*GRADF_05 -33.49590 14.73902 -2.272600 0.0527

GRADF_01*GRADF_06 -95.86960 42.00134 -2.282537 0.0519

GRADF_02 2.151583 5.336538 0.403179 0.6974

GRADF_02^2 0.055711 0.167395 0.332811 0.7478

GRADF_02*GRADF_03 0.015794 0.117103 0.134872 0.8960

GRADF_02*GRADF_04 0.020115 0.031491 0.638759 0.5408

GRADF_02*GRADF_05 0.251368 0.381492 0.658907 0.5285

GRADF_02*GRADF_06 -0.017153 0.218251 -0.078592 0.9393

GRADF_03 -3.240265 2.234642 -1.450015 0.1851

GRADF_03^2 -0.016775 0.027662 -0.606428 0.5610

GRADF_03*GRADF_04 0.009721 0.013292 0.731339 0.4854

GRADF_03*GRADF_05 0.050262 0.111211 0.451954 0.6633

GRADF_03*GRADF_06 -0.058481 0.113252 -0.516375 0.6196

GRADF_04 12.47277 7.090086 1.759184 0.1166

GRADF_04^2 0.002532 0.002849 0.888807 0.4000


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GRADF_04*GRADF_05 -0.052651 0.124083 -0.424323 0.6825

GRADF_04*GRADF_06 0.023992 0.134657 0.178170 0.8630

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GRADF_05 7.276765 3.772467 1.928914 0.0899

GRADF_05^2 -0.832576 0.461648 -1.803485 0.1090

GRADF_05*GRADF_06 1.316010 0.528004 2.492423 0.0374

GRADF_06 24.79094 10.34056 2.397447 0.0433

GRADF_06^2 -0.510119 0.279641 -1.824190 0.1056

R-squared 0.806611 Mean dependent var 0.000942

Adjusted R-squared 0.229819 S.D. dependent var 0.001072

S.E. of regression 0.000941 Akaike info criterion -11.04743

Sum squared resid 7.09E-06 Schwarz criterion -9.815807

Log likelihood 226.8538 Hannan-Quinn criter. -10.61756

F-statistic 1.386810 Durbin-Watson stat 2.451071

Prob(F-statistic) 0.328531

Test 6: (Ramsey RESET Test)

F-statistic 5.586705 Prob. F(2,28) 0.0091

Log likelihood ratio 12.08857 Prob. Chi-Square(2) 0.0024

MA Backcast: 1972

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Variable Coefficient Std. Error t-Statistic Prob.

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C 7.536593 6.297793 1.196704 0.2415

LGFCF -0.153069 0.114859 -1.332660 0.1934

LPCHE 0.013077 0.106389 0.122918 0.9031

LTGOE 0.027589 0.031279 0.882046 0.3853

FITTED^2 0.056712 0.031649 1.791904 0.0840

FITTED^3 -0.000944 0.000706 -1.338052 0.1916

AR(1) 0.424934 0.402859 1.054795 0.3005

MA(1) -0.997456 0.134862 -7.396149 0.0000

R-squared 0.806611 Mean dependent var 24.58235

Adjusted R-squared 0.806046 S.D. dependent var 0.534708

S.E. of regression 0.029424 Akaike info criterion -4.020908

Sum squared resid 0.024241 Schwarz criterion -3.669015

Log likelihood 80.37634 Hannan-Quinn criter. -3.898088

F-statistic 1647.246 Durbin-Watson stat 1.831350

Prob(F-statistic) 0.000000

Inverted AR Roots .42

Inverted MA Roots 1.00

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Test 7

Test 8: (Wald Test)

Test Statistic Value df Probability

F-statistic 732.7938 (5, 30) 0.0000

Chi-square 3663.969 5 0.0000

Null Hypothesis Summary:


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Normalized Restriction (= 0) Value Std. Err.

C(1) - C(6) 13.57189 2.329195

C(2) - C(6) -0.070035 0.206707

C(3) - C(6) -0.238718 0.181060

C(4) - C(6) -0.464100 0.180140

C(5) - C(6) 0.103462 0.266811

Restrictions are linear in coefficients.

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