The Relationship Between Public Capital And Economic Activity

1855 words - 7 pages

1 INFRASTRUCTURE:

In the Aschauer’s (1989a, 1989b) original work, a Cobb-Douglas production function was estimated with stocks of various infrastructure as capital and labour as the other input. He established that military capital had insignificant association with productivity. Nevertheless, the ‘core’ infrastructure such as streets, highways, airports, mass transit, sewers, water systems, etc., had the majority explanatory power for productivity.

The relationship between public capital and economic activity at the State level in the US was examined by Munnell (1990a, 1990b). In the initial analysis, public capital was found to have a considerable and positive impact on output even though the output elasticity was roughly one-half the size of the national estimate. In the following analysis, public capital was found to enhance the productivity of private capital, boost its rate of return and promote more investment. Alternatively, from the investors’ standpoint, public capital was looked upon as an alternative for private capital which crowded out private investment.

There are not many studies conducted at the regional level using cross-section data. Costa et. al. (1987) tested the relationship between public capital and regional output using translog production function for 48 States of the USA for the year 1972. Three sector wise aggregates were considered in the study viz., non-agricultural sectors, all economic sectors and manufacturing. Public capital and Labour were found to be complementary inputs with diminishing returns. Some of the later studies by Duffy-Deno and Eberts (1989), Eberts (1986, 1990), and Eisner (1991) were also conducted at the regional level. All these studies found a positive relationship between infrastructure and economic growth.

In the Indian scenario, there are not many empirical studies carried out to examine the impact of infrastructure on economic growth. Jha and Sahni (1992) have studied the efficiency of the electricity, railways sectors and gas by estimating translog cost functions. They have estimated the factor elasticities with respect to output, and cross elasticities along with the factors of production. Nevertheless, they have not considered the effect of these sectors either on economic growth or on industrial productivity.

The India Infrastructure Report (1996) [Chairman: Dr. Rakesh Mohan] produced by the
Government of India has made investment predictions for the infrastructure sectors in the next decade. Assuming additional or incremental capital output ratio (ICOR) reduces to 3.5 resulting in GDP growth rate of 6.2 per cent in 1996-97, rising to 7.5 per cent in 2000-01 and 8.5 per cent in 2005- 06, the Report has estimated an investment obligation at around Rs. 4,000 billion to Rs. 4,500 billion (US $ 115 to US $ 130 billion) over the next five years (1996-97 to 2000-01) and this would rise to about Rs. 7,500 billion (US $ 215 billion) in the following five years (2001-02 to...

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