NEW CONSTRUCTION AND RECONSTRUCTION: IMPACT ON GROWTH OF SUB-REGIONS OF MAINLAND PORTUGAL

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1 Economic Inerferences NEW CONSTRUCTION AND RECONSTRUCTION: IMPACT ON GROWTH OF SUB-REGIONS OF MAINLAND PORTUGAL Vera Moa 1, Paulo Maçãs Nunes 2 and Anónio Fernandes de Maos 3 1) 2) Beira Inerior Universiy, Covilhă, Porugal 3) CEFAGE- UE (Cener for Advanced Sudies in Managemen and Economics), Évora, Porugal Absrac Based on a panel made up of 28 sub-regions (NUT III) of mainland Porugal for he period , we show ha building reconsrucion has a posiive impac on he economic growh of sub-regions of mainland Porugal, whereas he effec of new consrucion seems o be of negligible imporance. The empirical evidence obained in his sudy les us make suggesions on urban policy for counries in general, and for Porugal in paricular, namely o concenrae on reconsrucion raher han new buildings. Keywords: consrucion of new buildings, dynamic panel esimaors, economic growh, reconsrucion of buildings, sub-regions JEL Classificaion: C23, O40, R59 Inroducion For a long ime he erm growh mean an arihmeic increase in producion, leading o increased naional wealh and maerial sandard of living. Nowadays, his erm has a more and more resriced meaning and developmen which includes growh iself is se agains is repercussions on people s well-being and he social sysem iself, as well as susainabiliy. Developing he idea ha he ciy belongs o all and i is he shared responsibiliy of all involved paries, he idea of belonging and he noion of he role of he urban environmen in he fuure of humaniy and he plane, are fundamenal for susainable developmen. Throughou hisory, we find ha ciies have always been cenres of civilizaion, innovaion, culure and invenion. Cerainly, economic developmen is unimaginable wihou he ciy, for boh economic and social reasons. Urban resoraion should be inegraed and promoed as a pracice in European, Naional and Local Urban Policy, emerging as he means for consolidaing small and medium-sized Corresponding auhor, Paulo Maçãs Nunes - macas@ubi.p Vol XII No. 27 February

2 New Consrucion and Reconsrucion: Impac on Growh of Sub-Regions of Mainland Porugal owns and an insrumen for creaing a poly-cenred urban sysem. In his conex, urban resoraion becomes a dimension of susainable developmen. Seing ou from recogniion of he unprecedened dangers and challenges facing hisorical ciies a he sar of he hird millennium, and aking ino accoun heir singular pas of adaping o change, rehabiliaion and urban renewal, we can have a model for ciies ha aim for a secure and susainable fuure, conciliaing conservaion, susainable local developmen and he compeiiveness of urban areas. In his conex, assuming ha urban resoraion will be an imporan pillar for susainable developmen, also being imporan for more raional use of resources, a he ouse we mus ascerain if resoraion is relevan for regions economic growh compared o he relevance of new building. This imporan subjec has no been deal wih in he lieraure, alhough is sudy is relevan for urban policy guidelines se ou by he European Union and also by counries naional and local governmens. Aemping o fill he gap idenified in he lieraure, his sudy inends o invesigae he impacs of boh building reconsrucion and new building on economic growh in subregions of mainland Porugal. Iniially, we esimae regressions considering each variable in isolaion, and hen go on o consider boh variables ogeher in regressions. We use as dependen variable he GNP per capia of each sub-region (NUT III) of mainland Porugal in each period of analysis (1995 o 2006), and as independen variables: 1) invesmen per capia in new building and 2) invesmen per capia in building reconsrucion. We op o consider he variables in logarihms in he regressions, an idenical procedure o he one used in empirical sudies of economic growh. To esimae he regressions which are subjec o analysis we use dynamic panel esimaors. Iniially, we use he GMM sysem (1998) esimaor. However, given he raher low number of observaions we also use he LSDVC (Leas Squares Dummy Variable Correced) esimaor, by Bruno (2005). Use of he LSDVC (2005) esimaor is fundamenal in order o es he robusness of he resuls obained wih he GMM sysem (1998) esimaor, due o he considerable number of insrumens generaed hrough using he GMM sysem (1998) esimaor compared o he number of cross-secions, which could lead o bias of he esimaed parameers. Afer his inroducion, he aricle is divided as follows: 1) secion 2 concerns mehodology, wih presenaion of he daabase and variables as well as he esimaion mehod used; 2) secion 3, presens he empirical evidence obained in his sudy; and 3) finally secion 4 presens he conclusions and implicaions of he sudy. 1. Mehodology 1.1 Daabase and Variables The daa used in his sudy were gahered from he INE (Naional Insiue of Saisics), and from he ANMP (Naional Associaion of Poruguese Local Auhoriies). All he daa were deflaed, so as o remain a consan prices Amfiearu Economic

3 Economic Inerferences Table no. 1 below presens he variables used in his sudy ogeher wih heir corresponding measures. Variable Table no. 1: Variables and Measures Measure ln GNPpc Logarihm of he raio of GNP o he residen populaion, in each sub-region of mainland Porugal ln NCpc Logarihm of he raio of invesmen in new building o he residen populaion in each sub-region of mainland Porugal ln RECpc Logarihm of he raio of invesmen in reconsrucion o he residen populaion in each sub-region of mainland Porugal As dependen variable we use he GNP per capia of each sub-region of mainland Porugal in each period of analysis. Given ha he aim of his sudy is o analyze he impacs of invesmen in new building, as well as invesmen in building reconsrucion, on economic growh in he sub-regions of mainland Porugal, we use as independen variables: 1) invesmen per capia in new building and 2) invesmen per capia in building reconsrucion. I is worh poining ou ha in he esimaed regressions we use he variables in logarihms. However, in presening he descripive saisics of he variables, we choose o presen he variables no as logarihms, so as o make comparisons more easily. 1.2 Mehod of Esimaion Iniially, we esimae he regressions considering each independen variable in isolaion, and hen go on o consider boh variables ogeher in he regressions. In addiion, since he GNP per capia is a persisen series, i.e. GNP per capia in he presen and previous periods will be highly correlaed, in esimaing he regressions we consider he relaionship beween GNP per capia in he presen and previous periods. We choose o consider he variables as logarihms in he regressions, an idenical procedure o he one used in empirical sudies of economic growh. Therefore, he regressions o esimae can be given by he following expressions: ln + GNPpc = 0 + λ lngnppc + β1 ln NCpc + ui + d e β (1) ln + GNPpc = 0 + λ lngnppc + β 2 ln RECpc + ui + d e β (2) ln GNPpci, = β 0 + λ lngnppci, + β1 ln NCpci, + β 2 ln RECpci, + ui + d + e (3) in which: ln ln is he logarihm of GNP per capia in he presen period; GNPpc, i GNPpc is he logarihm of GNP per capia in he previous period; NCpc he logarihm of invesmen per capia in new building consrucion; logarihm of invesmen per capia in building reconsrucion; ln is ln is he RECpc, i u i are non-observable Vol XII No. 27 February

4 New Consrucion and Reconsrucion: Impac on Growh of Sub-Regions of Mainland Porugal individual effecs of he erriorial unis analyzed; d are annual dummy variables measuring possible macroeconomic effecs on he logarihm of GNP per capia; and e is he error which is presumed o have normal disribuion. Compared o using saic panel models, dynamic esimaors have he following advanages: 1) conrol of endogeny; 2) conrol of possible collineariy beween explanaory variables; and 3) greaer conrol of he possible effecs of omission of relevan independen variables in explaining he dependen variable. Besides he above, use of dynamic esimaors avoids possible bias of he parameer measuring he relaionship beween GNP per capia in he presen and previous periods, a bias arising from he correlaion beween u i and lngnppc, and beween e and GNPpc. ln Based on wha has been saed, in his sudy we esimae equaions (1), (2) and (3) using dynamic panel esimaors. Blundell and Bond (1998) conclude ha when he dependen variable is persisen and he number of periods is no paricularly high, use of he GMM (1991) esimaor, by Arellano and Bond (1991), leads us o bias of he esimaed parameers, mainly regarding he parameer measuring he relaionship beween he dependen variable in he presen and previous periods. Wha is more, Blundell and Bond (1998) conclude ha in he case of persisence of he dependen variable and a raher low number of periods, he insrumens generaed by he GMM (1991) esimaor are weak. Given ha GNP per capia is normally a persisen series, i.e. he correlaion beween GNP per capia in he presen and previous periods is considerable, in his sudy use of he GMM sysem (1998) esimaor is seen o be more suiable han use of he GMM (1991) esimaor. This being so, we op for he GMM sysem (1998) esimaor. However, he resuls obained wih he GMM sysem (1998) esimaor can only be considered valid on wo condiions: 1) validiy of he insrumens; and 2) no second order auocorrelaion. To es insrumen validiy, we use he Hansen es. The null hypohesis indicaes validiy of he insrumens, he alernaive hypohesis being invalidiy of he insrumens. Rejecion of he null hypohesis means he insrumens are no valid. On he conrary, by no rejecing he null hypohesis, we conclude he insrumens are valid. In he case of second order auocorrelaion, he null hypohesis is non-exisence of second order auocorrelaion, he alernaive hypohesis being exisence of second order auocorrelaion. In he case of rejecing he null hypohesis, we conclude here is second order auocorrelaion. By no rejecing he null hypohesis, we conclude here is no second order auocorrelaion. Due o he raher low number of observaions, we use he LSDVC (Leas Squares Dummy Variable Correced) esimaor by Bruno (2005), which is suiable for samples made up of limied observaions 1. In his sudy, use of he LSDVC (2005) esimaor becomes 1 The LSDVC (2005) esimaor is used in various empirical sudies where he number of observaions is no very high, in order o es robusness of he resuls obained wih he GMM sysem (1998) esimaor, as for example in Serrasqueiro and Maçãs Nunes (2008) and in Serrasqueiro (2009) Amfiearu Economic

5 Economic Inerferences fundamenal, given he considerable number of insrumens generaed by use of he GMM sysem (1998) esimaor, compared o he number of cross-secions, a fac ha may lead o bias of he esimaed parameers. Therefore, we esimae he regressions given by equaions (1), (2) and (3) using, besides he GMM sysem (1998) esimaor, he LSDVC (2005) esimaor. 2. Resuls In his secion, we firs presen he descripive saisics of he variables used in his sudy. Then we presen he resuls of he regressions obained wih he GMM sysem (1998) and LSDVC (2005) esimaors. 2.1 Descripive Saisics Table no. 2 below presens he resuls of he descripive saisics of he variables used in his sudy. Table no. 2: Descripive Saisics Variable Observaions Mean Sandard Deviaions Minimum Maximum GNPpc NCpc RECpc We can see he sandard deviaion of GNP per capia is under he respecive mean, and so he volailiy of GNP per capia is no paricularly high, he same happening in he case of invesmen per capia in new building and invesmen per capia in building reconsrucion. We observe ha invesmen per capia in new consrucion, in sub-regions of mainland Porugal, is on average considerably above invesmen per capia in building reconsrucion. 2.2 Growh Regressions Table no. 3 below presens he resuls of he growh regressions, using he GMM sysem (1998) esimaor. Vol XII No. 27 February

6 New Consrucion and Reconsrucion: Impac on Growh of Sub-Regions of Mainland Porugal Table no. 3: GMM Sysem (1998) Esimaor Growh Regressions Dependen Variable: ln GNPpc Independen Variables I II III lngnppc *** *** *** ( ) ( ) ( ) ln NCpc ( ) ( ) ln RECpc ** ** ( ) ( ) CONS *** ( ) ** ( ) ** ( ) F (N(0.1)) *** *** *** 2 Hansen ( χ ) m 1( N(0.1)) -6.31*** -6.39*** -6,46*** m 2( N(0.1) Observaions Noes: 1. Sandard deviaions are repored in parenhesis. 2. *** indicaes significance a 1% level, ** indicaes significance a 5% level. 3. The esimaes include ime dummy variables, bu no shown. 4. We use he collapse lag (2.2) in he GMM sysem (1998) esimaor so ha he number of insrumens generaed by he GMM sysem (1998) esimaor does no exceed he number of cross-secions. Firsly, observing he resuls of he Hansen es, we find ha whaever he regression esimaed, we canno rejec he null hypohesis of validiy of he insrumens used. Secondly, he resuls of he second order auocorrelaion es le us conclude we canno rejec he null hypohesis of absence of second order auocorrelaion, for any of he regressions esimaed. Therefore, based on he Hansen and second order auocorrelaion ess, we can conclude ha he resuls wih he GMM sysem (1998) esimaor are valid. We find here is a saisically insignifican relaionship beween invesmen per capia in consrucion of new buildings and GNP per capia. However, we see ha he relaionship invesmen per capia in building reconsrucion and GNP per capia is posiive, and saisically significan a 5% significance. Finally, he relaionship beween GNP per capia in he presen period and GNP per capia in he previous period is posiive, and saisically significan a 1% significance. This resul indicaes ha growh in he sub-regions of mainland Porugal is a coninuous process over ime, an idenical resul o ha obained in various sudies of economic growh, as for example in Sequeira and Maçãs Nunes (2008), Sequeira and Marins (2008) and Sequeira and Ferraz (2009). We calculae he coefficien of he correlaion beween GNP per capia in he presen period and GNP per capia in he previous period. The value of he correlaion coefficien is , showing ha GNP is clearly a persisen series. Therefore, use of he GMM 1741 Amfiearu Economic

7 Economic Inerferences sysem (1998) esimaor is clearly seen o be suiable, raher han use of he GMM (1991) esimaor by Arellano and Bond (1991). The resuls are robus since esimaing he regressions, considering each explanaory variable individually, or aken ogeher, does no mean significan changes in he esimaed parameers regarding magniude and saisical significance. I is relevan o highligh ha building reconsrucion has a posiive effec on economic growh in he sub-regions of mainland Porugal, whereas consrucion of new buildings has an apparenly negligible effec. Table no. 4 below presens he resuls of he growh regressions using he LSDVC (2005) esimaor. Table no. 4: LSDVC (2005) Esimaor Growh Regressions Dependen Variable: ln GNPpc Independen Variables I II III ln GNPpc *** *** *** ( ) ( ) ( ) ln NCpc ( ) ( ) ln RECpc *** *** ( ) ( ) Observaions Noes: 1. Sandard deviaions are repored in parenhesis. 2. *** indicaes significance a 1% level. 3. The esimaes include ime dummy variables, bu no shown. We find he resuls obained using he LSDVC (2005) esimaor are quie similar o hose obained wih he GMM sysem (1998) esimaor, which confirms he robusness of he empirical evidence obained in his sudy. The empirical evidence obained indicaes ha building reconsrucion should be encouraged as a measure of urban policy, as an alernaive o new building, since i conribues posiively o increased economic growh in he sub-regions of mainland Porugal, while new building is of negligible imporance for economic growh in hese subregions. Conclusion A presen, almos half he plane s populaion live in urban areas wih he consequen worsening of living condiions and lack of adequae infrasrucure o saisfy ciies evergrowing needs. On one hand, concenraion in urban areas causes problems of genrificaion and securiy in hese areas, and on he oher i causes depopulaion in rural disrics. This urban problem is on a world scale, and is also visible in Porugal hrough grea imbalance, wih congesion on he coas and poor perspecives for growh inland. Apar from he foreseeable economic impacs (job creaion, economy of use and occupaion, and profiabiliy of buildings) of policies based on culural heriage as a resource, i is seen ha rehabiliaion is a key insrumen in he search for susainable developmen. In his conex, he resoraion of hisorical ciy cenres is paricularly relevan Vol XII No. 27 February

8 New Consrucion and Reconsrucion: Impac on Growh of Sub-Regions of Mainland Porugal and can be seen as a huge recycling operaion, in which he process iself is an example of susainable developmen. The aim of his sudy was o es empirically he possibiliy of new building and reconsrucion conribuing, or no, o increased GNP per capia in he sub-regions of mainland Porugal. We find ha building reconsrucion has a posiive effec on he economic growh of he sub-regions of mainland Porugal, whereas new building has a negligible effec. The empirical evidence obained in his sudy is paricularly relevan because i shows ha, besides building reconsrucion being of relaively greaer imporance for economic developmen in he sub-regions of mainland Porugal, compared wih new building, i also conribues o growh in hese sub-regions, somehing which does no happen when analyzing he impac of new building on he economic growh of hese sub-regions. As measures of Local and Naional Urban Policy, bu which can and should be exended o he Local and Naional Governmens of oher counries, a preference for building reconsrucion is clearly indicaed, as an alernaive o he consrucion of new buildings. In erms of impacs we consider his policy could creae: 1) significan economic impacs in sub-regions, 2) when acceped by he local populaion, urban rehabiliaion in general, and building reconsrucion in paricular, can creae synergies ha conribue o improved qualiy of life for he inhabians. I is up o us o reflec on his urban problem, of which we are an inegral par, and conribue daily owards a susainable soluion. References Arellano, M. & Bond, S., Some Tess of Specificaion For Panel Daa: Mone Carlo Evidence and an Applicaion o Employmen Equaions. Review of Economic Sudies, 58, pp Blundell, M. & Bond, S., Iniial Condiions and Momen Resricions in Dynamic Panel Daa Models. Journal of Economerics, 87, pp Bruno, G., Approximaing he Bias of LSDV Esimaion he Bias of LSDV Esimaor for Dynamic Unbalanced Panel Daa Models. Economic Leers, 87, pp Sequeira, T. & Maçãs Nunes, P., Does Tourism Influence Economic Growh? A Dynamic Panel Daa Approach. Applied Economics, 40, pp Sequeira, T. & Marins, E., Educaion Public Financing and Economic Growh: An Endogenous Growh Model Versus Evidence. Empirical Economics, 35, pp Sequeira, T. & Ferraz, N., Is Educaion Prejudiced by Counry-Risk?. The Economic Record, 85, pp Serrasqueiro, Z. & Maçãs Nunes, P., Performance and Size: Empirical Evidence from Poruguese SMEs. Small Business Economics, 31, pp Serrasqueiro, Z., Growh and Profiabiliy in Poruguese Companies: A Dynamic Panel Daa Approach. Amfiearu Economic, 26, pp Amfiearu Economic