New evidences on the link between public capital and economic growth. from a small island economy.

Transcription

1 New evidence on he link beween public capial and economic growh from a mall iland economy. Jameel Khadharoo, Univeriy of Mauriiu, Redui, Mauriiu jkhadaroo@uom.ac.mu Boopen Seeanah, Univeriy of Technology, Mauriiu Poine-Aux-Sable, Mauriiu b.eeanah@um.inne.mu

2 New evidence on he link beween public capial and economic growh from a mall iland economy. -Abrac- The conribuion of public capial on economic growh ha been he focu of only few udie and ha o dae focued mainly on developed counrie. Moreover i i only laely ha he link ha been analyed in a dynamic framework, allowing for feedback effec. The empirical lieraure ha hardly deal wih mall economie uch a Mauriiu. The preen paper build on a producion funcion approach, uing a unique ime erie daae over he period , o derive he aociaion beween public capial and economic performance and economic growh for Mauriiu. Given he non-aionary characeriic of he daa, a vecor-error-correcion mechanim (VECM) i ued o model he dynamic. Public capial i hown o have ignificanly conribued o Mauriian economic performance. Moreover reul ugge ha here may be indirec effec via privae capial accumulaion a well. Key word Public capial, Economic Growh, Vecor-error-correcion mechanim. 2

3 I. Inroducion Capial formaion originae from boh he privae and public ecor of he economy. Economic udie have moly concenraed on he link beween privae and oal capial accumulaion and developmen. The conribuion of public capial in he above conex ha been he focu of only few udie. Even hen he majoriy of hee udie have been baed on aeing he conribuion of he public capial inpu in an exended Cobb- Dougla pecificaion uing a aic framework (ee Achauer (989), Munnell (990, 992)). I i only laely ha cholar have analyed he link uing dynamic economeric framework (ee Pereira and De Fruco (999), Surm, Jacob and Grooe (999), Lighhar (2000), Pereira (2000), Pereira and Andraz (200) and Pereira and Roca Sagale (2003) among oher). Thee udie have reaed public inpu a an unpaid facor and have overall eablihed poiive impac of public capial on economic growh. There have alo been a few excepion which repored inignifican effec (ee Taom (99), Hulen and Schwab (993) and Holz-Eakin (994)). More imporanly however, mo of exiing lieraure aemping o uppor he public capial-growh hypohei ha been baed on developed economie cae uch a US and Weern Europe. Among he very carce udie on developing counrie are hoe from Looney (997) who udied he link for he cae of Pakian and Ghali (998) for he cae of Tuniia. In he fir cae public capial wa repored no o have been inigaing privae ecor expanion while in he econd cae public capial were even een o have a negaive effec on privae invemen and hu oupu. 3

4 The preen udy aemp o fill a gap in he lieraure by analying he link beween public capial accumulaion and economic growh for he cae of an iland economy, namely, Mauriiu. I ue a uniquely conruced ime erie daae daing back ince 950 whereby he oal capial ock ha decoupled ino public and privae capial ock. Moreover boh are allowed o ener imulaneouly in an exended Cobb-Dougla producion funcion, wih public capial enering a an unpaid inpu. Dynamic economeric echnique i ued, namely a Vecor Error correcion model (VECM), o analye feedback effec in he yem. The paper addree hu iue peraining o exogeneiy, crowding in and ou and caualiy direcion a well. The rucure of hi paper i a follow Secion 2 decribe he preferred modelling funcion ued and elaborae on he proxie ued and he daa e conrucion. Secion 4 inveigae he empirical link beween he public capial and economic growh for he cae of Mauriiu and ecion 5 conclude and dicue policy implicaion. II. Mehodology and Analyi Dynamic feedback iue and VAR The analyi ue dynamic economeric echnique in a Cobb-Dougla producion funcion framework, namely a Vecor Auoregreive model (VAR), following recen 4

5 udie in public capial-economic growh debae (ee Ghali (998), Surm, Jacob and Grooe (999), Pereira and De Fruco (999), Lighhar (2000) and Pereira and Roca Sagale (2003)) o model he hypohei. I hu ake ino accoun he poibiliy of dynamic feedback among he variable in he model. In fac public capial being an addiional unpaid inpu in he producion funcion, no only affec a counry oupu direcly bu alo indirecly i may affec privae capial and employmen. Moreover he income level of a counry can alo be een o ranlae ino he creaion of more public capial. Daa conrucion and ource Since he overall and alo decoupled privae and public capial ock value for he counry were unavailable, hey had o be conruced uing he Perpeual Invenory Mehod (PIM) a recommended by OECD (200) and he US Bureau of Economic Analyi (999). Thi approach ha been widely ued in he lieraure 2. Conrucion of hee capial ock required diaggregaed invemen daa erie o feed he above mehodology. The Penn-World able (6.) only provided oal invemen figure ince he 950. In an aemp o eparae he oal invemen ino he above componen, we gahered daa on oal governmen capial invemen over he whole period under udy ( ). Thee were available from he variou individual Accounan General See Pereira and De Fruco (999) and Lighhar (2000) for a complee reamen of feedback effec. 2 Thi mehodology ha alo been widely ued in boh claical and recen lieraure) for inance by Munnell (990) and Surm and de Haan (995)). More recenly Jacob e al (997), Lighhar (2000), Canning and Bennahan (2000), and Kamp (2003) among oher alo conruced capial ock uing he PIM. 5

6 Annual Repor of he counry and alo from he Financial Accoun of he Mauriian Colony for period before independence (pre-968). To meaure labour we ued employmen level figure available from he Cenral Saiical Office (CSO) and he Bi-annual Dige of Saiic (variou iue). The dependen variable oupu wa proxied by he real Gro Domeic Produc a conan price and wa generaed from he Penn World Table (6.). Model Specificaion and preliminary e We exend a claical Cobb Dougla funcion and diaggregae he capial ock ino privae and public capial. I implie wriing he following heoreical model β β 2 β 3 Q A ( K ) ( G ) ( L ) equaion Q denoe he economy oupu, A () he hif in he producion funcion aribued o echnical progre, which i aumed o be Hick neural, K he privae capial ock, G i he public capial ock and L labour. Taking log on boh ide of he equaion and denoing he lowercae variable a he naural log of he repecive uppercae variable reul in he following: y 3 α β k β 2g β l ε equaion 2 6

7 Before conidering he appropriae pecificaion of he VAR, he univariae properie of aionariy of he daa erie are inveigaed uing he Augmened Dickey-Fuller (ADF) (979) and Phillip-Perron (PP) (988) uni-roo e. The reul are ummaried in able and 2. Te for aionariy (refer o able and 2) how ha all our variable are inegraed of order (I()) and hu aionary in difference. Furher analyi in erm of coinegraion uing he Johanen Maximum Likelihood approach have been underaken and i repored in able 3. The Schwarz Bayeian crierion (SBC) uggeed a VAR of order 2. Evidence from boh race and maximal eigenvalue e ugge ha here i a mo a ingle coinegraing vecor or analogouly 2 independen common ochaic rend wihin he 3 variable equaion. A he 5% level, race value and maximum eigenvalue e 3 boh how here i one coinegraing vecor. Engle and Granger (987) howed by he error-repreenaion heorem ha coinegraed variable implie in effec an error correcion model (ECM). He argued ha regreion of he fir difference of coinegraed variable would reul in mipecificaion error. Accordingly, he VAR wa accordingly formulaed in a Vecor Error Correcion model (VECM) o analye he dynamic of he relaionhip. Thi involve he incluion of he lagged error of he coinegraing regreion a one of he independen variable in he regreion equaion. 3 For he maximum Eigen Value, he relevan compued aiic i a compared o 2.2 and for he race value, compued aiic i 7.97 compared o criical

8 The Vecor Error Correcion Model We derive he model following Johanen (988, 996), Hendry (995), Ender (995), and Ghali (998) and pecify he following Z Ψ Z Ψ2Z 2... Ψk Z k μ η equaion 3 Where Z vecor of (n k) dimenion Ψ k vecor of (n n) dimenion η Vecor of unanicipaed impule (movemen in X ) niid(0,σ) Where n i he number of variable in he VAR, k i he dimenion of he VAR, and i ime. For he preen analyi, our VAR coni of four endogenou variable [ (n4), Z y, g, k, l ] and a conan erm and he dummy variable 4. The yem feaure 2 lag (k2) ha were choen uing SBC. So z i a 4 x vecor conaining y, k, l and g where again y i real GDP, k i privae capial ock, l i he level of employmen and g i our public capial ock. 4 Eimae of a VECM wihou any dummy wa underaken for boh pecificaion and howed ha he reidual were no random and depiced a marked drop in he year 960. Upon inveigaion we realied ha hi wa due o cyclone Carol, he mo devaaing cyclone of all ime. Thu a dummy variable wa included o ake hi ino accoun. Moreover he regreion wa alo run including a ime rend, dummy for oher major cyclone and wih a po independen dummy (independenly and ogeher). However heir repecive coefficien proved o be aiically inignifican and were judged no appropriae in our analyi. In any cae he reul obained were no oo differen from he acual one. 8

9 Since he variable are I () variable ha are I (0) afer applying he difference filer once and a i ha been eablihed hey are alo coinegraed of order, we may impoe hi conrain upon our unrericed VAR o enable a Vecor Error Correcion Model formulaion. The hor run dynamic can be udied uing he following general Vecor Error Correcion Model (VECM): Z Γ Z Γ Z Γ Z ΠZ μ η k k k equaion 4 Where Z i he vecor of growh rae of he above four variable, and he Γ are eimable parameer, i a difference operaor, η i a defined above. Π i he long run parameer marix wih rank equal o r (in our cae i i one), he number of coinegraing vecor uch ha <r<n-. Wih r coinegraing vecor (< r< 4), Π having a rank of r can be decompoed a Πα β, wih α and β boh being (n x k), or 4 x marice. α i defined a he adjumen or loading coefficien which meaure he rengh of he coinegraing vecor in he VEC model or in oher word he peed of adjumen. The β are parameer in he coinegraing relaionhip and repreen he long run coefficien. Small leer denoe ha he variable are in naural logarihmic erm. The yem feaure 2 lag (k2) ha were choen uing SBC. Analyi 9

10 The eimae of α and β are preened in he following able. The long run eimae of β indicae ha all he variable, including public capial have a poiive and ignifican effec on he level of oupu of he counry. In fac he oupu elaiciy wih repec o public capial i and indicae ha a 0% increae in public capial ock of he counry i likely o bring a 3.56% increae in he economic growh. Thi value i no oo far from wha oher cholar repored in heir udie, for inance Achauer (989) and Munnell (992) repored an elaiciy of around 0.4, Eber (997) an elaiciy of 0.38 and Pereira and De Fruo (999) an elaiciy of 0.65 for he cae of USA and Lighhar (2000) oberved an elaiciy of 0.20 for Porugee cae. Privae capial ock conribuion, a expeced, i repored o be he highe and a poiive relaionhip for labour a well i oberved. Weak exogeneiy e on each of he equaion below were alo performed, ha i eing repecively if α 0, α 2 0, α 3 0 and α 4 0 (refer o yem of equaion below). The Walde yield Likelihood or Chi quare value obained are 5.58, 0.56, , and 4.47 repecively. The reul enable u o rejec he null hypohei of weak exogeneiy a 95% ignificance level in all cae and we hu proceeded wih an unchanged yem of equaion. Now he vecor error correcion repreenaion can be expanded in he following e of equaion 0

11 l g k y y, 4, 3, 2,, 0 ε α υ θ θ θ θ θ i) l g k y k 2, 2 4, 3, 2,, 0 ε υ α δ δ δ δ δ ii) l g k y g 3, 3 4, 3, 2,, 0 ε υ α ρ ρ ρ ρ ρ iii) l g k y l 4, 4 4, 3, 2,, 0 ε υ α μ μ μ μ μ iv) where i he number of feaured lag θ,δ,ρ,μ are he hor erm parameer of he lagged variable α, α 2, α 3 and α 4 are he adjumen coefficien and ν i he coinegraing vecor. Eimae of he Error-Correcion Model OLS eimae of he error-correcion model are preened in able 5. The yem of equaion pae he diagnoi e relaed o erial correlaion (baed on Lagrange muliplier e of reidual erial correlaion) and heerocedaiciy (baed on he regreion of quared reidual on quared fied value).

12 The VECM model reveal ha he hor run parameer in privae capial, public capial and employmen ha a poiive and ignifican effec on he level of oupu of he counry. The analyi how ha public capial (wih an oupu elaiciy of 0.223) indeed conribue o economic performance, hough no o he ame exen a privae capial (wih an oupu elaiciy of 0.72). Referring o column 2 above, i i alo inereing o noe ha public capial eem alo o impac poiively on privae capial hu concluding ha ome indirec effec migh alo be preen. Thee reul are in line wih heoreical raionale. Moreover i can be oberved ha he adjumen parameer i which indicae a relaively average adjumen peed of he yem o i long run equilibrium. I reflec he peed a which he diequilibrium i made for in he nex period. Thi adjumen peed coupled wih he fac ha he hor run parameer i maller han he long run parameer migh indeed alo ugge ha public capial ake ime o aain i full impac on he economy. ECM baed Caualiy e In our eing (refer o he yem of equaion 5i 5v), he analyi of a Granger-caual relaion from infrarucure on GDP boil down o eing wheher he um of he θ 3, (or θ 3, in equaion 5i) elemen in above equaion differ from zero. However, we canno ue ordinary F-e, which apply o he individual equaion, becaue he error erm may be correlaed over he equaion, and g affec y hrough hee correlaed error erm. Following Geweke e al (983), who indicaed ha he Granger procedure conduced uing a Wald chi-quare e aiic ouperform oher caualiy e in a erie of 2

13 Mone-Carlo experimen, we accordingly apply Wald e o e erie of pair-wie caualiy. Thu o e wheher public invemen Granger caue growh, we e he null hypohei H 0 : θ 3, 0 uing a Chi quare aiic. In equaion 5i, rericing θ 3, 0, yield a Chi Square aiic of , and i aiically ignifican a 95% ignificance. Thi rejec he null hypohei and confirm a caualiy effec from public capial o GDP 5. Same direcion of caualiy i oberved for he cae of privae capial accumulaion and employmen and economic growh (refer o able 6) Revere Caualiy Teing for revere caualiy, would be o examine if growh Granger caue public invemen and hi would mean eing he null hypohei H 0 : ρ, 0 in he hird equaion (in equaion 8 iii). The Wald e for he above gave a Chi Square aiic of The null hypohei i hu acceped and implie non-caual effec from growh o public capial. So deciion o inve eem o be independen of economic ae of he economy. On he oher hand, here i evidence of revere cauaion from GDP o privae invemen and bi-direcionaliy beween hee wo variable. Crowding-in or Crowding-ou? 5 We alo performed block caualiy e and i confirm he reul. 3

14 The null hypohei H 0 : δ 3, 0, uing equaion 5ii above, i eed o inveigae wheher public invemen Ganger caue privae invemen. i a e of A Wald e reuled in a Chi Square value of which i more han he criical value a 90% ignificance level hu indicaing ha public capial arac privae invemen. However here i no indicaion of caualiy from privae o public capial accumulaion. The reul of ECM baed caualiy are ummaried in able 6. Reul obained from he ECM baed caualiy have been found in general o conolidae hoe from he VECM approach. Moreover impule repone analyi performed i alo in line wih he above finding 6. IV. Summary of reul The udy aemped o fill a gap in he lieraure by uing a mulivariae dynamic framework o udy link beween public capial and economic performance for a mall iland economy. Reul from he analyi revealed ha public capial ha been an inrumenal elemen in he economic progre of he economy over he period of udy. The oupu elaiciie are eimaed o be in he hor run and in he long run uggeing ha public capial ake ome ime o be fully producive. The ECM baed caualiy and impule repone analyi alo end o confirm he above link. Furher analyi of variable indicae ha here exi no feedback from he counry level of 6 Deailed analyi of impule repone funcion are available from he auhor upon reque. 4

15 oupu o he invemen in public capial and alo ha public capial eem o arac privae capial hu uggeing he poibiliy of crowding in effec. However he udy could no eablih revere cauaion effec in boh of he above cae hu indicaing ha he public capial i poible an exogenou iem for he cae of Mauriiu. I i recommended above all ha governmen refrain ielf in undergoing draic cu, paricularly in ranpor capial expendiure, even in difficul ime. I i believed ha he governmen would be beer off in aking advanage of World Bank and oher inernaional iniuion infrarucural and developmenal loan inead of capial expendiure cu from he budge. Governmen need o ake immediae acion o formulae and adop a long erm viion and pell ou inegraed infrarucural policie involving all ake holder. Broad paricipaion of differen inere group and conumer i eenial for he effecivene of uch planning. The long erm plan hould alo incorporae he developmen of a land managemen regime o avoid miue of land. Given governmen budge conrain and in he ligh of our empirical analyi, he cae of privae financing and join public/privae financing arrangemen hould be le ambiguou o long here i addiion o he counry ock capial, no maer who i financing i. Governmen hould enure ha he privae ecor have ufficien incenive o inve in ranpor capial and in i ervice a well. To hi end, he governmen need o develop a efficien iniuional framework and furher improvemen are alo required in 5

16 a number of area o creae a conducive environmen: Thee include improving he legilaive and regulaory environmen, including he formulaion of a BOT law, removing unneceary bureaucraic procedure and pracice, markeing he poenial of Mauriiu o he inernaional inveor communiy. Reference Achauer, D (989), I public expendiure producive?, Journal of Moneary Economic, Vol. 23, pp Dickey, D.A and W.A. Fuller (979), Diribuion of he eimaor for auoregreive ime erie wih a uni roo, Journal of he American Saiical Aociaion. Eber, R.W (990), Public infrarucure and regional economic developmen, Economic Review, Federal Reerve Bank of Cleveland, 26(): pp 5-27 Fernald, G. J.(999), Road o properiy? Aeing he link beween public capial and Produciviy, The American Economic Review, June 999 pp

17 Fiher R.C (997), The effec of ae and local public ervice on economic developmen, New England Economic review, March 997, pp Garcia-Mila, T, T.J McGuire (992), The conribuion of publicly provided inpu o ae' economie, Regional Science and Urban Economic, Vol.22, pp Ghali, K.H.(998) Public invemen and privae capial formaion in a vecor-errorcorrecion model of growh, Applied Economic Vol.30, pp Hendry, D.(995), Dynamic Economeric, Oxford univeriy Pre Heon A, R Summer and B.Aen (2002), Penn World Table Verion 6., Cener for Inernaional Comparion a he Univeriy of Pennylvania (CICUP) Holz-Eakin, D.(994), Public ecor capial and he produciviy puzzle, The review of economic and Saiic LXXVI, pp 2-2 Hulen, C. and R. Schwab(993), Public capial formaion and he growh of regional manufacuring indurie, Naional Tax Journal XLVI, pp Johanen, S (988), Saiical Analyi of coinegraion vecor, Journal of Economic Dynamic and Conrol, Vol.2, pp

18 Lighhar, J.E.(2000), Public Capial and oupu growh in Porugal: An Empirical Analyi, IMF working paper WP/00/ Looney, R.E (997), Infrarucure and Privae Secor Invemen in Pakian, Journal of Aian Economic. Munnell, A (990), Why ha produciviy declined? Produciviy and public invemen, New England economic Review, Vol. Jan/Feb pp 2-22 OECD (200a), A manual on he meauremen of capial ock, Conumpion of fixed Capial and Capial Service, Pari. Available a Pereira, A.M. and R.F. De Fruo (999), Public Capial Accumulaion and privae ecor Performance, Journal of Urban economic, Vol.46, pp Pereira, A.M (2000), I all public capial equal?, The review of Economic and Saiic, Vol.82(3), pp Pereira M A and Andraz J M (200), On he impac of public invemen on he performance of U.S indurie, Public Finance Review Vol. 3 No Pereira, A. M. and O Roca-Sagale (2003), Spillover effec of public capial formaion: evidence from he Spanih Region, Journal of Urban economic Vol. 53 pp

19 Phillip, P.C.B and Perron,P (988), Teing for a uni roo in ime erie regreion, Biomerica, Vol.75, pp Srum J. and Jacob J and Grooe J (999), Oupu effec of infrarucure invemen in he Neherland , Journal of Macroeconomic, Vol. 2, pp Taom, J.(99), Public capial and privae ecor performance, Review of he Federal Reerve Bank of S Loui, pp 3-5 9

20 Table : Summary reul of Uni Roo Te in level form: Dickey-Fuller and Phillip/Perron Te Variable Lag Aug. Phillip Criical Variable Aug Dickey Criical Variable (in log) elecion Dickey Perron Value Type Fuller Value Type Fuller (ime rend () y I() I() k I() I() g I() I() l I() I() Table 2: Summary reul of Uni Roo Te in fir difference : D/F and Phillip/Perron Te Variable Lag Aug. Phillip Criical Variable Aug Dickey Criical Variable (in log) elecion Dickey Perron Value Type Fuller(wih Value Type Fuller ime rend() y I(0) I(0) k I(0) I(0) g I(0) I(0) l I(0) I(0) 20

21 Table 3: Te reul from Johanen procedure Johanen Maximum Likelihood procedure of he coinegraing regreion y (k,g,l) :number of coinegraing vecor() uing he coinegraion likelihood raio. Null Alernaive Te Criical Value Criical Value Hypohei Hypohei Saiic 5% 0% Maximal eigenvalue of he ochaic r0 r marix r< r r<2 r Trace of he r0 r> ochaic marix r< r> r<2 r> Table 4: α and β vecor Variable β -raio α -raio y *** k -0.79*** *** 3.25 g *** ** l -0.55* ** 2. ignifican a 0%, ** ignifican a 5%, ***ignifican a % 2

22 Table 5 :Eimae of he Error-Correcion Model Variable y k g l Conan -2.0*** 0.767*** ** y * k 0.79*** 0.746*** g 0.228* 0.** 0.487*** 0.266* l 0.25* ** Dum *** 0.037* ** υ -0.25*** -0.64*** -0.94** 0.204*** 2 R *ignifican a 0%, ** ignifican a 5%, ***ignifican a % Table 6 : Summary of ECM-baed caualiy e Direcion of cauaion Χ 2 aiic Concluion g caue y Χ Caualiy exi k caue y Χ Caualiy exi y caue g Χ Caualiy doe no exi y caue k Χ Caualiy exi g caue k Χ Caualiy exi k caue g Χ 2.5 Caualiy doe no exi 22