Significance of Infrastructure Investment for Economic Growth

The study attempts to examine the impact of infrastructure investment on economic growth in Pakistan. For this purpose, social and economic infrastructure indices are constructed using Principle Component Analysis and VECM is applied to estimate the long-run as well as short-run relationship between the variables. The study follows the theoretical background of Barro’s (1990) model of government expenditure. The theory suggests that infrastructure investment can have negative impact on economic growth if marginal product of such investment falls below price of capital. The results show that long-run impact of private investment and social infrastructure investment on economic growth is positive and significant while economic infrastructure investment affects economic growth negatively. In short-run, on the other hand, infrastructure investment does not have any significant impact on economic growth. But national savings rate and private investment rate show negative impact on growth. Whereas, price of capital and direct tax have positive impact on economic growth. Diagonastic tests are also performed to test validity of the model. The results have important policy implications as the study reveals inefficiency of infrastructure investment in Pakistan. There is need to divert resources from economic infrastructure to social infrastructure which has the potential to increase growth rate