The impact of public infrastructure investment on economic growth in Thailand

This study investigates the effects of public infrastructure investment on economic growth under Thailand‟s fiscal sustainability framework. A recursive supply-side model based on the Standard Neoclassical Model framework is used using Thai national data on public revenue (taxes, non-tax revenue and debt) to estimate infrastructure investment. An aggregate production function is used based on quarterly time series data from 1993 to 2006. This period comprises economic circumstances in Thailand including recession and recovery. Variables were subjected to unit root test to justify stationary status. If all variables were stationary, the Ordinary Least Square (OLS) method was used in estimation. If all variables were non-stationary and of an order I(1), then the cointegration test was conducted for long-run equilibrium. If the variables confirm cointegration, then the Error Correction Model was estimated using OLS, as the error correction term is constructed to estimate for coefficients. If the variables were found to have a mix of stationary and non-stationary variables, then the Autoregressive Distributed Lag model was used in the estimation. Finally, a simulation process was conducted, based on the estimated model, termed Infrastructure Finance Model for Emerging Economies. Simulation was carried out with ex-ante and ex-post scenarios: to generate a time-path within the data time period to prove model consistency; and for time-path values beyond the time period to provide prediction for policy decisions. The simulation consists of five scenarios: maximum borrowing or 20 per cent of budget; 15 per cent of budget; 10 per cent of budget; 5 per cent of budget; and no borrowing, or no effect on budget. ii The results indicate that public infrastructure investment has a mixed effect on domestic growth. A positive result is found in lagged public investment as a proportion of GDP at the third quarter, confirming that infrastructure capital has a positive significant effect on economic growth. However, a negative impact is found in lagged real government investment at the second quarter. As public investment increases, the demand for resources also increases and, given full capacity for the economy, this may lead to increased costs of private investment, resulting in a fall in private investment and thus reduce economic growth (crowding-out effect). Hence, under conditions of full capacity, an increase in public investment could result in negative impact on growth. The Infrastructure Finance model is therefore a useful indicator of private sector intentions for resource expenditure