Impact of Social Infrastructure on Economic Growth A longitudinal sectional analysis of 127 countries

Abstract

Economic growth is a complex phenomenon and a sensitive issue when it comes to malfunctioning economies. Since the emergence of this discipline, multitude of theories held saving rates, population growth rates, physical and human capital and total factor productivity (TFP) as determinants of economic growth. Hall and Jones (1999) defined social infrastructure as institutions and government policies that determines economic environment within which individuals accumulate skills, and firms accumulate capital and produce output; and empirically proved that social infrastructure is the driving force behind economic growth. This research study seconds this hypothesis and econometrically tests the relationship between the two variables for cross sectional data of 127 countries for three differing years, i.e. 1987, 1996 and 2004. Using method of two stage least squares, it is empirically proven that social infrastructure significantly and positively impacts the economic growth, measured by output per worker. Second hypothesis tested by this study is, the impact of social infrastructure on output per worker is transmitted through components of production function i.e. TFP, human and physical capital. The largest magnitude of impact is channeled via TFP, followed by physical and then human capital. The results of these hypotheses corroborate the findings of Hall and Jones (1999) for all the tested periods. However, the present research study also test the hypothesis that impact of social infrastructure on output per worker varies for varying groups of countries. Our results show that, the said impact is much stronger in lower and upper middle income countries rather than in high and lower income countries. All the findings are graphically and statistically represented.