Estimating the contribution of infrastructure to national productivity in Europe

Abstract

While there is much interest in understanding the contribution that investment in different types of infrastructure can make to the economic development of cities, regions and nations, such research is constrained by various methodological difficulties. Following the approach of Égert, Kozluk and Sutherland (2009), this paper seeks to identify whether countries might be over- or under-investing in infrastructure relative to other forms of capital investment, from the point of view of raising productivity. While subject to various limitations (and also highlighting the continuing data constraints in this area), such an analysis provides a consistent and comparable basis on which to assess whether countries might benefit from additional infrastructure investment or, conversely, whether they might in fact stand to gain from alternative forms of fixed capital formation.The article analyses five types of infrastructure in the 27 Member States of the European Union (prior to 2013), Norway and Switzerland. We find some evidence of over-investment in electricity-generation capacity (investment in other forms of capital would likely yield higher productivity returns) and under-investment in roads, motorways and telephone infrastructure (there is potential for greater productivity growth from investing in these infrastructures). The evidence of a relationship between rail investment and productivity is less clear. While the results suggest that countries might stand to improve their national productivity by shifting the balance between infrastructure and other capital, higher productivity is not a country’s only objective. Resilient infrastructure provision and/or upgrades with a view to pursuing other objectives such as climate-change mitigation may take precedence, necessitating at least some degree of ‘non-optimal’ investment.