TRANSPORT INFRASTRUCTURE AND ECONOMIC GROWTH: PANEL DATA APPROACH FOR ARMENIA, GEORGIA AND TURKEY

Abstract

Provision of efficient, reliable, and affordable infrastructure is essential for economic growth. Transportation infrastructure in particular, is vital to the prosperity of regions. To investigate the relationship and the direction of causality between transport infrastructure, investment in infrastructure and economic growth, we use panel cointegration analysis and panel causality analysis for three countries Armenia, Turkey, and Georgia. We use annual data of Armenia, Turkey and Georgia for the period 1982-2010.The tests proved the existence of more than one cointegrating vector indicating that the system under examination is stationary in more than one direction. The VECM results showed that gross capital formation and road/rail goods transported have a positive and statistically significant impact on economic growth in the short-run. Overall, the existence of bidirectional causality between economic growth and infrastructure investment, and between road and rail passengers carried and infrastructure investment was indicated in both the short and long-run. 1. Introduction Provision of efficient, reliable, and affordable infrastructure is essential for economic growth. Transportation infrastructure in particular, is vital to the prosperity of regions. First, it links residents with employment, public services, shopping or social networks, and businesses to labor, consumers, and suppliers (Kirkpatrick, 2004). Second transport infrastructure may increase productivity of existing inputs and/or decrease transport and production costs making the region more attractive for investors (Pradhan and Bagchi, 2013). Besides this, transport infrastructure affects economic growth through the aggregated demand. The importance of transport infrastructure to economic growth has been recognized long ago in many studies (Wang, 2002; Esfahani & Ramirez, 2003; Phang, 2003; Short & Kopp, 2005; Pradhan, Bagchi, 2013). However, the causal link between infrastructure and growth may exist in the opposite direction, as countries with high levels of output will be able to fund higher infrastructure investments (Egert et al., 2009). Using a panel data approach, we test the link between transport infrastructure, investment in infrastructure and economic growth in Armenia, Turkey, and Georgia over the period 1982 -2010. The degree of relationship between transport infrastructure and economic growth relation is vital for transport infrastructure strategy and policies in these neighbor developing countries. There is bunch of literature sources dealing with the link between infrastructure and economic growth in different developed and developing countries. However, we are not aware of any of such study for Armenia, Georgia and Turkey. The purpose of choosing these countries is also that they are neighbor countries, with similar historical background. Two of these countries were the members of the former Soviet Union. Before independence of Georgia and Armenia from Soviet Union and the war between Azerbaijan and Armenia, the borders connecting the letter two countries were open. The objective of this paper is to investigate the relationship and causality between economic growth, transport infrastructure, and investment in infrastructure. To achieve this aim, we use panel data approach to test for panel unit roots to identify the order of integration of the variables and