The Relationship Between Public Capital and Economic Activity

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1 INFRASTRUCTURE: In the Aschauer’s (1989a, 1989b) original work, a Cobb-Douglas production function was estimated with stocks of various infrastructure as capital and labour as the other input. He established that military capital had insignificant association with productivity. Nevertheless, the ‘core’ infrastructure such as streets, highways, airports, mass transit, sewers, water systems, etc., had the majority explanatory power for productivity. The relationship between public capital and economic activity at the State level in the US was examined by Munnell (1990a, 1990b). In the initial analysis, public capital was found to have a considerable and positive impact on output even though the output elasticity was roughly one-half the size of the national estimate. In the following analysis, public capital was found to enhance the productivity of private capital, boost its rate of return and promote more investment. Alternatively, from the investors’ standpoint, public capital was looked upon as an alternative for private capital which crowded out private investment. There are not many studies conducted at the regional level using cross-section data. Costa et. al. (1987) tested the relationship between public capital and regional output using translog production function for 48 States of the USA for the year 1972. Three sector wise aggregates were considered in the study viz., non-agricultural sectors, all economic sectors and manufacturing. Public capital and Labour were found to be complementary inputs with diminishing returns. Some of the later studies by Duffy-Deno and Eberts (1989), Eberts (1986, 1990), and Eisner (1991) were also conducted at the regional level. All these studies found a positive relationship betw... ... middle of paper ... ...egional Economic Growth", Working Paper No. 8610, Federal Reserve Bank of Cleveland, December. Eberts, R.W. (1990), "Public Infrastructure and Regional Economic Development", Economic Review, Federal Reserve Bank of Cleveland, 26, pp. 15-27. Eisner, R. (1991), "Infrastructure and Regional Economic Performance", New England Economic Review, Federal Reserve Bank of Boston, Sept.-Oct., pp. 47-48. Jha, Raghbendra and B.S. Sahani (1992), Industrial Efficiency: An Indian Perspective, Government of India (1996), India Infrastructure Report, Department of Economic Affairs, Ministry of Finance, Government of India. Sahoo, Satyananda, and K.K. Saxena (1999), "Infrastructure and Economic Development: Some Empirical Evidence", Indian Economic Journal, 47(2), October-December, pp.54-66. Sims, C. (1980), "Macroeconomics and Reality", Econometrica, 48, pp. 1-48.

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