INFRASTRUCTURE DEVELOPMENT, TRADE, AND ECONOMIC GROWTH IN THE EAST AFRICAN COMMUNITY: AN EMPIRICAL ANALYSIS
Date
2022-01-17
Authors
BABU, JAMES OCHIENG
Journal Title
Journal ISSN
Volume Title
Publisher
University of Nairobi
Abstract
Infrastructure holds a central position in a country’s economic activity, hence the need to do
a comprehensive analysis of its specific contributions to an economy. In the last decades, the
East African Community (EAC) governments have devoted significant public resources
towards building new infrastructure projects in the region. However, growth has not been
commensurate with increased public investment in infrastructure; in addition, the volume of
trade has stagnated. Therefore, this study employed panel time-series technique and
infrastructure augmented production function, to establish the short- and long-run
relationship between infrastructure stock and economic growth using data for the period
1990-2019. The study also explored the possible channels through which infrastructure could
manifest itself on growth by doing an in-depth analysis on key determinants of growth, like
private investment and trade. Infrastructure stock index was constructed from public
economic infrastructure including transport, energy, and communications. Data was
obtained from various sources including the Socio-Economic database of African
Development Bank, World Bank database, International Monetary Fund database and
National Bureaus of Statistics of EAC Partner States. Panel data models for growth and
private investment were analysed using pooled mean group estimation technique. The study
established a cointegrating relationship between infrastructure stock and economic growth in
EAC and a uni-directional causality from infrastructure to economic growth. Using an error
correction framework to capture the short-and long-run dynamics, the results confirmed that,
public infrastructure investment crowds-out private investment in the short-run but crowds-in
private investment in the long-run. The study estimated a gravity model augmented for both
hard and soft infrastructures from transport and information and communications technology
indicators using random effects model and Poisson Pseudo Maximum Likelihood method.
Both methods confirmed that infrastructure stock is important in increasing the volume of
EAC’s trade. The policy implications are that increased investment is vital in economic
infrastructure to increase infrastructure stock, encourage private sector activities and growth
in the long-run. Macroeconomic stability is also crucial for private sector investment.
Transport infrastructure has a greater impact on exports than Information and
Communications Technology infrastructure and thus, it is important to channel additional
resources towards increasing transport infrastructure stock. The study also found that, many
documents required for exports lowers the volume of trade, hence it is critical to enhance
border efficiency for more trade.
Description
Keywords
Infrastructure Development , Economic Growth , Private Investment , International Trade , EAC