Public Infrastructure and Economic Growth in Pakistan: A Dynamic CGE-Microsimulation Analysis

Public Infrastructure and Economic Growth in Pakistan: A Dynamic CGE-Microsimulation Analysis

Publication details

  • Saturday | 16 Mar, 2013
  • Vaqar Ahmed
  • Contributed Chapter Series
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Summary Public spending on infrastructure plays an important role in promoting economic growth and poverty alleviation. Empirical studies unequivocally show that under- investment in infrastructure limits economic growth. At the same time, numerous other studies have shown that investment in infrastructure can be an effective tool in fighting poverty reduction. In that context, the financing of infrastructure has been a critical element of most economic growth and poverty reduction strategies in developing countries since the start of this millennium. Several developing countries have recently started putting a policy emphasis on scaling up infrastructure investment.  In  this  book, we  provide a  comparative analysis of the aggregate and sectoral implications of higher spending on infra- structure in three very different Asian countries: China, Pakistan, and the Philip- pines. In our analysis, we pay particular attention to the role of alternative financing mechanisms for increasing public infrastructure investment, namely distortionary and non-distortionary means of financing. Using an intertemporal general equilibrium methodology that distinguishes between credit-constrained and unconstrained households, these studies tackle an important topic discussed in the literature on economic development: (i) how does infrastructure investment contribute to growth at the aggregate and sectoral level, and hence to poverty reduction; and (ii) what role do different financing methods of public spending on infrastructure play in facilitating economic development. The comparative country analysis reveals  that the effects of  infrastructure investments on economic growth and poverty reduction can diverge significantly between countries and can also differ depending on the financing method used. However, a general conclusion emerges that public infrastructure investment gen- erally increases growth and reduces poverty and inequality in the long run, although it can have negative impacts under certain circumstances and in some countries in the short term. In addition, international borrowing is found to be better than tax financing in terms of job creation, improved productivity and complementarity with social protection measures.