Impact of Infrastructure Development on Economic Growth-Analysis (Dissertation Proposal)

Impact of Infrastructure Development on Economic Growth-Analysis

Background of the Study

An adequate supply of infrastructural services has been recognized as a core component for growth and productivity. In the recent years, infrastructure’s role has received significant attention. From an academic perspective, academic literature that attempts to quantify infrastructure’s contribution to income and growth has been on the rise since the initial seminal work by Aschauer (1989) as cited by (Calderón & Servén, 2004). In addition, based on a policy perspective there has been increased concern related to infrastructural development that can be traced to two global developments that have taken place in the last three decades (Calderón & Servén, 2004). The initial development was the publisc sector retrechments that have taken from the mid 1980s in a majority of the developed and developing nations, from a dominant position in providing infrastructure (Calderón & Servén, 2004). This was in the context of rising pressures of fiscal adjustments and consolidation. The second event was the acceptance of infrastructural industries to private participation(Sundaram, Chowdhury, Sharma, & Platz, 2016). This was part of a global push towards increasing the dependence on markets and the activities of the private sector(Sundaram et al., 2016). Today, this is evidenced by the increased privatization of public utilities and concessions multiplications including widespread public-private partnership (PPP)(Sundaram et al., 2016). The process begun in developing countries and gained significant momentum, particuallry in the United Kingdom (UK)(Sundaram et al., 2016). However, it extended to even the developing countries and became a global phenomenon.

Infrastructure is considered to be among the primary factors that promote economic growth. It means the foundational structure supporting and lubricating the flow of economic activity(Abu Bakar & Che Mat, 2017). Infrastructure comprises of physical assets, for example, roads, power plants, fiber cables, and sewer systems including other services, for instance, communication networks and power distribution services (Yılmaz & Çetin, 2017). However, as noted by Snieska & Simkunaite (2009) it is difficult to establish a single definition of infrastructure and infrustructural components employed in scientific literature.Infrastructure is a determinant of a country’s manufacturing and agricultural activities’ success and infrastructural investments alleviate poverty hence improve the lives of individuals(Idris, 2018). Both social and economic infrastructure development has been among the determinants of economic growth(Abu Bakar & Che Mat, 2017). Therefore, the lack of infrastructure remains among the key barriers to economic development.

In the last few decades, there has been an increased diffusion of information and communication technology (ICT) that has resulted in the transformation the globe into an information society(Bahrini & Qaffas, 2019). The ICT infrastructure, for example, fixed phone lines, mobile phones, the internet, and broadband have allowed individuals, companies, and governments to have increased information and knowledge access(Bahrini & Qaffas, 2019). The diffusion of ICT has promoted resource allocation efficiency, reduced the costs of production, and generated increased demand and investment in every sector of the economy(Bahrini & Qaffas, 2019; Grimes, Stevens, & Ren, 2012; Gruber & Pantelis, 2010).

Numerous studies have analyzed the link between infrastructure and economic development. These studies include Aschauer (1989), Baldwin & Dixon (2008), Calderon & Serven (2003),Grubesic (2009), Prud’homme (2005), and Sahoo & Dash (2009) to mention a few. The findings from these studies including the estimations that they make cannot be genralized as th researchers present vaerying streams of economic science and also conduct analysis of different geographical areas.

Focussing on industrialized countries, previous studies have employed varying econometric models and used cross-country data to establish the link between ICT diffusion and economic growth and produced mixed findings. Some of the findings were ambiguous resulting in significant disagreement between researchers regarding the economic growth enhancing impact of ICT difussion. Therefore, the area is still open to further investigation. The purpose of this study will be to conduct and examination of the impact of ICT infrastructure on economic growth among 10 countries in the EU including Britain for a 10-year period (2009-2019). The study will employ the Generalized Method of Moments based on the countries’ panel data as applied by Toader, Firtescu, Roman, & Anton (2018). The goal will conducting an empirical investigation of how different indicators for measuring ICT infrastructure impact economic growth. The proxy that will be employed here is the percapita Gross Domestic Product (GDP). Macroeconomic control variables will also be included to determine the impact on per capita GDP.

Significance of the Study

The role of infrastructure is considered vital for both households and companies with the infrastructure quality and availability leading to varying investment decisions that may promote migration and the location of establishing businesses(Snieska & Simkunaite, 2009). Infrastructure services are used as final consumer items by households and intermediate consumer items for companies(Snieska & Simkunaite, 2009). The availability of infrastructural services influences both regional and country development and it form the rationale of why the level and quality of infrastructure directly impact the growth and productivity of businesses(Snieska & Simkunaite, 2009). Also, different capital investments in infrastructure result in regional and country inequalities. Therefore, the effects of infrastructure development on a country are hence a vital element in strategic development and the formulation of developmental policies, particularly during economic transitions.

Over the last decade, there have been significant advancements in ICT that have pushed researchers to conduct investigations on the economic implications of ICT. The focus has been, especially on ICTs contribution to higher productivity, the promotion of economic growth, and poverty reduction. International organizations, for example, the United Nations (UN), the International Telecommunications Union (ITU), theOrganization for Economic Co-operation and Development (OECD), and the World Bank consider ICT as a critical driver of sustainability in economic development(World Economic Forum, 2013). A 10% increase in a country’s level of digitization is projected to result in approximately 0.75% GDP percapita increase and a reduction of 1.02% in the rate of employment. Further, OECD (2010) noted that ICT is key in povery reduction as it creates new income sources and employment opportunities and at the same time increases access to health and education services among the poor.

Despite these positive effects, there are other findings that have highlighted a negative impact as indicated above. Therefore, the study will demystify the confusuion inherent in the area and add to the esisting knowledge in the field. In addition, given the importance and increased use ICT, highlighting its impact in economic growth will provide direction on economic policy development to esnure investments are made in areas that will have maximum effect on economic growth. Further, in light of the current COVID-19 pandemic, the present findings will also provide direction on the key areas that should be harnnessed as economies within the EU as the companies strategize on how to open up their economies as a means of promoting economic recovery. Finally, EU nations provide development funds to many developing nations. Therefore, the study will ensure that the funds are directed towards areas that will promote economic growth within these countries.

Problem Statement of the Study

In relation to the increasing importance of ICT including its role in global transformation, researchers have focussed on understanding ICTs impact on economic growth at different levels (industry, national, and cross-country). Empirical studies such as that by Sassi & Goaied (2013) and Vu (2011) have produced mixed findings regarding the relationshiop between ICT difussion and the growth of infrastructure. Theoretical and empirical studies have been conducted to answer the question related to the role of the impact of ICT on economic growth. Existing literature such as that by Koutroumpis (2009) recognize that ICT plays a significant role in accelarating and improving the rate of economic growth. However, at the same time studies, for example, those by Papaioannou & Dimelis (2007), Pradhan, Arvin, & Norman (2015), and Yousefi (2011) have highlighted that in many regions and countries globally, ICT diffusion has a negative impact on economic growth.

Aims of the Study

The purpose of this study will be to conduct an investigation to determine the impact of ICT diffusion on economic development by testing the correlation in EU nations. It will achieve this by focusing on four key areas business productivity, agricultural productivity, and employment creation.

Objectives of the Study

The objectives of the study will include:

To determine the overall impact of ICT diffusion on economic growth in EU nations.
To determine the effect of ICT diffusion on business productivity in EU nations.

To find out the impact ICT diffusion on agricultural productivity ion EU nations.

To highlight the impact of ICT on the creation of employment in EU nations.

Hypothesis of the Study

Based on the above objectives, the hypotheses of the study will include:

H₀: ICT diffusion has an overall positive effect on economic growth by improving business productivity, agricultural productivity, and creation of employment in EU nations.

H₁:ICT diffusion has an overall positive effect on economic growth by improving business productivity, agricultural productivity, and creation of employment in EU nations.

Preliminary Review of Literature

Information and communication technology (ICT) according to Pradhan et al. (2015)comprise hardware, software, networks, and media collection, storage, processing, transmission, and presentation of information that includes voice, data, text, and images. It also includes the “digital telephone network, mobile phones, Internet capability, Internet servers and fixed broadband and other technologies” (Pradhan et al., p. 3).Such ICT development have had a positive impact on economic development through the increase of business and agricultural productivity and creating opportunities for employment.

Broersma & Van Ark (2007)examinedthe diffusion of knowledge intensive business services (KIBS) and its correlation to ICT-based innovation and the impact on the growth of productivty. The intermediate KIBS purchases was the determinat of the degree of KIBS difussion (Broersma & Van Ark, 2007). The difussion is considered a component of a larger process of innovations within the organiozations and the study established a strong positive relationship between the KIBS difusion measure and the ICT intensity (Broersma & Van Ark, 2007). Using IT and KIBS positively contributed to the growth in labor productivity including within the aggregate economy. Another study by Jameel, Abdulkarem, & Mahmood (2017) the researchers targeted at finding out the effect of of ICT technologies and their application on businesses. They conducted an intensive review of literature and found gaps related to the role of ecommerce and ERP hence more studies were required in the area (Jameel et al., 2017). In addition, they established that most of the studies were focused on adoption factors and e-commercebenefits and barriers instead of the use of e-commerce in cost and productivity (Jameel et al., 2017). However, ERP and productivity were significantly related.

In relation to agricultural productivity, Das, Munshi, & Kabir (2016) conducted a study to dtermine the impact of ICTs on agricultural production in Bangladesh. They employed a randomized survey approach among 1990 farmers drwan from the whole country. Following a counterfactual analysis, their findings revealed that the incorporation of ICTs accelerated agricultural production (Das et al., 2016). Also, Milovanović (2014) analyzed the role and potential contribuition of ICT in agribusiness and offer an explanation for uising IT in different fields in the sector. the findings suggested that IT has a significant potential to support farmers and other key stakeholders in increasing efficiency, effectiveness, and proudctivity (Milovanović, 2014). The stakeholders, on the other hand, were required to caope with the limitations and issues tied to the use of IT.

Finaly, considering employment, Mbongo (2019) checked the impact of rapid ICTs diffusion on the structure and volume of employment in African nations. To establish the impact on employment volume, a dynamic panel model that employed the GMM approach was used on a sample of 20 nations for the period 1995-2015. Secondly, the researcher conducted an empirical test after contextually redifining the hypothesis of of skill-biased technologicalchange. The findings indicated that ICT diffusion increased employment and, particulalry youth employment.

Theoretical Framework of the Study

The existing theories have always indicated that capital, labor and technological development as being the caore drivers for sustainable economic growth. Technology is considered as a complement to capital and labor as it generates productivity gains in production through new knowledge and innovations(Solow, 1956). The neoclassical growth model considers technology as an exogenous factor. Therefore, the income between countries are expected to converge overtime as each country gains access to technological advamncements. The endogenous growth theory, on the other hand, does not support the convergence of incomes as it explains the variance in the levels of technology in different countries.

A common model employed in previous research in the investigation of the impact on the grwoth in outputs is the Solow model (Solow, 1956). Within the model, technology (Solow residual) as a factor of economic growth is important and comprises all the other production factors that cannot be explained by labor and capital alone. Growth in the model is influenced by technology and is determined by various factors, for example, innovations, externalities, human capital, and decisions on investments. The correlation between the Solow residual and the variable of capital is considered to be positive hence the neoclassical appraoch is the most suitable theoretical framework for this study. In the digital era, GPD growth is tied to multiple technological factors. Therefore, the function of production as outlined by Solow includes three factors of prodcution as proovided below.

𝑌 = 𝐴𝐾𝛼𝐿¹⁻^𝛼

Y: Stock output.

K and L: Capital and labor stock respectively.

A: Technological parameter

The function indicates constant returns to scale the implication being a unit increase in labor and capital contributes to a unit increase in the degree of output.The values of 𝛼 and (1 − 𝛼) will hence add up to 1.

The main aim of this study is to check the impact of the rapid diffusion of

ICTs in Africa on the volume and structure of employment. First, to

analyze the impact of ICT diffusion on the volume of employment, we

estimate a dynamic panel model using the GMM method on a sample of

20 African countries over the period 1995-2015. In a second step, from a

contextual redefinition of the hypothesis of skill-biased technological

change, we empirically test the validity of this hypothesis for our panel. To

do this, we also estimate a dynamic model by the estimators mentioned

above. The results show that ICT diffusion is favorable to employment in

general, and to youth employment in particular