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 recent years, the 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 public sector retrenchments 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). This is evidenced by the increased privatization of public utilities and concession multiplications, including widespread public-private partnership (PPP) (Sundaram et al., 2016). The process began in developing countries and gained significant momentum, particularly 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 that supports and lubricates the flow of economic activity (Abu Bakar & Che Mat, 2017). Infrastructure comprises 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 infrastructural components employed in scientific literature. Infrastructure is a determinant of a country’s manufacturing, and agricultural activities’ success and infrastructural investments alleviate poverty and improve individuals’ lives (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 transformed the world into an information society (Bahrini & Qaffas, 2019). The ICT infrastructure, such as fixed phone lines, mobile phones, the internet, and broadband, has 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 generalized as the researchers present different streams of economic science and also conduct an 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 impact of ICT diffusion on the growth-enhancing economic effects. Therefore, the area is still open to further investigation. This study will examine the impact of ICT infrastructure on economic growth among ten 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 be conducting an empirical investigation of how different indicators for measuring ICT infrastructure impact economic growth. The proxy that will be employed here is the per capita 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 forms 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 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 ICT’s economic implications. The focus has been, especially on ICT’s 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), the Organization 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 per capita rise and a reduction of 1.02% in the rate of employment. Further, OECD (2010) noted that ICT is critical in poverty 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, other findings have highlighted a negative impact, as indicated above. Therefore, the study will demystify the confusion inherent in the area and add to the existing knowledge in the field. In addition, given the importance and increased use of ICT, highlighting its impact on economic growth will provide direction on economic policy development to ensure 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 ion the key areas that should be harnessed 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 relationship between ICT diffusion and the growth of infrastructure. Theoretical and empirical studies have been conducted to answer the question of the role of ICT in economic growth. Existing literature, such as that by Koutroumpis (2009) recognizes that ICT plays a significant role in accelerating 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 investigate 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 of 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 the creation of employment in EU nations.
H1: ICT diffusion has an overall positive effect on economic growth by improving business productivity, agricultural productivity, and the creation of employment in EU nations.
Preliminary Review of Literature
Information and communication technology (ICT), according to Pradhan et al. (2015), comprises hardware, software, networks, media collection, storage, processing, transmission, and presentation of information, including 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 has had a positive impact on economic growth by increasing business and agricultural productivity and creating employment opportunities.
Broersma & Van Ark (2007) examined the diffusion of knowledge-intensive business services (KIBS) and its correlation to ICT-based innovation and the impact on the growth of productivity. The intermediate KIBS purchases were the determinant of the degree of KIBS diffusion (Broersma & Van Ark, 2007). The diffusion is considered a component of a larger process of innovations within the organizations. The study established a strong positive relationship between the KIBS diffusion 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 ICT technologies and their application on businesses. They conducted an intensive review of literature and found gaps in e-commerce and ERP; hence more studies were required in the area (Jameel et al., 2017). Also, they established that most of the studies were focused on adoption factors and e-commerce benefits and barriers instead of the use of e-commerce in cost and productivity (Jameel et al., 2017). However, ERP and productivity were significantly related.
Concerning agricultural productivity, Das, Munshi, & Kabir (2016) conducted a study to determine the impact of ICTs on agricultural production in Bangladesh. They employed a randomized survey approach among 1990 farmers drawn 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 contribution of ICT in agribusiness and offered an explanation for using 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 productivity (Milovanović, 2014). The stakeholders, on the other hand, were required to cope with the limitations and issues tied to the use of IT.
Finally, considering employment, Mbongo (2019) checked the impact of rapid ICTs diffusion on the structure and volume of employment in African nations. To establish the effect on employment volume, a dynamic panel model employed in the GMM approach was used on a sample of 20 countries for the period 1995-2015. Secondly, the researcher conducted an empirical test after contextually redefining the hypothesis of skill-biased technological change. The findings indicated that ICT diffusion increased employment and, particularly, particularly youth employment.
Theoretical Framework of the Study
The existing theories have always indicated that capital, labor, and technological development as being the core 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 is expected to converge over time as each country gains access to technological advancements. On the other hand, the endogenous growth theory 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 growth in outputs is the Solow model (Solow, 1956). Within the model, technology (Solow residual) as a factor of economic growth is essential. It 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, such as innovations, externalities, human capital, and decisions on investments. The correlation between the Solow residual and the variable of capital is considered positive; hence the neoclassical approach is the most suitable theoretical framework for this study. In the digital era, GPD growth is tied to multiple technological factors. Therefore, as outlined by Solow, the function of production includes three factors of production, as provided below.
𝑌 = 𝐴𝐾 𝛼𝐿 1−𝛼
Here:
Y: Stock output.
K and L: The stock for labor and capital, respectively.
A: The technological parameter affecting K and L’s productivity.
The function represents a constant returns to scale the implication being that a unit rise in labor and capital contributes to a unit rise in the degree of output. Therefore, the 𝛼 and (1 − 𝛼) values add up to one.
Methodology of the Study
The present study targets at evaluating the effect of ICT diffusion on economic growth for a 10-year period that is 2009-2019. The study will use panel data generated from the relevant data sources and analyzed using a dynamic panel data model and utilize the GMM approach for the sample population. The study’s dependent variable will be economic growth, which will be proxied by per capita GDP in Euros at current prices and Purchasing Power Parities (PPPs). The explanatory variables will include the determinants of ICT infrastructure and the macroeconomic control variables that will then be analyzed.
Research Timeline & Work Plan
References
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