Infrastructure Investments in Portugal Volume II: Essays on the Economic Effects of Infrastructure Investments in Portugal Alfredo Marvão Pereira Rui Marvão Pereira May, 2015 1 Alfredo Marvão Pereira Project Coordinator Thomas Arthur Vaughn Memorial Professor of Economics The College of William and Mary Williamsburg, Virginia, USA Tel.: 001 804 741 8196 Email: [email protected] Rui Marvão Pereira Lecturer in Economics The College of William and Mary Williamsburg, Virginia, USA Tel.: 001 757 221 2390 Email: [email protected] 2 Index CHAPTER 1 Introduction: Preliminary Conceptual Remarks _____________________________ 9 1.1 General Presentation of this Volume _____________________________________________________ 9 1.2 The Literature _______________________________________________________________________ 9 The Industry Dimension ___________________________________________________________________ 10 The Regional Dimension ___________________________________________________________________ 10 1.3 The Economic Effects of Infrastructure Investments ________________________________________ 12 1.4 Why and How These Essays are Different ________________________________________________ 14 CHAPTER 2 Data Sources and Description __________________________________________ 17 2.1 The Industry Data Set ________________________________________________________________ 17 General Scope _________________________________________________________________________ 17 Industry Coverage ______________________________________________________________________ 17 The Traded Goods versus Non-traded Goods Divide __________________________________________ 17 On the Evolution of the Industry Variables __________________________________________________ 18 On the Evolution of Labor Productivity by Sector _____________________________________________ 18 2.2 The Regional Data Set ________________________________________________________________ 19 General Scope _________________________________________________________________________ 19 On the Regional Evolution of the Macro Variables ____________________________________________ 20 2.3 The Infrastructure Investment Data Set __________________________________________________ 21 General Scope _________________________________________________________________________ 21 On the Evolution of Investments on the Different Infrastructure Assets ___________________________ 21 Overall Evolution of Infrastructure Investments ______________________________________________ 22 The Regional Dimension of Infrastructure Investments ________________________________________ 23 CHAPTER 3 Methodological Considerations ________________________________________ 35 3.1 General Methodological Remarks _______________________________________________________ 35 3 General Approach ______________________________________________________________________ 35 The Underlying Economic Model __________________________________________________________ 35 Link to the Fiscal Multiplier Literature ______________________________________________________ 36 3.2 Preliminary Data Analysis _____________________________________________________________ 36 Unit Roots Cointegration ________________________________________________________________ 36 Cointegration _________________________________________________________________________ 37 VAR specifications _____________________________________________________________________ 39 3.3 Identifying Exogenous Innovations in Infrastructure Investment ______________________________ 40 The Problem and Our Approach __________________________________________________________ 40 The Policy Functions ____________________________________________________________________ 40 The Orthogonalization Assumptions _______________________________________________________ 41 The Regional Dimension _________________________________________________________________ 42 The Estimated Policy Functions ___________________________________________________________ 42 3.4 Measuring the Effects of Innovations in Infrastructure Investment ____________________________ 43 The Exogenous Shock ___________________________________________________________________ 43 The Accumulated Impulse Response Functions ______________________________________________ 44 Error Bands and Significance _____________________________________________________________ 44 The Measurement of the Total Effects _____________________________________________________ 44 The Long Term Elasticities _______________________________________________________________ 45 Long Term Marginal Products ____________________________________________________________ 45 Annual Rates of Return _________________________________________________________________ 46 CHAPTER 4 Identifying Priorities in Infrastructure Investment __________________________ 47 4.1 Introduction ________________________________________________________________________ 47 4.2 On the Empirical Evidence _____________________________________________________________ 49 On the Elasticities with Respect to Infrastructure Investments __________________________________ 49 On the Effects of Infrastructure Investments on Labor Productivity ______________________________ 50 4 Marginal Products with Respect to Infrastructure Investment __________________________________ 50 On the Potential Budgetary Effects ________________________________________________________ 52 Rates of Return of Infrastructure Investments _______________________________________________ 52 Long-term Marginal Products versus Effects on Impact ________________________________________ 53 Long-Term Marginal Products and the Relative Scarcity of Infrastructure Capital ___________________ 55 4.3 Summary and Concluding Remarks _____________________________________________________ 57 Summary _____________________________________________________________________________ 57 Policy Implications _____________________________________________________________________ 58 CHAPTER 5 Is All Infrastructure Investment Created Equal? ____________________________ 69 5.1 Introduction ________________________________________________________________________ 69 5.2 The Empirical Results _________________________________________________________________ 71 Long-Term Elasticities ___________________________________________________________________ 71 Long-term effects on labor productivity ____________________________________________________ 72 Long-Term Marginal Products and Rates of Return ___________________________________________ 73 Long-term Marginal Products versus Effects on Impact ________________________________________ 75 Long-Term Marginal Products and the Relative Scarcity of Infrastructure Capital ___________________ 78 5.3 International Comparisons ____________________________________________________________ 81 5.4 Summary and Concluding Remarks _____________________________________________________ 85 Summary _____________________________________________________________________________ 85 Policy Implications _____________________________________________________________________ 86 CHAPTER 6 Infrastructure Investment and the Composition of Economic Activity _________ 107 6.1 Introduction _______________________________________________________________________ 107 6.2 The Empirical Results ________________________________________________________________ 108 The Effects at the Industry Level: A First Look_______________________________________________ 108 The Effects at the Industry Level: A Closer look _____________________________________________ 109 On the Effects on the Composition of Economic Activity ______________________________________ 112 5 On the Relationship between the Aggregate and Sectorial Effects ______________________________ 115 6.3 Summary and Concluding Remarks ____________________________________________________ 117 Summary ____________________________________________________________________________ 117 Policy Implications ____________________________________________________________________ 118 CHAPTER 7 Infrastructure Investment, Labor Productivity, and International Competitiveness 137 7.1 Introduction _______________________________________________________________________ 137 7.2 The Empirical Results ________________________________________________________________ 139 The Effects of Investments in Road Transportation Infrastructures _____________________________ 139 The Effects of Investments in Other Transportation Infrastructures _____________________________ 141 The Effects of Investments in Social Infrastructures __________________________________________ 142 The Effects of Investments in Public Utilities and Telecommunications __________________________ 143 The Effects on Labor Productivity from an Industry Perspective ________________________________ 145 7.3 Summary and Concluding Remarks ____________________________________________________ 147 Summary ____________________________________________________________________________ 147 Policy Implications ____________________________________________________________________ 148 CHAPTER 8 On the Choice of the Regional Location of Infrastructure Investments ________ 154 8.1 Introduction _______________________________________________________________________ 154 8.2 The Empirical Results ________________________________________________________________ 156 Where to invest for each infrastructure asset_______________________________________________ 156 What to invest for each region __________________________________________________________