Threshold Effects of Institutional Quality in the Infrastructure-Growth Nexux
Keywords:
infrastructure, institutions and growth, sub-Saharan Africa, principal components, threshold regression model, First-differenced General Method of Moments
Abstract
This study estimates the threshold level of institutional quality that will ensure the efficient use of infrastructure in stimulating growth in Sub-Saharan Africa based on panel data from 41 countries in the region between 1996 and 2015. It employs a dynamic panel threshold regression model which is derived from the New Institutional Economics theory and this is estimated using the first-differenced Generalized Method of Moments estimator. Results reveal that the relationship between infrastructure and growth is non-linear which provides support for the use of a threshold regression model, with institutional quality serving as the threshold variable. In terms of the threshold level, the findings show that the index of institutional quality that will ensure the efficient use of infrastructure in stimulating growth is 0.410. The study also finds that, on average, countries in the region operate below this threshold level, hence their poor growth. The conclusion that is drawn from the analysis is that poor or low institutional quality is one of the factors hampering the growth of countries in the SSA region. A major limitation of the study is that the estimator employed for the threshold analysis is developed for models with single threshold value only and so does not allow for multiple threshold values. Thus, it is recommended that governments in the region need to formulate and implement policies targeted at improving the level of institutional quality in their countries.
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References
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Ageenor, P. R., & Montiel, P. J. (2015). Development macroeconomics. New Jersey: Princeton University Press.
Akanbi, O. A. (2015). Structural and Institutional Determinants of Poverty in Sub-Saharan African Countries. Journal of Human Development and Capabilities, 16(1), 122-141. https://doi.org/10.1080/19452829.2014.985197.
Ansar, A., Flyvbjerg, B., Budzier, A., & Lunn, D. (2016). Does infrastructure investment lead to economic growth or economic fragility? Evidence from China. Oxford Review of Economic Policy, 32(3), 360-390. https://doi.org/10.1093/oxrep/grw022.
Apanisile, O., & Akinlo, T. (2013). Rail Transport and Economic Growth in Nigeria (1970-2011). Australian Journal of Business and Management Research, 3(5), 18-24.
Aschauer, D. A. (1989). Is public expenditure productive? Journal of Monetary Economics, 23(2), 177-200. https://doi.org/10.1016/0304-3932(89)90047-0.
Badalyan, G., Herzfeld, T., & Rajcaniova, M. (2015). Infrastructure, institutions, and economic productivity in transition countries. Retrieved from https://pdfs.semanticscholar.org/b1d4/27a87d48042ea5229b08b07d162713a33dd8.pdf.
Batuo, M. E. (2015). The role of telecommunications infrastructure in the regional economic growth of Africa. The Journal of Developing Areas, 49(1), 313-330. https://doi.org/10.1353/jda.2015.0005.
Boopen, S. (2006). Transport infrastructure and economic growth: evidence from Africa using dynamic panel estimates. The Empirical Economics Letters, 5(1), 37-52.
Borrmann, A., Busse, M., & Neuhaus, S. (2006). Institutional Quality and the Gains from Trade. Kyklos, 59(3), 345-368. https://doi.org/10.1111/j.1467-6435.2006.00336.x.
Bross, I. D. (1971). Critical levels, statistical language and scientific inference. Foundations of Statistical Inference, 500-513.
Cadot, O., Roller, L. H., & Stephan, A. (2006). Contribution to productivity or pork barrel? The two faces of infrastructure investment. Journal of Public Economics, 90(6), 1133-1153. https://doi.org/10.1016/j.jpubeco.2005.08.006.
Calderon, C., Moral‐Benito, E., & Serven, L. (2015). Is infrastructure capital productive? A dynamic heterogeneous approach. Journal of Applied Econometrics, 30(2), 177-198. https://doi.org/10.1002/jae.2373.
Calderón, C., & Serven, L. (2003a). The Output Cost of Latin America’s Infrastructure Gap. In Easterly, W., Servén, L., (ed.), The Limits of Stabilization: Infrastructure, Public Deficits, and Growth in Latin America. Retrieved from http://documents.worldbank.org/curated/en/812361468773091055/The-limits-of-stabilization-infrastructure-public-deficits-and-growth-in-Latin-America
Candelon, B., Colletaz, G., & Hurlin, C. (2013). Network Effects and Infrastructure Productivity in Developing Countries. Oxford Bulletin of Economics and Statistics, 75(6), 887-913. https://doi.org/10.1111/j.1468-0084.2012.00722.x.
Canning, D., & Pedroni, P. (2004). The Effect of Infrastructure on Long Run Economic Growth. Retrieved from. https://web.williams.edu/Economics/wp/pedroniinfrastructure.pdf.
Crescenzi, R., Cataldo, M. D., & Rodríguez-Pose, A. (2016). Government Quality And The Economic Returns Of Transport Infrastructure Investment In European Regions. Journal of Regional Science, 56(4), 555-582. https://doi.org/10.1111/jors.12264
Damijan, S., & Padilla, B. (2014). Effectiveness of Infrastructure Project Investments in Africa. Retrieved fromhttps://institute.eib.org/wp-content/uploads/2016/04/Effectiveness_of_Infrastructure_Project_Investments_in_Africa_final_vers....pdf
Deng, T., Shao, S., Yang, L., & Zhang, X. (2014). Has the transport-led economic growth effect reached a peak in China? A panel threshold regression approach. Transportation, 41(3), 567-587. https://doi.org/10.1007/s11116-013-9503-4.
Dethier, J. J., & Moore, A. (2012). Infrastructure in developing countries: An overview of some economic issues. Retrieved from https://ideas.repec.org/a/eee/retrec/v38y2013i1p139-148.html.
Devarajan, S., Swaroop, V., & Zou, H. F. (1996). The composition of public expenditure and economic growth. Journal of Monetary Economics, 37(2), 313-344. https://econpapers.repec.org/paper/agsubzefd/123305.htm.
Duran-Fernandez, R., & Santos, G. (2014). An empirical approach to public capital, infrastructure, and economic activity: A critical review. Research in Transportation Economics, 46, 3-16. https://doi.org/10.1016/j.retrec.2014.09.001.
Egert, B., Kozluk, T. J., & Sutherland, D. (2009). Infrastructure and growth: empirical evidence. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.617.2958&rep=rep1&type=pdf.
Escobal, J. A., & Ponce, C. (2011). Access to public infrastructure, institutional thickness and pro‐poor growth in Rural Peru. Journal of International Development, 23(3), 358-379. https://doi.org/10.1002/jid.1775.
Estache, A., & Fay, M. (2007). Current debates on infrastructure policy (Policy Research Working Paper No. 4410). World Bank, Washington, DC.
Estache, A., Speciale, B., & Veredas, D. (2005). How much does infrastructure matter to growth in Sub-Saharan Africa?. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.508.7016&rep=rep1&type=pdf.
Falk, B. (1986). Further evidence on the asymmetric behavior of economic time series over the business cycle. Journal of Political Economy, 94(5), 1096-1109. https://doi.org/10.1086/261423.
Fedderke, J. W., & Bogetic, Z. (2009). Infrastructure and growth in South Africa: Direct and indirect productivity impacts of 19 infrastructure measures. World Development, 37(9), 1522-1539. https://doi.org/10.1596/1813-9450-3989.
Fisher, R. A. (1956). Statistical Methods and Scientific Inference. New York: Hafner.
Ghafoor, A., & Yorucu, V. (2002). Public expenditure and productivity puzzle: The case of Northern Cyprus. METU Studies in Development, 29(1-2), 69-86.
Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345-368. https://doi.org/10.1016/S0304-4076(99)00025-1.
Kherallah, M., & Kirsten, J. F. (2002). The new institutional economics: Applications for agricultural policy research in developing countries. Agrekon, 41(2), 110–133. https://doi.org/10.1080/03031853.2002.9523589.
Kodongo, O., & Ojah, K. (2016). Does infrastructure really explain economic growth in Sub-Saharan Africa? Review of Development Finance, 6(2), 105-125. https://doi.org/10.1016/j.rdf.2016.12.001.
Kourtellos, A., Stengos, T., & Tan, C. M. (2016). Structural threshold regression. Econometric Theory, 32(4), 827-860. https://doi.org/10.1017/S0266466615000067
Law, S. H., Azman-Saini, W. N. W., & Ibrahim, M. H. (2013). Institutional Quality Thresholds and the Finance–Growth Nexus. Journal of Banking & Finance, 37(12), 5373-5381. https://doi.org/10.1016/j.jbankfin.2013.03.011.
Loayza, N., Fajnzylber, P., & Calderón, C. (2005). Economic growth in Latin America and the Caribbean: stylized facts, explanations, and forecasts. Washington, DC: The World Bank.
Matthews, R. C. O. (1986). The Economics of institutions and sources of growth. The Economic Journal, 96(384), 903-918. https://doi.org/10.2307/2233164.
Neftci, S. N. (1984). Are economic time series asymmetric over the business cycle? Journal of Political Economy, 92(2), 307-328. https://doi.org/10.1086/261226.
North, D. C. (1990). Institutions, Institutional Change and Economic Performance. New York: Cambridge University Press.
North, D. C., & Thomas, R. P. (1973). The rise of the western world: A new economic history. United Kingdom: Cambridge University Press.
Okoh, A. S., & Ebi, B. O. (2013). Infrastructure investment, institutional quality, and economic growth in Nigeria: An interactive approach. Retrieved from http://jedsnet.com/journals/jeds/Vol_3_No_2_June_2015/14.pdf.
Richter, R. (2005). The New Institutional Economics: Its Start, its Meaning, its Prospects. European Business Organization Law Review, 6(2), 161-200. https://doi.org/10.1017/S1566752905001618.
Romp, W., & Haan, J. D. (2007). Public capital and economic growth: A critical survey. Perspektiven Der Wirtschaftspolitik, 8(S1), 6-52. https://doi.org/10.1111/j.1468-2516.2007.00242.x.
Seethepalli, K., Bramati, M. C., & Veredas, D. (2008). How Relevant Is Infrastructure to Growth in East Asia. Retrieved from https://openknowledge.worldbank.org/handle/10986/6727.
Seo, M. H., & Shin, Y. (2016). Dynamic panels with threshold effect and endogeneity. Journal of Econometrics, 195(2), 169-186.
Siyan, P., Eremionkhale, R., & Makwe, E. (2015). The impact of road transportation infrastructure on economic growth in Nigeria. International Journal of Management and Commerce Innovations, 3(1), 673-680.
Williamson, O. E. (1985). The economic institutions of capitalism: Firms, markets, relational contracting. New York: The Free Press.
Yamano, N., & Ohkawara, T. (2000). The regional allocation of public investment: Efficiency or equity?. Journal of Regional Science, 40(2), 205-229.
Zhang, Y. F., & Sun, K. (2019). How does infrastructure affect economic growth? Insights from a semiparametric smooth coefficient approach and the case of telecommunications in China. Economic Inquiry, 57(3), 1239-1255.
Ageenor, P. R., & Montiel, P. J. (2015). Development macroeconomics. New Jersey: Princeton University Press.
Akanbi, O. A. (2015). Structural and Institutional Determinants of Poverty in Sub-Saharan African Countries. Journal of Human Development and Capabilities, 16(1), 122-141. https://doi.org/10.1080/19452829.2014.985197.
Ansar, A., Flyvbjerg, B., Budzier, A., & Lunn, D. (2016). Does infrastructure investment lead to economic growth or economic fragility? Evidence from China. Oxford Review of Economic Policy, 32(3), 360-390. https://doi.org/10.1093/oxrep/grw022.
Apanisile, O., & Akinlo, T. (2013). Rail Transport and Economic Growth in Nigeria (1970-2011). Australian Journal of Business and Management Research, 3(5), 18-24.
Aschauer, D. A. (1989). Is public expenditure productive? Journal of Monetary Economics, 23(2), 177-200. https://doi.org/10.1016/0304-3932(89)90047-0.
Badalyan, G., Herzfeld, T., & Rajcaniova, M. (2015). Infrastructure, institutions, and economic productivity in transition countries. Retrieved from https://pdfs.semanticscholar.org/b1d4/27a87d48042ea5229b08b07d162713a33dd8.pdf.
Batuo, M. E. (2015). The role of telecommunications infrastructure in the regional economic growth of Africa. The Journal of Developing Areas, 49(1), 313-330. https://doi.org/10.1353/jda.2015.0005.
Boopen, S. (2006). Transport infrastructure and economic growth: evidence from Africa using dynamic panel estimates. The Empirical Economics Letters, 5(1), 37-52.
Borrmann, A., Busse, M., & Neuhaus, S. (2006). Institutional Quality and the Gains from Trade. Kyklos, 59(3), 345-368. https://doi.org/10.1111/j.1467-6435.2006.00336.x.
Bross, I. D. (1971). Critical levels, statistical language and scientific inference. Foundations of Statistical Inference, 500-513.
Cadot, O., Roller, L. H., & Stephan, A. (2006). Contribution to productivity or pork barrel? The two faces of infrastructure investment. Journal of Public Economics, 90(6), 1133-1153. https://doi.org/10.1016/j.jpubeco.2005.08.006.
Calderon, C., Moral‐Benito, E., & Serven, L. (2015). Is infrastructure capital productive? A dynamic heterogeneous approach. Journal of Applied Econometrics, 30(2), 177-198. https://doi.org/10.1002/jae.2373.
Calderón, C., & Serven, L. (2003a). The Output Cost of Latin America’s Infrastructure Gap. In Easterly, W., Servén, L., (ed.), The Limits of Stabilization: Infrastructure, Public Deficits, and Growth in Latin America. Retrieved from http://documents.worldbank.org/curated/en/812361468773091055/The-limits-of-stabilization-infrastructure-public-deficits-and-growth-in-Latin-America
Candelon, B., Colletaz, G., & Hurlin, C. (2013). Network Effects and Infrastructure Productivity in Developing Countries. Oxford Bulletin of Economics and Statistics, 75(6), 887-913. https://doi.org/10.1111/j.1468-0084.2012.00722.x.
Canning, D., & Pedroni, P. (2004). The Effect of Infrastructure on Long Run Economic Growth. Retrieved from. https://web.williams.edu/Economics/wp/pedroniinfrastructure.pdf.
Crescenzi, R., Cataldo, M. D., & Rodríguez-Pose, A. (2016). Government Quality And The Economic Returns Of Transport Infrastructure Investment In European Regions. Journal of Regional Science, 56(4), 555-582. https://doi.org/10.1111/jors.12264
Damijan, S., & Padilla, B. (2014). Effectiveness of Infrastructure Project Investments in Africa. Retrieved fromhttps://institute.eib.org/wp-content/uploads/2016/04/Effectiveness_of_Infrastructure_Project_Investments_in_Africa_final_vers....pdf
Deng, T., Shao, S., Yang, L., & Zhang, X. (2014). Has the transport-led economic growth effect reached a peak in China? A panel threshold regression approach. Transportation, 41(3), 567-587. https://doi.org/10.1007/s11116-013-9503-4.
Dethier, J. J., & Moore, A. (2012). Infrastructure in developing countries: An overview of some economic issues. Retrieved from https://ideas.repec.org/a/eee/retrec/v38y2013i1p139-148.html.
Devarajan, S., Swaroop, V., & Zou, H. F. (1996). The composition of public expenditure and economic growth. Journal of Monetary Economics, 37(2), 313-344. https://econpapers.repec.org/paper/agsubzefd/123305.htm.
Duran-Fernandez, R., & Santos, G. (2014). An empirical approach to public capital, infrastructure, and economic activity: A critical review. Research in Transportation Economics, 46, 3-16. https://doi.org/10.1016/j.retrec.2014.09.001.
Egert, B., Kozluk, T. J., & Sutherland, D. (2009). Infrastructure and growth: empirical evidence. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.617.2958&rep=rep1&type=pdf.
Escobal, J. A., & Ponce, C. (2011). Access to public infrastructure, institutional thickness and pro‐poor growth in Rural Peru. Journal of International Development, 23(3), 358-379. https://doi.org/10.1002/jid.1775.
Estache, A., & Fay, M. (2007). Current debates on infrastructure policy (Policy Research Working Paper No. 4410). World Bank, Washington, DC.
Estache, A., Speciale, B., & Veredas, D. (2005). How much does infrastructure matter to growth in Sub-Saharan Africa?. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.508.7016&rep=rep1&type=pdf.
Falk, B. (1986). Further evidence on the asymmetric behavior of economic time series over the business cycle. Journal of Political Economy, 94(5), 1096-1109. https://doi.org/10.1086/261423.
Fedderke, J. W., & Bogetic, Z. (2009). Infrastructure and growth in South Africa: Direct and indirect productivity impacts of 19 infrastructure measures. World Development, 37(9), 1522-1539. https://doi.org/10.1596/1813-9450-3989.
Fisher, R. A. (1956). Statistical Methods and Scientific Inference. New York: Hafner.
Ghafoor, A., & Yorucu, V. (2002). Public expenditure and productivity puzzle: The case of Northern Cyprus. METU Studies in Development, 29(1-2), 69-86.
Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345-368. https://doi.org/10.1016/S0304-4076(99)00025-1.
Kherallah, M., & Kirsten, J. F. (2002). The new institutional economics: Applications for agricultural policy research in developing countries. Agrekon, 41(2), 110–133. https://doi.org/10.1080/03031853.2002.9523589.
Kodongo, O., & Ojah, K. (2016). Does infrastructure really explain economic growth in Sub-Saharan Africa? Review of Development Finance, 6(2), 105-125. https://doi.org/10.1016/j.rdf.2016.12.001.
Kourtellos, A., Stengos, T., & Tan, C. M. (2016). Structural threshold regression. Econometric Theory, 32(4), 827-860. https://doi.org/10.1017/S0266466615000067
Law, S. H., Azman-Saini, W. N. W., & Ibrahim, M. H. (2013). Institutional Quality Thresholds and the Finance–Growth Nexus. Journal of Banking & Finance, 37(12), 5373-5381. https://doi.org/10.1016/j.jbankfin.2013.03.011.
Loayza, N., Fajnzylber, P., & Calderón, C. (2005). Economic growth in Latin America and the Caribbean: stylized facts, explanations, and forecasts. Washington, DC: The World Bank.
Matthews, R. C. O. (1986). The Economics of institutions and sources of growth. The Economic Journal, 96(384), 903-918. https://doi.org/10.2307/2233164.
Neftci, S. N. (1984). Are economic time series asymmetric over the business cycle? Journal of Political Economy, 92(2), 307-328. https://doi.org/10.1086/261226.
North, D. C. (1990). Institutions, Institutional Change and Economic Performance. New York: Cambridge University Press.
North, D. C., & Thomas, R. P. (1973). The rise of the western world: A new economic history. United Kingdom: Cambridge University Press.
Okoh, A. S., & Ebi, B. O. (2013). Infrastructure investment, institutional quality, and economic growth in Nigeria: An interactive approach. Retrieved from http://jedsnet.com/journals/jeds/Vol_3_No_2_June_2015/14.pdf.
Richter, R. (2005). The New Institutional Economics: Its Start, its Meaning, its Prospects. European Business Organization Law Review, 6(2), 161-200. https://doi.org/10.1017/S1566752905001618.
Romp, W., & Haan, J. D. (2007). Public capital and economic growth: A critical survey. Perspektiven Der Wirtschaftspolitik, 8(S1), 6-52. https://doi.org/10.1111/j.1468-2516.2007.00242.x.
Seethepalli, K., Bramati, M. C., & Veredas, D. (2008). How Relevant Is Infrastructure to Growth in East Asia. Retrieved from https://openknowledge.worldbank.org/handle/10986/6727.
Seo, M. H., & Shin, Y. (2016). Dynamic panels with threshold effect and endogeneity. Journal of Econometrics, 195(2), 169-186.
Siyan, P., Eremionkhale, R., & Makwe, E. (2015). The impact of road transportation infrastructure on economic growth in Nigeria. International Journal of Management and Commerce Innovations, 3(1), 673-680.
Williamson, O. E. (1985). The economic institutions of capitalism: Firms, markets, relational contracting. New York: The Free Press.
Yamano, N., & Ohkawara, T. (2000). The regional allocation of public investment: Efficiency or equity?. Journal of Regional Science, 40(2), 205-229.
Zhang, Y. F., & Sun, K. (2019). How does infrastructure affect economic growth? Insights from a semiparametric smooth coefficient approach and the case of telecommunications in China. Economic Inquiry, 57(3), 1239-1255.
Published
2019-08-31
How to Cite
Ogbaro, E. (2019). Threshold Effects of Institutional Quality in the Infrastructure-Growth Nexux. Journal of Quantitative Methods, 3(2), 45-61. https://doi.org/10.29145/2019/jqm/030203
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Copyright (c) 2019 Eyitayo O. Ogbaro
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