On the Causal Bond between Infrastructure Investment and Development Effects

BY BINISH QADRI

Econometric models(Walters, 1968)allow us to estimate the long-run relationship between variables. The elementary awareness and understanding of Vector Auto regression(VAR) causality testing is that the past can influence the present and the future or past can cause the present and the future, but not the other way round and Granger causality covers this model. According to Granger causality test, we can determine whether one time series forecasts another (Granger, 1969). There is Granger causality between infrastructure and economic development. That is to say that the lagged values of infrastructure better forecast the current values of economic development than the lagged values of economic development alone, and we may conclude that infrastructure (granger) causes economic development(Gujarati, 2004).
Infrastructure has a two-way causal relationship with economic development. In other words, there is bi-way causality between infrastructure and economic development implying that infrastructure causes development and development causes infrastructure. Infrastructure stimulates and supports economic development. It widens the market and reduces trade walls and restrictions. In urban centers, metropolitan in particular, it contributes to make bigger the magnitude of all markets in the economy and makes them very efficacious and successful, the goods market, labor market, and knowledge and skill markets, in particular, as a consequence cumulating and snowballing the levels of productivity and national income.
Economic development, on the another hand, brings about positive vicissitudes or changes in infrastructure. Development which has a trickle-down effect and is all-encompassing and sustainable in the long-run, meeting the needs of present generation without compromising the needs of the future generation, will have a dual effect: on the one hand, it will create infrastructure and on another hand, it will improve the productivity of all infrastructural set-up.
The socio-economic effectiveness of infrastructure is a function (depend) of organized markets, institutional commands, and economic systems for the reason that infrastructure is always rooted in government regime which does not mean that it has no private dimension (Homme, 2004). There is a significant and positive relationship between organized markets, institutional commands, and economic systems in the economy and socio-economic factors of infrastructure. The better the socio-economic factors of infrastructure, the better will be the organized markets, institutional commands, and economic systems in the economy, and accordingly, the better will be the effectiveness of infrastructure and vice versa. We need to bring economic development back into development studies(Fischer, 2019). Similarly, need of hour is to bring infrastructure and development connection back into growth and development studies.
Capital encompasses all assets which augment one’s performance to do productive work. For Adam Smith, it is that part of the stock of men which fetches them income. The economics of infrastructure, in general , and nature of infrastructure, in particular, is rooted in the basics of capital infrastructure. In order to understand the nitty-gritty of the causal pathways between infrastructure investment and development outcomes, we need to understand the economics of infrastructure, physical capital and human capital in particular, and its allied areas.
References
Fischer, A. M. (2019). Bringing Development Back into Development Studies. Development and Change, 50(2), 426–444.
Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424–438.
Gujarati, N. D. (2004). Basic Econometrics (Fourth). The McGraw-Hill Companies.
Homme, P. R. (2004). Infrastructure and Development. In Annual Bank Conference on Development Economics. Washington, DC.
Walters, A. A. (1968). An Introduction to Econometrics. London: Macmillan.
—Author: BinishQadri*
The author is an ICSSR Doctoral Fellow, Department of Economics, Central University of Kashmir and Guest Faculty at NIFT, Srinagar. She can be reached at:
[email protected]

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