Infrastructure Development, Trade, and Economic Growth in the East African Community: an Empirical Analysis

Abstract

Infrastructure holds a central position in a country’s economic activity, hence the need to do a comprehensive analysis of its specific contributions to an economy. In the last decades, the East African Community (EAC) governments have devoted significant public resources towards building new infrastructure projects in the region. However, growth has not been commensurate with increased public investment in infrastructure; in addition, the volume of trade has stagnated. Therefore, this study employed panel time-series technique and infrastructure augmented production function, to establish the short- and long-run relationship between infrastructure stock and economic growth using data for the period 1990-2019. The study also explored the possible channels through which infrastructure could manifest itself on growth by doing an in-depth analysis on key determinants of growth, like private investment and trade. Infrastructure stock index was constructed from public economic infrastructure including transport, energy, and communications. Data was obtained from various sources including the Socio-Economic database of African Development Bank, World Bank database, International Monetary Fund database and National Bureaus of Statistics of EAC Partner States. Panel data models for growth and private investment were analysed using pooled mean group estimation technique. The study established a cointegrating relationship between infrastructure stock and economic growth in EAC and a uni-directional causality from infrastructure to economic growth. Using an error correction framework to capture the short-and long-run dynamics, the results confirmed that, public infrastructure investment crowds-out private investment in the short-run but crowds-in private investment in the long-run. The study estimated a gravity model augmented for both hard and soft infrastructures from transport and information and communications technology indicators using random effects model and Poisson Pseudo Maximum Likelihood method. Both methods confirmed that infrastructure stock is important in increasing the volume of EAC’s trade. The policy implications are that increased investment is vital in economic infrastructure to increase infrastructure stock, encourage private sector activities and growth in the long-run. Macroeconomic stability is also crucial for private sector investment. Transport infrastructure has a greater impact on exports than Information and Communications Technology infrastructure and thus, it is important to channel additional resources towards increasing transport infrastructure stock. The study also found that, many documents required for exports lowers the volume of trade, hence it is critical to enhance border efficiency for more trade. Key Words: Infrastructure Development; Economic Growth; Private Investment; International Trade; EAC JEL Classification: H54; O47; R42; F10; F15