A presentation conducted by Warwick J. McKibbin , Chair, Public Policy, Adjunct Professor, Australian Centre for Economic Research on Health Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, Australian National University. Presented on Thursday the 3rd of October 2013. This presentation will use recent World Bank research on the macroeconomic returns to infrastructure to explore the macroeconomic impact of infrastructure spending on the Australian economy. This will combine the World Bank empirical results to the G-Cubed model of the world economy to explore the macroeconomic adjustment to a substantial increase in infrastructure spending in Australia.

1. ENDORSING PARTNERS
The Macroeconomics of
Infrastructure Investment in
Australia
The following are confirmed contributors to the business and policy dialogue in Sydney:
•
Rick Sawers (National Australia Bank)
•
Nick Greiner (Chairman (Infrastructure NSW)
Monday, 30th September 2013: Business & policy Dialogue
3rd
www.isngi.org
Tuesday 1 October to Thursday,
October: Academic and Policy
Dialogue by: Warwick J. McKibbin , Chair, Public Policy, Adjunct Professor,
Presented
Australian Centre for Economic Research on Health Centre for Applied
Macroeconomic Analysis, Crawford School of Public Policy, Australian National
University
www.isngi.org

2. The Macroeconomics of
Infrastructure Investment in
Australia
Warwick J. McKibbin
Chair in Public Policy
Centre for Applied Macroeconomic Analysis,
Crawford School of Public Policy, ANU
Presentation to SMART Infrastructure Conference, Wollongong 3 October 2013

3. Overview
• The Macroeconomic Impact of
Infrastructure
• A model for assessing the consequences
• Some preliminary results for alternative
government spending scenarios
• Conclusion

4. Macro benefits of Infrastructure
• it raises productivity and reduces the cost of
private production,
– As an additional input in private production
– By enabling a rearrangement of production
– By enhancing the productivity of existing inputs
through a “factor bias effect”

5. Macroeconomic costs of
Infrastructure
• Public investment may crowd out private
investment
• Depends on degree of substitutability and
how the investment is funded
– Borrowing
– Cutting other spending
– User fees
– Higher taxes elsewhere

6. Australian literature
• Good survey by Shanks and Barnes (2008).
•
“Econometric Modelling of Infrastructure and Australia’s Productivity” Internal Research
memorandum 08-01, Productivity Commission
• Two broad approaches to estimating the link
between infrastructure and economic activity
– a macroeconomic approach measuring aggregate
relationship
– a detailed industry based analysis

7. Aschaur (1989) approach
• Initiated a large literature of trying to measure
the impact of infrastructure on economic
growth
• Y = AF(K, L,G)
• Applied in Australia by Otto and Voss (1994)
using gross general government capital stock

8. Range of Australia estimates
• Elasticity of output wrt public infrastructure
capital between 0.01 and 0.45
• Elasticity of industry output wrt public
infrastructure capital between -0.75 and 2.04

9. Many issues
• Measurement problems
• Estimates very sensitive to econometric
procedures
• Is it the stock of infrastructure capital of
infrastructure investment that matters?

10. This paper
• Uses an approach developed as part of a
World Bank project published in
McKibbin W, Stoeckel A, and Lu Y (2013),
"Global Fiscal Adjustment and Trade
Rebalancing", The World Economy,
(forthcoming).

11. This paper
• Uses empirical estimate of the impact of the
stock of public infrastructure capital on
productivity in private sector production
functions

12. The Approach
• César Calderón, Enrique Moral-Benito, Luis
Servén, (2011) “Is infrastructure capital
productive? a dynamic heterogeneous
approach, World Bank Working Paper 5682
• Using data from 88 countries from 1960 to
2000 they estimate a long run production
function with infrastructure capital included

13. The Approach
• Output elasticity ranges between 0.07 and 0.1
on average across countries and across time
• We assume that every 10% change in
infrastructure capital yields 0.8% higher
output per worker.

14. Question
• What would happen if these estimates were
used to introduce infrastructure investment
and capital into a general equilibrium model ?
• Results are very preliminary and represent a
conservative estimate of the average impact
of infrastructure across all countries

15. G-Cubed Model G-Cubed Model
The
-
The G-cubed model developed by McKibbin and Wilcoxen, drawing
on McKibbin- Sachs and Jorgenson- Wilcoxen models.
Hybrid of macro models (dynamic stochastic general equilibrium
model) and a computable general equilibrium models
Models the trade and financial linkages within and between
economies
Allow for inter-industry input-output linkages, capital movements, and
consumption and investment dynamics.
Annual frequency with detailed macroeconomic and sectoral
dynamics
Used since 1986 by governments, corporations and international
institutions around the world
15
15

16. Countries (Version GGG6V108)
10 China
11 India
12 Indonesia
13 Other Asia
14 Latin America
15 Other Emerging Economies
16 Eastern Europe and the
former Soviet Union
17 Oil Exporting Developing
Countries
1 United States
2 Japan
3 United Kingdom
4 Germany
5 Euro Area
6 Canada
7 Australia
8 Korea
9 Rest of Advanced
Economies
16

17. Sectors
–
–
–
–
–
–
Energy
Mining
Agriculture
Durable Manufacturing
Non-Durable Manufacturing
Services
– Capital producing sector
17

18. Some additional assumptions
• Infrastructure capital depreciates at 3.5% per
year
• Infrastructure capital has the same
productivity effect on output per worker in all
sectors (can easily be modified)

19. 2 scenarios for Australia
• Increase in government spending on goods
and services of 1% of GDP per year forever
financed by issuing debt (debt rises by 55% of
GDP in the long run)
• Increase in infrastructure spending of 1%of
GDP forever financed by issuing debt (debt
rises by 55% of GDP in the long run)

20. 2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
2052
2054
2056
2058
2060
2062
2064
2066
2068
2070
2072
2074
2076
2078
2080
2082
2084
2086
2088
2090
2092
2094
2096
2098
2100
2102
%GDP Change
Change in Public Infrastructure Capital Stock
30
25
20
15
10
5
0

21. Results
• A baseline is generated with assumptions
about productivity growth by sector/by
country, population growth by country, and
assumption about monetary and fiscal
regimes across countries.
• The shock is introduced in 2014 as a surprise
announcement that is fully credible.
• Results are expressed as outcomes relative to
the underlying baseline

29. Summary
• The approach in this paper attempts to
measure the impact of infrastruture spending
by integrating the “tops down”
macroeconomic approach with the
sectoral/industry approach

30. Summary
• Even conservative estimates of infrastructure
returns show a well designed rollout can have
significant impacts on the Australia economy
• Macroeconomic effects on trade flows, and
real exchange rates are important to
understand
• Impacts vary across sectors and across time
depending on the structure of production and
the structure of trade

31. Further work
• The approach in this paper should be subject
to further sensitivity analysis including
– changing assumptions about how government
spending on infrastructure is allocated across
sectors
– changing assumptions about the amount of new
infrastructure used by each sector
– Exploring different financing assumptiond

32. Opportunity for Funding
Infrastructure
• Currently missing a great opportunity to fund
public infrastructure through borrowing in
international markets at long duration and at
historically low interest rates.
• Need to issue 50 year bonds to provide a large
pool of funds for infrastructure investment
• But projects need to be independently
evaluated and implemented by an agency
such as the productivity commission.

33. WWW.SENSIBLEPOLICY.COM