ENDORSING PARTNERS

The Macroeconomics of
Infrastructure Investment in
Australia

The following are confirmed contributors...
The Macroeconomics of
Infrastructure Investment in
Australia
Warwick J. McKibbin
Chair in Public Policy
Centre for Applied...
Overview
• The Macroeconomic Impact of
Infrastructure
• A model for assessing the consequences
• Some preliminary results ...
Macro benefits of Infrastructure
• it raises productivity and reduces the cost of
private production,
– As an additional i...
Macroeconomic costs of
Infrastructure
• Public investment may crowd out private
investment
• Depends on degree of substitu...
Australian literature
• Good survey by Shanks and Barnes (2008).
•

“Econometric Modelling of Infrastructure and Australia...
Aschaur (1989) approach
• Initiated a large literature of trying to measure
the impact of infrastructure on economic
growt...
Range of Australia estimates
• Elasticity of output wrt public infrastructure
capital between 0.01 and 0.45
• Elasticity o...
Many issues
• Measurement problems
• Estimates very sensitive to econometric
procedures
• Is it the stock of infrastructur...
This paper
• Uses an approach developed as part of a
World Bank project published in
McKibbin W, Stoeckel A, and Lu Y (201...
This paper
• Uses empirical estimate of the impact of the
stock of public infrastructure capital on
productivity in privat...
The Approach
• César Calderón, Enrique Moral-Benito, Luis
Servén, (2011) “Is infrastructure capital
productive? a dynamic ...
The Approach
• Output elasticity ranges between 0.07 and 0.1
on average across countries and across time
• We assume that ...
Question
• What would happen if these estimates were
used to introduce infrastructure investment
and capital into a genera...
G-Cubed Model G-Cubed Model
The

-

The G-cubed model developed by McKibbin and Wilcoxen, drawing
on McKibbin- Sachs and J...
Countries (Version GGG6V108)
10 China
11 India
12 Indonesia
13 Other Asia
14 Latin America
15 Other Emerging Economies
16 ...
Sectors
–
–
–
–
–
–

Energy
Mining
Agriculture
Durable Manufacturing
Non-Durable Manufacturing
Services

– Capital produci...
Some additional assumptions
• Infrastructure capital depreciates at 3.5% per
year
• Infrastructure capital has the same
pr...
2 scenarios for Australia
• Increase in government spending on goods
and services of 1% of GDP per year forever
financed b...
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
2052
2054
2056
2058
2060
20...
Results
• A baseline is generated with assumptions
about productivity growth by sector/by
country, population growth by co...
Summary
• The approach in this paper attempts to
measure the impact of infrastruture spending
by integrating the “tops dow...
Summary
• Even conservative estimates of infrastructure
returns show a well designed rollout can have
significant impacts ...
Further work
• The approach in this paper should be subject
to further sensitivity analysis including
– changing assumptio...
Opportunity for Funding
Infrastructure
• Currently missing a great opportunity to fund
public infrastructure through borro...
WWW.SENSIBLEPOLICY.COM
SMART International Symposium for Next Generation Infrastructure: Macroeconomic outcomes from infrastructure spending in A...
SMART International Symposium for Next Generation Infrastructure: Macroeconomic outcomes from infrastructure spending in A...
SMART International Symposium for Next Generation Infrastructure: Macroeconomic outcomes from infrastructure spending in A...
SMART International Symposium for Next Generation Infrastructure: Macroeconomic outcomes from infrastructure spending in A...
SMART International Symposium for Next Generation Infrastructure: Macroeconomic outcomes from infrastructure spending in A...
SMART International Symposium for Next Generation Infrastructure: Macroeconomic outcomes from infrastructure spending in A...
SMART International Symposium for Next Generation Infrastructure: Macroeconomic outcomes from infrastructure spending in A...
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SMART International Symposium for Next Generation Infrastructure: Macroeconomic outcomes from infrastructure spending in Australia

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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.

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SMART International Symposium for Next Generation Infrastructure: Macroeconomic outcomes from infrastructure spending in Australia

  1. 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. 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. 3. Overview • The Macroeconomic Impact of Infrastructure • A model for assessing the consequences • Some preliminary results for alternative government spending scenarios • Conclusion
  4. 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. 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. 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. 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. 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. 9. Many issues • Measurement problems • Estimates very sensitive to econometric procedures • Is it the stock of infrastructure capital of infrastructure investment that matters?
  10. 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. 11. This paper • Uses empirical estimate of the impact of the stock of public infrastructure capital on productivity in private sector production functions
  12. 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. 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. 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. 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. 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. 17. Sectors – – – – – – Energy Mining Agriculture Durable Manufacturing Non-Durable Manufacturing Services – Capital producing sector 17
  18. 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. 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. 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. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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.
  26. 26. WWW.SENSIBLEPOLICY.COM

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