The Growth And Welfare Effects Of Infrastructure In Pakistan
Author: Sabila Khatoon


This dissertation explores the impact of economic, social, and financial infrastructure on Pakistan’s economic growth, regional development, and social welfare. This dissertation employs multiple methodologies to analyze the research questions. The Principal component analysis (PCA) is applied to construct indexes for the dataset ranging from FY1980-81 to 2022-23 for time series regression analysis. An Autoregressive Distributive Lag (ARDL) estimation technique measures the long-run and short-run effects while Fully Modified Ordinary Least Square (FMOLS) estimation time series analysis for the robustness check. Dynamic Spatial Durbin panel data model estimated for provincial panel data analysis for dataset ranges from 1990 to 2020. The model incorporates spatial lags of both dependent and explanatory variables, capturing short-term and long-term direct and indirect effects, including spatial spillover effects on economic growth. Spatial panel data and cross-sectional spatial data analysis for the welfare analysis has been conducted at the district level using Pakistan Social and Living Standard Measurement (PSLM) survey data. This dissertation provides a comprehensive analysis of the research questions, ensuring robustness and capturing the various dimensions of the phenomena under investigation by employing multiple sets of methodologies and approaches. This study found the significant importance of core, social infrastructure of education and health and financial infrastructure in generating long-term and short-term productivity growth effects. The core infrastructure increased the productivity growth in Pakistan, non-linearly. An inverted U-shape- nonlinear relationship of the physical stock of core infrastructure and education indicates the fundamental role of core and social infrastructure at the early stages of economic development. Based on the insignificant coefficient for the physical stock of education, it is inferred that Pakistan has not yet made sufficient investments in building educational infrastructure given to its growing population to reap the long-term benefits fully. However, despite the poor addition in physical infrastructure for education in per-worker terms, the utilization of educational services has been increased over time and contributed positively to Pakistan’s long-run productivity growth. The physical infrastructure for health services does augment LR productivity growth linearly, while physical infrastructure for financial services augments LR productivity growth nonlinearly. It showed that investing in the financial infrastructure had increased productivity growth at an accelerated rate over time. While, in the short run, investing in core, health, and financial infrastructure drives up the productivity growth signficantly. In addition, this study also analyzes the asymmetric impact of each type of infrastructure by conducting country-specific analysis. Study found a significant asymmetric effect in the LR. Particularly the coefficient for positive-one is highly significant, representing all types of infrastructure critical for LR economic development of Pakistan. In the short run (SR), the asymmetric effect is significant for the core and educational infrastructure. Therefore, we inferred that core, social and financial infrastructure are the critical investment drivers of the productivity growth of Pakistan. The net reduction in the stock of infrastructure thus hampers the productivity growth. The provincial-level analysis finds evidence for a positive spatial spillover effects. The findings support the proposition of the critical importance of the investment in the human capital stock, private capital stock, and core infrastructure for the economic development in provonices . The study found highly significant and positive spatial parameters (spatial lambda and spatial rho), indicating the presence of spatial dependence and positive regional spillover effects. The analysis reveals a reverse-spatial-temporal diffusion, as the negative and highly significant spatial diffusion parameter suggests a detrimental effect on economic development due to relative attractiveness resulting from lagged economic growth in neighboring areas. In the short run, both direct and indirect effects of core infrastructure are negative and highly significant. However, in the long run, direct spillover effects become positive and highly significant, with the total net effects (direct and indirect effects) being positive. These findings support the argument that Pakistan’s current infrastructure investment strategy aims to maximize long-term gains. Therefore, it is highly recommended to allocate resources prudently towards infrastructure projects, taking into account the short-term tradeoffs associated with such investments. The existence of these tradeoffs can be primarily attributed to factors such as extensive implementation timelines, initial feasibility assessments, design vetting processes, contract tendering procedures, and the need for significant fiscal space. Hence, securing funding and technical assistance from international agencies becomes imperative for the successful implementation of infrastructure projects in Pakistan. Additionally, this study examines the impact of transportation infrastructure investment on economic geography of social welfare in districts. The findings revealed investing in road infrastrcuture reduces social depreviation (reduction in multidimensional poverty). Using Spatial Error Model (SEM) and Spatial Lag Model (SLM) at the district level supported the evidence for positive network externalities (global effect). The observed disparities in the state of development at the district level are attributed to variations in infrastructure stock, population density, urbanization, and geographic coverage across districts. Hence, the degree of regional connectivity and economic integration significantly influences regional economic and social development in Pakistan. Based on these findings, it is highly recommended to prioritize investment in the development and maintenance of road infrastructure in the most impoverished and geographically large districts of Pakistan. The relative geographic size emerges as an important driver of social welfare in the country. Furthermore, effective public administration management at the district level is crucial in addressing social deprivation in Pakistan. To alleviate social deprivation and economic marginalization, the study emphasizes on devolving policy and decision-making authority to the district level given the critical importance of enhance regional connectivity.

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Keywords : Core Infrastructure, Exploratory Spatial Data Analysis, Financial Infrastructure, Health Infrastructure, Regional Connectivity, Social Infrastructure, Spatial Regression Analysis, Spillover effects
Supervisor: Hafsa Hina

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