The impact of highway construction on local firms

The impact of highway construction on local firms

Abstract

The objective of this project is to investigate the impact of road network project on the economic growth in Kenya. The researcher reviewed the annual data on infrastructure expenditure and economic growth from 1963 to 2015. The study will apply for Ordinary Least Squares method access the impact of the construction of the road network to the economic growth of developing nations.

From the data analysis, it is observed that government spending on road network projects promotes economic growth in developing countries. This is based on the results that for a single shilling spent on infrastructure result in raise GDP per capita by Kshs. 797.13 assuming all other factors are constant. The study, therefore, demonstrates a positive impact on economic growth by the road infrastructure project in developing nations.

Introduction

The ability of a country to achieve economic growth and development is pegged on its available economic resources to the society and the ability to use them efficiently. These project address one of the issues of the region and start development. The paper will evaluate the impact of road infrastructure development on the competitive and economic growth of developing countries. Road infrastructure is considered to be one of the key requirements of the county social and economic development. This is specifically true in developing nations where road transport is the major means of transport. Since the role of the road networks goes beyond national boundaries, the upgrade and expansion of the road network play important role in enhancing economic performance thus, poor road network hinders domestic and foreign investment in developing nations which have an impact on the country’s competitiveness enhancement and economic performance.

The project will address the key aspects of road network development such as funding sources, investment and condition of the road network in the countries. The road development level will be correlated with the county gross domestic product (GDP) growth in the country.

In Kenya, road infrastructure is key in the achievement of its nation’s development blueprint vision 2030. In Kenya, road transport is the main mode of transport accruing 95% of the total passenger and cargo traffic (Kenya Roads Board). In Kenya roads are classified into five main categories which include; class A consisting of road connecting the international centres such as cross border terminals and ports, class Broad- consists of roads connecting national borders within Kenya, Class C- those connecting regions within the county, Class D roads mostly secondary roads and Class E road this consist of the minor roads however 98,950 kilometres are not classified (Kenya Roads Board).

The efficiency of road infrastructure plays an important role in supporting the transport sectors.  Also, road infrastructure network state and progress reveals that many governments have put more efforts on expansion of existing roads infrastructure as well as increasing their budget allocation to new roads.

The government used the expansion of the road network as a fundamental element in social-economic transformation. In the last 10 years, the focus has shifted to the construction of the Trans Africa corridor which starts from Mombasa to Dakar Senegal. Further, the northern corridor passing through Kenya from South Africa (Cape Town) to Cairo in Egypt (Northern Africa) has played a critical role in road network development in Kenya. Other road infrastructure project includes the construction of Thika superhighway which has many by-passes (Southern, Eastern and Northern), Lamu Port South Sudan Ethiopia Transport (LAPSSET) project among other rural and urban roads.  This has made a tremendous transformation in the state of the road network in Eastern Africa.  The government has continued to collaborate with other international agencies such as the European Development Bank, World Bank and African Development Bank to finance road infrastructure projects. The commercial banks in Kenya have also played a critical role in financing road project through buying of infrastructure bonds floated in the stock exchange market by the government.

The current development in road infrastructure financed by the Public-private Partnership (PP) has also played a critical role in solving the infrastructure financing problem. However, this could be enhanced if the road infrastructure could have an economic multiplier effect on the growth of the economy. This study, therefore, will access the relationship between road infrastructure network projects and economic growth in East Africa Sub-Sahara a case study of Kenya. The study tries to evaluate the impact of road network projects in economic growth in Kenya. The reason behind this is to measure the multiplier effect of road network project on the economy hence promoting the financing of infrastructure projects.

LITERATURE REVIEW

The empirical review of studies on the impact of road infrastructure on economic growth in sub-Sahara Africa shows a rich pull of research work in several geographical setting.   Aschauer (1989) suggested that there is a strong nexus between government investment in infrastructure and GDP growth for the US for the period between 1949 and 1985.  The researcher observed a decline in economic growth for the US between the 1970s and 1990s, which resulted from a reduction in infrastructure public investment. The same results were observed by the World Bank development report (1994) which confirmed the role of infrastructure in the growth of the economy for different nations.  According to Aschauer (2000), it was observed that capital investment in infrastructure projects contributes a critical role to the production. He also noted that public investment helps in improving living standards as well as private investment returns and economic growth.  This was also confirmed by the findings of Demetriades and Mamuneas (2000) who suggested that public investment in infrastructure projects has a significant impact on the long-term impact on input demands and output supply.

An empirical study by Boopen (2006) who used panel and cross-section and data analysis accessed the effect of transport capital on economic growth, where he sampled 38 Sub- Saharan African countries. The sample nations showed that transport capital has a significant contribution to the economic growth. According to Seethepalli et al. (2008), it was also evidenced that infrastructure plays a critical role in the promotion of economic growth in East Asia.  Similar results were replicated by Montolio and Solé-Ollé (2009) which indicated road infrastructure investment has a positive effect on productivity performance in the Spanish economy. Increase accessible road network promotes faster productivity growth in those manufacturing industries which depend on road transport to transport raw materials. The increase in road network was therefore associated with improved productivity in Spain. However, Garcia-Mila et al. (1996), Holtz-Eakin and Schwartz (1995), Holtz-Eakin (1994); and Tatom (1991; 1993) report contradicting results that infrastructure investment has little impact in the economic growth in the US using panel data.

Theoretical review on the causal relationship between the road network and gross domestic product, a lot of empirical studies have been done by economics. According to Gramlich (1994), it was reported that there is no causal relationship between transport infrastructure network and economic growth. Kessides (1996) noted that most of the researcher have not given much focus on the nexus between the infrastructure network and economic development and hence much research need to be done so that to come up with adequate results supporting the relationship between the two variables.  De la Fuente (2000) argued that there is causality flows from investment in infrastructure projects and economic growth. According to research by modelling, Mittnik and Neumann (2001) public investment influence GDP positively, however, there is no significant causal relationship between public investment and the GDP.  Canning and Pedroni (2008) similarly accessed the impact of various infrastructure projects in different countries. The study concluded that although there is a positive effect of infrastructure to the long-term economic growth of a nation substantial variation was observed across different countries. An empirical study by Nurudeen and Usman (2010) using error correlation and counteraction models analyzed nexus between public expenditure and GDP growth in Nigeria thus, demonstrating total recurrent expenditure, total capital expenditure and public expenditure by government on education have an adverse impact on economic growth. On the other hand, an increased expenditure on communication and transport result in positive growth in the economy. Finally, research by Pradhan (2010) on the correlation between energy consumption, transport infrastructure (rail and road) and India economic growth between 1970 and 2007 found that transport infrastructure had a unidirectional casualty.

Methodology

The methodology of this study is based on Solow’s neoclassical growth model. The model presents the correlation between the country total output and the aggregate demand of production factors. The model assumes constant technology, constant labour force productivity, full employment, no government intervention and constant-output ratio.

The period selected for this economic analysis was between 1963 and 2015. This was based on the availability of data and the effort of the researcher to capture all development projects since independence. The researcher used secondary data retrieved from Kenya’s Economic Surveys and Statistical Abstract, Central Bank of Kenya and Kenya National Bureau of Statistics. The researcher only considered the capital expenditure in this project and not recurrent expenditure. Further, the researcher applied data on the actual capital expenditure meaning that budgeted expenditure was ignored in this project.

Based on the Solow’s model physical capital is assumed to be the ideal model of capital in a country. From the perspective of economics, road infrastructure is considered to be a capital good sense is applied in the production process of goods and services. Road necessitate goods and services movement within the economy. Hence, the amount of capital stock will have an impact on economic growth rate which implies that the road infrastructure network is part of physical capital have an impact on economic growth. Hence the relationship between road infrastructure project and GDP as evidenced in the Solow’s model of economic growth.

Based on Solow’s model the empirical model for this study is as follows:

GDP= b₀+b₂ + b₂ + b₃ + b₄ + b₅+ b₆ +µ

Where

GDP-is the Gross Domestic Product

b₂ – The private sector’s spending on the road infrastructure.

b₂ – The government’s spending on road infrastructure.

b₃ -This is the economy’s labour force.

AGRPS -This is the public sector expenditure on the agricultural sector.

OSSPS -This is the public sector expenditure on the provision of other major social services.

Institutional Dummy -Dummies capturing structural and institutional changes

µt – The error term of the model

The researcher will use Ordinary Least Squares (OLS) to estimate the relationship between variables. This will be achieved through the help of statistic package of social science (SPSS). This was applied to the annual data derived from different sources. The coefficient correlation model was used to determine both short term and long term relationship between variables.

Results

The study focuses on investigating the impact of road infrastructure on the economic growth of developing countries. This section presents the finding, discussion and interpretation of the research findings.

The descriptive statistic of the study indicates that education has the highest mean value of Kshs. 4.89 billion followed by the population growth rate average of 2.35 million people. Public and private infrastructure spending follow as number three and four.  Similarly, education is observed to have the highest standard deviation and variance. While the dispersion of the public expenditure on road infrastructure is the second. The gross domestic per capita has the smallest dispersion from the mean.  The distribution metrics indicate that all the variables of the study are positively skewed. This indicates that variables are skewed to the normal. The study also indicates that all variables of the study are non-normal distribution. However, the researcher observed normal distribution in GDP per capita which has a kurtosis value of 0.67

Correlational analysis

The researcher did a correlation analysis to evaluate the relationship between the variables by computing the coefficient correlation. The findings below represent the correlation matrix of the variables.

The finding of the study shows that all the variables are moderately correlated. However, a strong relationship is observed between education and infrastructure are strongly correlated. Further, agriculture is strongly correlated to both public and private expenditure. A strong relationship is also observed between population growth and economic growth. The findings of the study indicate that there is a moderate correlation between the road infrastructure and the economic growth of the country

From the coefficient correlation, the researcher observed that there was no bias in the allocation of resources among different sectors. The correlation coefficient among different public spending is positive. This reveals that the expenditures by the government are not mutually exclusive but they are mutually exhaustive.

Unit root tests

To integrate the previous empirical model estimation with variable the researcher used the unit root test. This is to avoid spurious challenge as a result of empirical estimation model without prior understanding of variable integration. The researcher applied the Dickey-Fullerer test to test the absence or present of unit root among different variables.

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The finding of the study indicates that all variable re non-stationary at level t-statistics which indicate that the variables have Unit roots. This is demonstrated by higher critical values compared to 1%, 5% and 10% level of significance. Hence, this demanded for the variables differencing. After differencing of the variable the researcher came up with stationary which implies the absence of unit root.

2 Regression analysis

The results of the study indicate that all variables observed are significant in influencing the economic growth in the economy at a significance level of 5% per cent. From the study, the P-value below is a significant level of 5%. The research found that the government spending on infrastructure, population growth, education, and agriculture and the dummy variables are significant at five per cent as their p-values are below 5%. However, the research concluded road infrastructure spending in investigating the economic growth at 10%. The researcher observed p-value of 7.0% which is higher than 1%, 5%and 10%.

The study findings indicate that holding all other factors constant on one shilling spent on the road network by the Kenya government increased gross domestic per capita by Ksh 797.13. Thus investment in road infrastructure affects economic growth positively. This includes both public and private investment on infrastructure development as maintaining all other factors constant. On the other hand, investing one shilling in agriculture, education and labour would result to increase in GDP per capita Ksh 852.02, 690.76, 1040.77 respectively. All this development is influenced by infrastructure road directly or indirectly and therefore the improvement in the road network has a positive impact on economic growth. The findings of this study, therefore, indicates that infrastructure development has a great impact on the economic growth of a country.

Conclusion

The objective of this project is to investigate the impact of road network project on the economic growth in Kenya. The researcher reviewed the annual data on infrastructure expenditure and economic growth from 1963 to 2015. The reason behind this study is to confirm of road infrastructure plays a critical role in poverty reduction and economic growth since it contributes to competitiveness enhancement, trade facilitation and integration of nations with other countries. From the literature review, road infrastructure enhance access to employment opportunities as well as access to goods and services. The road network promotes trade and investment among nations. The result of sustainable economic growth which results from multiplier effects of government expenditure on infrastructure in a country.

From the data analysis, it is observed that government spending on road network projects promotes economic growth in developing countries. This is based on the results that for a single shilling spent on infrastructure result in rising GDP per capita by Kshs. 797.13 assuming all other factors are constant. Therefore, road infrastructure has a vital role in the achievement of the vision 2030 economic development blueprint. The findings of this study, therefore, confirm the government ambitious strategy is to establish more road network projects. The objective of increasing the number of tarmacked roads network is based on the concept of positive multiplier effect on the country economic growth. Further, the government have been seen not only to develop international road but more focus is been geared toward construction of rural, urban and national roads in its effort to enhance connectivity.

The findings of this study demonstrate that the GDP per capita is more responsive to public expenditure as compared to the investment in road infrastructure by the private sector. However, it is noteworthy to state that the private expenditure has a positive effect on the economic growth and hence the need to include the private sector on development on road through a public-private partnership.

Recommendations

Several critical policy recommendations can be derived from the findings of this study. First, the government must corroborate with the private sector in funding the road network in developing countries.  This can be achieved through sensitization of private-public partnership (PPP).  Further, the government should more effort in the development of rural road network to promote the agriculture sector which plays a critical role in promoting economic growth.