Analysis of the Correlations Between Public Capital Investments and Economic Development in Romania

Abstract

Literature Review on the Correlation Between Public Capital Investments and Economic DevelopmentThe purpose of this literature review is to present a selection of studies and reports which show the positive and also the negative correlations between public capital investments and economic growth, studies that were based on results obtained in the respective countries. Discussions on the effects of infrastructure had increased especially after 1989, with the assumption made by David Alan Aschauer, that the decline in productivity of public services is crucial to explain the general decline in growth. With his work as a support results in which analyzed the economic situation of the United States, Aschauer noted that an increase of 1% of the stock of public capital generates a 0.4% increase in productivity 1 . As a consequence, sustained participation of state capital is able to contribute to economic growth. Various empirical studies show the importance of public capital composition on growth of different regions, as some components have greater direct effects on the production process than others. An example is the study of Mastromarco and Ulrich (2006), on the case of Italy, which shows that capital investment include a basic infrastructure and other non-basic type. The first category included: roads and airports, railways and metros, ports, power lines and water, telecommunications, while the seconds include hospitals, public buildings etc 2 .

The contribution of public capital towards economic growth: A KwaZulu-Natal case study

“…A study on Belgium indicated a negative relationship between the rate of employment and expenditure on public capital (Everaert & Heylin 2004). An increase of 1% in this kind of public expenditure led to an increase in private sector unemployment of 0.32% (Sava & Zugravu 2010). In these cases, a relationship between public expenditure on capital and economic growth was found, but it was negative probably because of a crowding-out effect of private investments.…”

“…They studied Chinese data over the period 1988-2007 and estimated output elasticities using Cobb-Douglas production functions, which they developed into a gross productive equation. Sava and Zugravu (2010) studied the correlation coefficients between infrastructure and national income for Romania using regression analysis over the period [2006][2007][2008][2009], and found a similar positive relationship, although not very strong. Higher government expenditure on capital thus also led to economic development in Romania.…”