Public infrastructure capital, scale economies and returns to variety



One exception is the important paper on the US economy by Holtz-Eakin and Lovely (1996).
The basic premises of this model have been utilised here for an analysis of the Greek case. The
model’s empirical calibration distinguishes between two main effects of infrastructure on the economy
- the impact on the non-manufacturing part on the one hand and on the manufacturing sector on the
other.

However, there are significant differences between the US and the Greek empirical research
based on the model. In the former, cross-sectional data were used for four years, whereas in the
Greek case the time dimension of the panel data is ten years. Furthermore, there are no available data
for the Greek case that permit a proper empirical modelling of the non-manufacturing part of the
economy and to circumvent this problem quasi-production functions were used.

The basic equation was calibrated not only for the aggregate measure of the private non-
manufacturing sector output, which was the regional GDP, but also for its breakdown to regional sub-
categories. Three measures of public infrastructure capital were used, total infrastructure, and its two
categories - productive and social public capital. The results showed that there is no significant effect
on the total regional GDP, no matter the type of infrastructure proxy in use. There are, however,
some sub-categories of regional GDP, for which public capital at first sight seems to have a significant
impact. However, for these categories there is the technical problem of the endogeneity of public
infrastructure in the equations.

The analysis of the effects of infrastructure on the manufacturing sector of the economy has
also been conducted at four different spatial levels. First, a panel of the total (large scale)
manufacturing of the Greek prefectures is used; second, there is a sectoral breakdown of the
manufacturing for Greece as a whole; third, comes a sectoral breakdown for the metropolitan area of
Athens; and finally, the fourth level offers a sectoral breakdown for the Rest of Greece.

The empirical calibration tried to examine the two ways by which the theoretical model
assumes that public capital affects the manufacturing sector. The first possibility is that changes of
infrastructure provision alter the preferred scale of production for the firms of the manufacturing
sector. The empirical counterpart of this possibility was the examination of the impact of public
capital and the number of manufacturing establishments on the output per manufacturing
establishment. The results showed that total public capital plays a significant positive role at all spatial
levels, with the exception of the metropolitan area of Athens. The productive infrastructure
coefficients are similarly significant positive, again with the exception of Athens. However, the picture
is not clear for the case of social public capital. At the regional level, where the total of manufacturing
sectors is considered, social infrastructure appears not to play any important role. The same is true for
the sectoral breakdown for the area of Athens. Nevertheless, for the sectoral breakdown for Greece as

28



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