COMM II Argumentative Research Paper

8/13/2019 COMM II Argumentative Research Paper

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THE ECONOMIC GROWTH AND DEVELOPMENT EFFECTS

OF INCREASED GOVERNMENT SPENDING

ON INFRASTRUCTURE

A Research Paper

Presented to

Ms. Mishima Z. Miciano

Department of Arts and Communication

College of Arts and Sciences

University of the Philippines Manila

In Partial Fulfillment of the

Requirements in

Communication II

By

Ferdinand B. Sta. Ana, Jr.

October 19, 2012


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The Economic Growth and Development Effects of Increased Government Spending on

Infrastructure

Increased government spending on infrastructure leading to the creation and enhancement of

infrastructure will improve the economy because it can spur growth and raise the quality of

living of the people through developments on both economic and social services.

I. As a component of fiscal policy, infrastructure spending is a tool utilized bydevelopment economics to influence the economy.

II. An increase in government spending on infrastructure leading to greater infrastructureprovisions causes economic growth by affecting production, investment and trade.

A. Infrastructure can raise productivity, affecting the production of goods andservices.

B. Infrastructure can attract investments.C. Infrastructure can improve trade facilitation.

III. Greater provisions of infrastructure in the form of economic services such as energyand transportation creates economic development

A. The construction of roads or, generally, the development of the transportationsector can produce several development effects.

B. Electrification is also capable of developing a community, specifically a ruralcommunity, in ways such as increased employment.


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IV. Greater infrastructure provisions, when they improve the production and delivery ofsocial services such as health and education, directly cause economic development,

and through these social services, they can also produce economic growth.

A. Infrastructure causes economic development as it improves health and educationwhich raise the standard of living of people

B. Infrastructure indirectly causes economic growth when it enhances health andeducation as these have a positive effect on output and productivity.

V. The necessity of increasing government spending on infrastructure in producingeconomic growth and development is questioned.

A. Increasing government spending on infrastructure can deprive other expenditures.B. At optimal levels of allocation, the gains from increasing infrastructure spending

have a positive impact sufficient to offset the losses suffered in other areas.

VI. Evidence of the effects of infrastructure yields several recommendations on bothfuture research and government policy on infrastructure spending.

A. In general, the government should increase spending on infrastructure leading tothe rehabilitation and enhancement of infrastructure.

B. Research recommendations mainly revolve around identifying the optimaldistribution of government resources on the different aspects of infrastructure.

VII. Based on the effects of infrastructure discussed in this paper, increased governmentspending on infrastructure improves the economy.


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THE ECONOMIC GROWTH AND DEVELOPMENT EFFECTS OF INCREASED

GOVERNMENT SPENDING ON INFRASTRUCTURE

FERDINAND B. STA. ANA, JR.

Development economics is a field of economics that deals with the generation of

advancements in the quality of life of people especially in developing or low-income countries

(Todaro & Smith, 2012). Many countries in the world including the Philippines are low-income

countries. It is therefore imperative to conduct studies in this field so that low-income countries

can be guided towards development. Research in this field is mostly focused on the creation and

implementation of policies with a goal of translating economic growth into improvements in the

different aspects of peoples lives such as education and health (Todaro & Smith, 2012).

Conventions in economics equate development with prolonged growth rates which allow

the rate of output to increase such that it is faster than the population growth rate. The

conventions emphasize the importance of attaining economic growth, which is defined as the

increase in the total output of goods and services in an economy over time, in developing an

economy because it leads to greater income. Furthermore, income increases are believed to be

transformed into benefits for the people. Thus, in order to increase income, focus and effort are

dedicated to raising the gross domestic product (GDP), an indicator of economic growth.

However, Sen (as cited in Todaro & Smith, 2012) believes that development should be less

involved with economic growth and wealth and more concerned with directly improving the

quality of the life of the human being. Consequently, economic development is basically the

enhancement of the standard of living of people (Todaro & Smith, 2012).


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In order to accomplish this, development economics utilizes possible and vital

mechanisms. As the public conduit of development, the government plays an extremely

important role because of its function in public policy formulation and implementation (Todaro

& Smith, 2012). One such policy is the fiscal policy which is the use of taxation and government

spending to affect the economy. As a component of fiscal policy, government spending can be

used as an important tool in influencing the economy, and one of the avenues for government

spending is infrastructure.

The term infrastructure can refer to various concepts. It can refer to roads, highway,

trains and ports which can be categorized as transportation infrastructure. It can also refer to

telephone lines, cell sites and satellites which can be categorized as communications

infrastructure. The organizational structure through which health care and education systems

operate can also be referred to as infrastructure. It is therefore important to define infrastructure

in the context of this paper. For the purposes of this paper, infrastructure is defined as a capital

good which facilitates the production and distribution of goods and services. This definition is

functionally broad to cover the different aspects of infrastructure. This definition can also

accommodate both private and public provisions, and through the latter, infrastructure becomes

an area for expenditure by the government.

Infrastructure spending by the government has been touted as one of the keys to

economic progression. Aside from being potentially capable of raising economic growth,

infrastructure has also been shown to be capable of causing several development effects. These

effects include the creation of more jobs and more opportunities for raising income (Olsson,

2009). A comprehensive study of the wide-ranging growth and development effects of

infrastructure needs to be performed in order to verify the advantages or disadvantages of


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al., 2010) observe a 2.9% boost in the per capita income growth when the infrastructure stocks

index is raised by one standard deviation.

Infrastructure expands an economys potential for growth. This provides the government

the capacity to advance the growth potential of the economy by increasing the spending on

infrastructure. Increased spending on infrastructure can achieve this through the ability of

infrastructure to lower costs and raise profitability of businesses which, in turn, improve

productivity, draw investments (Diokno, 2010) and facilitate trade efficiently (Brooks & Stone,

2010).

Infrastructure promotes economic growth by increasing productivity (Agenor &

Neanidis, 2011). One way infrastructure can increase productivity is when it is a factor of

production, an input used to produce goods and services. In this case, when infrastructure is

increased, the production of goods and services also increases (Straub & Terada-Hagiwara,

2011). An example is the text messaging service used in phones. Cell sites, which can be

considered as infrastructure, are prerequisites for performing this service, so more text messages

can be produced if there are more cell sites.

Another way infrastructure can increase productivity is when it encourages the

development of technology which, in turn, can affect the productivity of other production factors

(Straub & Terada-Hagiwara, 2011). Infrastructure has also shown a capacity to directly raise the

productivity of the other factors of production. An example is the achievability of using

machines for production when there is a provision for energy or electrification (Cook, 2011).

Other infrastructure sectors such as roads, highways, electricity and telecommunications have


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been found to significantly affect the productivity of different countries such as the Philippines,

Thailand and the United States (Straub & Terada-Hagiwara, 2011).

Infrastructure is also capable of attracting investments from the private sector, and an

increase in investments can spur economic growth (Brooks et al., 2010). According to Straub and

Terada-Hagiwara (2011), investment is influenced by infrastructure. Both the lack and low

quality of infrastructure can discourage investments because such infrastructure entails high

costs. As an example, Straub and Terada-Hagiwara (2011) explain that repeated power outages

increase the possibility of machines breaking down which creates higher repair and maintenance

costs. Consequently, government spending on infrastructure indicates that the government

guarantees success for investors (Diokno, 2010).

Infrastructure can also improve the facilitation of trade. This is another way in which

infrastructure can indirectly cause economic growth because improved trade facilitation

promotes economic growth. Francois and Wignaraja (as cited in Brooks & Stone, 2010) present

the outcome of having China, Japan and Korea establish a free trade relationship with the

Association of South East Asian Nations as an increase in the national income of all the countries

involved ranging from 2.6% to 12%.

Several obstacles must be surmounted before efficient trade facilitation is achieved.

These constraints are infrastructure in nature. These include high freight costs, delays in

customs clearance, unofficial payments, and poor governance(Brooks & Stone, 2010, p. 136).

Other infrastructure-related issues in trade facilitation include the transport technology in use, the

congestion of physical infrastructure in use and the efficiency of ports. All of these obstacles

certainly affect trade costs. Improving both the physical and soft infrastructure definitely leads to


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the reduction of costs and waiting times. These reductions in costs can foster production,

employment, trade expansion and growth (Brooks & Stone, 2010).

Yean, Devadason and Heng (2010) provide an example of how infrastructure can

decrease costs. The example shows Malaysia has spent about 93 billion Malaysian ringgit on

transport infrastructure development from 1991 to 2010. Specifically, about five billion

Malaysian ringgit was spent on port development. This resulted to improvements in ports such as

an increase in port capacity from 174.1 million tons in 1995 to 570.0 million tons in 2010 and an

increase in volume of cargo handled from 152.3 million tons in 1995 to 539.0 million tons in

2010 (Yean, Devadason, & Heng, 2009). These improvements reflect the reduction in trade costs

as more goods were traded. Better trade performance resulting from the improvements has

helped Malaysias economy grow, and according to Yean, Devadason and Heng (2009), become

one of the most highly integrated into the world economy(p. 148).

Attracting investments through infrastructure is also possible in the context of trade.

Trade expansion resulting from reduced costs means greater access to markets and suppliers.

This trade expansion has a positive impact on foreign direct investment (FDI), and as previously

stated, greater investments lead to economic growth. Then, given the right conditions, FDIs can

promote further trade. As a result, it is possible to have a cycle of trade facilitation, trade, and

investment that fosters increased trade and economic growth(Brooks & Stone, 2010, p. 145).

Aside from economic growth, increased government spending on infrastructure can also

improve the economy in terms of economic development. Infrastructure is capable of achieving

this when it acts as an economic service such as road construction and electrification.


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The construction of roads or, generally, the development of the transportation sector can

produce several development effects. These effects may either be general or specific. A study

conducted in the Philippines from 1990 to 2005 by Olsson (2009) was able to observe and

enumerate effects produced by a road construction project. The first of the specific effects

observed was the decrease in operating costs, in which fuel consumption and maintenance costs

decreased by 35% and 44%, respectively. Travel time also decreased by 40%. These effects

allowed the goods which were perishable to be sold at higher prices.

Greater accessibility was another effect created by the road project. This allowed the

arrival of investments. In turn, this resulted to a more competitive production system. Greater

accessibility also meant more markets. This led to trade expansion. Greater accessibility also

allowed the inflow of more capital such as motor vehicles and larger harvesting vessels. This led

to an increase in yield and trade volume. The yield increased by 425% in terms of metric tons

from before the road project (Olsson, 2009).

These specific effects that developed the community in the study were able to show two

general development effects. First, income was affected. Easier access to capital allowed more

opportunities for earning income. Increase in the production of goods and trade volume directly

raised income (Olsson, 2009). In another study, the reduction of transport costs resulting from

road construction has been found capable of raising the income of households. It was also

observed that the benefits from road construction were not equally distributed as the most distant

households benefited the most. As a result, road construction is thought to be capable of not only

raising income but also distributing income equitably (Jacoby & Minten, 2009).


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Second, there is an effect on employment. The competitive production system and ease of

access to capital goods also increased employment. More firms meant more jobs were created.

An example was that as capital goods such as harvesting vessels increased, the number of

workers needed also increased (Olsson, 2009). In another study performed in Thailand, Felker

and Townsend (as cited in Foster, 2012) finds that the number and earnings of firms, which

employ labor, decrease as the distance from a major highway increases.

Other than road construction, electrification is another economic service related to

infrastructure. Electrification has similar effects to road construction. Like road construction,

electrification can create opportunities for earning income by affecting the production of goods

and services. This is proved by a study performed by Prasad and Dieden (as cited in Cook, 2011)

wherein they find that electrification is responsible for 40% to 53% increase in the activity of

firms. Moreover, the empowerment of firms, especially those belonging to the poor or hiring

poor workers, raises the income of the poor. This demonstrates the impact of electrification on

poverty (Brenneman & Kerf, 2002)

Electrification also has an effect on employment. Dinkelman (as cited in Foster, 2012)

finds that electrification can increase labor supply. On the effect of electrification on

employment, women seem to be more affected. Cook (2011) explains that electrification can free

women from household work which leads to the creation of income opportunities. Calvo (as

cited in Brenneman & Kerf, 2002) provides evidence in which 769 women in sub-Saharan Africa

spend 0.29 hours to 2.48 hours per day to gather firewood, and believes that electrification can

reallocate the time used for gathering firewood to activities such as creating income.


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In general, electrification raises the standard of living of the poor. Venkataraman (as cited

in Brenneman & Kerf, 2002) surveyed 50 households, of which 20 are low-income households,

in five rural electrification cooperatives. Using the results of the survey, Venkatraman (as cited

in Brenneman & Kerf, 2002) reports that 60% of the low-income households stated household

work became easier due to electrification, 48% of the households said peace, order and security

improved due to electrification, and 86% declared electricity made their leisure activities better.

Economic development resulting from greater infrastructure provisions is also achievable

when infrastructure improves the production and delivery of social services such as health and

education because these social services can intrinsically raise the standard of living of people.

Generally, infrastructure has a positive impact on health outcomes. Valdivia (2004) finds an

increase of one standard deviation in the health infrastructure index of a community results to

children who are taller by 0.02 standard deviations. Improvements in infrastructure also result to

a decrease in mortality of children below five years old (Fay, Leipziger, Wodon, & Yepes,

2005).

Furthermore, specific types of infrastructure are capable of improving health through

different ways. These specific types include electrification, information and communications

technology (ICT), transportation and water and sanitation.

Poor households in developing countries commonly utilize biomass, such as coal and

firewood, as fuel to address their energy needs. This leads to indoor air pollution which can

negatively affect the respiratory health of households. Electrification provides a cleaner

alternative energy source. As a result of electrification, the occurrence of respiratory-related

sicknesses in poor households decreases (Brenneman & Kerf, 2002). Foster (as cited in


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Brenneman & Kerf, 2002) confirms the effect of electrification on the respiratory health of

people by performing a health survey on 430 children in Evaton, South Africa. The results of the

survey show that children of coal-powered households have a 190% greater chance of

developing respiratory ailments than children who are members of households with electricity.

Infrastructure as ICT can also improve health. Information in the form of patient records

and test results have a large impact on the administration of health care on people. Mishandling

and delays in obtaining information can have severe consequences such as inadequate and low

quality treatment of patients. ICT can solve this by allowing exchange of information through

easier and more efficient means such as the phone and the Internet. Consequently, time and

resource costs decrease, and health professionals provide optimal treatment (Brenneman & Kerf,

2002). The Telecommunication Development Bureau (as cited in Brenneman & Kerf, 2002, p.

57) offers as evidence that the use of ICT in providing health care in Mozambique can result to

savings of 10, 000 US dollars per year, obtained from a reduction in transportation costs for

inappropriate referrals.

Other than electrification and ICT, transportation infrastructure can also have a positive

impact on health. Several barriers to health care access are geographical location and remoteness

from health care centers. This negatively influences the health of people (Brenneman & Kerf,

2002). In a study conducted in the Philippines, Booth, Hammer, and Lovell (as cited in

Brenneman & Kerf, 2002) observe a 2% rise in mortality from a 10% increase in travel time to a

health care center. Improvements in transportation infrastructure which reduce travel costs and

time translate to better health care access. The World Bank (as cited in Brenneman & Kerf,

2002) conducted a study in Morocco which shows that after old and new roads were repaired and


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constructed respectively, hospital and health care center appointments made by women increased

from 1.1 to 2.4 per year and from 2.3 to 3.1 per year respectively.

Water and sanitation systems are another infrastructure which can positively influence

health. Utilization of untreated or unclean water poses several risks to the health of people such

as infection and disease contraction. Enhancing water and sanitation systems can assist in

decreasing the prevalence of waterborne diseases. As a result, the health of people improves.

Using results of a survey conducted in 1978 on 1, 903 households in the Bicol region of the

Philippines, Horton (as cited in Brenneman & Kerf, 2002) presents a significant and positive

correlation with a coefficient of 0.441 between the presence of piped water in homes and child

nutrition.

Aside from health, education is another social service that can be improved by greater

infrastructure provisions. One of the points made earlier is that electrification can reallocate time

resources from gathering biomass fuel into other productive activities. One possible activity is

education. Hence, children, instead of collecting biomass fuels, can attend classes and spend

more time on studying (Brenneman & Kerf, 2002). Khandker (as cited in Brenneman & Kerf,

2002) presents data from a survey of 87 villages in Bangladesh from 1991 to 1992 that providing

all schools with electricity can result to an increase in the number of schooling years from 4 to

4.38 and from 4 to 4.45 for boys and girls, respectively.

Sufficient transportation infrastructure is another key to better education especially for

rural communities because it provides both teachers and students easier access to schools

(Brenneman & Kerf, 2002). Levy (as cited in Agenor & Neanidis, 2011) verifies the positive

influence of transportation infrastructure through the results of a study in the Philippines wherein


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a 10% increase in school enrollment and a 55% decrease in dropout rates were observed after the

construction of rural roads.

If the construction of roads and schools in rural communities are impractical, modern

technology offers an alternative in the form ICT. ICT infrastructure can be utilized for distance

education programs. This allows better access to education. Exchanging information and

discussions over great distances are also possible through the use of ICT. Bhatia (as cited in

Brenneman & Kerf, 2002) reports 82% of participants in a distance education program for

teacher training consider the program better than traditional training methods.

In addition to economic development, infrastructure can also cause economic growth by

improving health and education. Several studies demonstrate the capacity of health and

education to induce economic growth. One such study states that enhancing the nutrition of

people triggers economic growth by improving labor productivity (Agenor & Neanidis, 2011).

Another study finds that improving the life expectancy of people by one year raises economic

output by 4% (Bloom, Canning, & Sevilla, 2004)

Different studies have also correlated better education with economic growth. In terms of

educational attainment, Bloom, Canning, and Chan (2003) observe a 0.35% rise in industrial

output as the number of people who have completed higher education increases by 1%, and a

0.15% increase in agricultural output as the number of science and engineering graduates

increases by 1%. In terms of school enrollment, a study reports a 40% increase in secondary

school enrollment results to a 1% increase in the growth rate of gross national product (GNP) per

capita, another indicator of economic growth,. (Gylfason, 2001). An increase in schooling years

also triggers economic growth. A study finds that increasing the number of years of secondary


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and tertiary education by 0.68 years and 0.09 years improves GDP growth by 1.1% and 0.5%

respectively (Bloom, Canning, & Chan, 2006).

These growth effects of health and education raise a certain issue regarding the necessity

of increasing infrastructure spending in promoting economic growth and development. It has

been argued that if improving health and education can produce growth and cause development,

then it may be better to increase direct spending on health and education rather than increase

infrastructure spending. Agenor (2010) argues that reallocating huge government resources to

infrastructure will only produce the preferred effects if the efficiency of public investments

which is largely affected by governance is high enough. In the Philippines, increasing

government spending on infrastructure may seem unviable due to governance issues.

However, infrastructure can cause several effects which make it a practical expenditure.

Public infrastructure can become sufficiently productive in health-related technology such that

increasing infrastructure spending has a positive effect which compensates for lower direct

spending on health. Infrastructure also has the capacity to maintain and enhance present

investments in both health and education. Furthermore, immediate gains on health and education

outcomes caused by infrastructure developments cannot be disregarded. These gains which

include greater access to health care and clean water are vital for raising the quality of peoples

lives (Agenor & Moreno-Dodson, 2006). It is therefore reasonable to believe that allocating

more resources for infrastructure may be a better way to improve health rather than spending

directly on health.

The effects of infrastructure discussed in this paper reveal the need to modify the existing

fiscal policy of the government in relation to infrastructure spending. First of all, in general, the


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government should increase spending on infrastructure, resulting to the rehabilitation and

construction of old and new infrastructure respectively.

Specific recommendations on the infrastructure spending policy of the government are

also important to note. First, as trade is crucial for economic growth, improvements in trade and

transportation infrastructure such as airports like the Ninoy Aquino International Airport should

be undertaken by the government. Second, the government should increase focus on

infrastructure developments in rural communities where they seem to have the greatest effect as

most of the studies cited in this paper were conducted in rural communities. Third, since poverty

is prevalent in the Philippines, the government should be geared towards raising the standard of

living of people by prioritizing infrastructure developments which improve social services such

as health and education.

Recommendations for future research are also important. First, future research should

focus on ascertaining the optimal distribution of government resources to the different types of

infrastructure. Second, further research should also determine the optimal distribution of

government resources among three aspects of infrastructure spending, rehabilitation of old

infrastructure, maintenance of existing infrastructure and construction of new infrastructure.

Lastly, future studies should gather empirical evidence which show the optimal allocation of

government spending on infrastructure in the Philippines.

In this paper, the capacity of infrastructure enhanced by increased spending to induce

economic growth through productivity, investment and trade was studied. This paper also

discussed the ability of infrastructure as an economic service to raise the quality of peoples

lives. Furthermore, this paper also studied the economic growth and development effects of


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social services such as health and education as infrastructure improved the production and

delivery of such services.

Finally, this paper inferred that allocating government resources on infrastructure is

justified as this produces positive effects on social services which are absent in direct spending

on social services. Using the evidence gathered, it can be concluded that increasing government

spending on infrastructure improves the economy because it enhances infrastructure which can

stimulate growth and enrich peoples lives as infrastructure positively affects economic and

social services.


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COMM II Argumentative Research Paper