How Important is Infrastructure Investment to Aggregate and Sectoral Production? New Evidence From Eastern Africa

ABSTRACT: The Eastern African countries have in the last years vigorously invested in public infrastructure to accelerate growth. However, in the empirical literature on Eastern Africa, the extent to which these investments have influenced the observed growth trajectories at the aggregate and sectoral levels remains uncertain. The current study bridges this gap. With a focus on nine Eastern African countries (i.e. Burundi, Comoros, Ethiopia, Kenya, Rwanda, Seychelles, Sudan, Tanzania, and Uganda), the study estimates a variety of aggregate and sectoral growth models using data for the period 2003-2019, and the Feasible Generalized Least Squares (FGLS) technique. This technique was selected based on the Breusch–Pagan Cross-sectional dependence LM test, and the presence of serial correlation, confirmed by the Wooldridge test, and heteroskedasticity, as per the Wald test results. Data was sourced from the World Bank World Development Indicator, and Africa Development Bank African Infrastructure Index. The study shows that infrastructure development is important for total output. At the sectoral level, the effect is observed strongest in the industrial sector, followed by the services and the agricultural sectors. While the impact of electricity infrastructure was greatest in the services sector followed by the agricultural and industrial sectors, a further disaggregation of electricity reveals that access to electricity exhibits the greatest benefit for the industrial sector followed by the services sector and agriculture sector. The water supply and sanitation infrastructure was found to display its greatest impact on the industrial sector, followed by the agricultural sector, and the services sector. Only the services sector appeared to benefit from transport infrastructure, albeit weakly. Additionally, financial development and investment drive domestic output, whereas trade liberalization and real exchange rate appreciation adversely affect it. First, well-integrated policies targeted at improving infrastructure, and particularly ICT, electricity and water supply and sanitation, should be adopted to propel growth in the agriculture, industry, and service sectors. Programs such as Water, Sanitation and Hygiene services, the United Nations' Water Action Decade', should be supported. Second, policy makers in Eastern Africa ought to focus not only on expanding electricity-generating capacity but also access while taking steps to curb electricity transmission and distribution losses.