An empirical examination of the effect of infrastructure on economic development: a large and heterogeneous panel data analysis

Infrastructure drives economic development. This study investigates to what extent infrastructure and skilled labour affect aggregate output, by analysing large heterogeneous panel data of 130 countries over two decades. We implement an autoregressive distributed lag (ARDL) model to extract the long-run production technology relationship among economic growth, infrastructure, and skilled labour. The complementarity of skilled labour and infrastructure is conducive to skill-biased economic growth. Skill differences account for disparities among workers’ wages worldwide, thereby widening inequalities in income and consequently, living standards. Contrary to previous studies that have used frameworks assuming production function homogeneity across countries, we propose a methodology to identify latent country groups based on the long-run production technology embedded in the ARDL model, using an identification procedure of the unknown group structure in panel models. We select the optimal number of groups by implementing a new information criterion under multiple nuisance parameters and estimate the coefficients of the production functions for each country group. Based on the complementarity estimates of country groups and the estimated country classifications, we find that the effects of infrastructure generated grouped-heterogeneity of growth span across countries in estimated production relationships.