RESEARCH PAPER NO. 839

MODELLING SOCIAL INFRASTRUCTURE AND GROWTH

by

MARTIN S. CHIN

MARCH 2002

Department of Economics. University of Melbourne. Melbourne Victoria 3010 Australia

ABSTRACT

This paper examines the impact of social infrastructure on economic growth by endogenously modelling its provision by a public sector in the context of a multi-sector growth model. Our model shows that not only is social infrastructure positively correlated with output per worker, countries that are more efficient in providing the infrastructure are able to limit the level of diversion while those that are not are unable to do so. Next, we augment the model with human capital which is endogenously determined by the education sector. The extended model indicates a positive link between the education and public sectors such that a shock to one of these sectors affects not only the immediate sector but the other as well. We also show that favourable social infrastructure can have positive long-term growth effects when the Lucas (1988) specification for the accumulation of human capital is adopted. Our results suggest that emphasis should be placed on raising the efficiency level of the public sector and productivity level of the education sector. Finally, the best way of combating diversion is to encourage individuals to adopt a higher degree of aversion to it.