Establishing The Importance Of Japanese Public Infrastructure

Abstract

In an endeavor to get the economy out of its economic slump the Japanese government has proposed several structural reform measures, one of which involves the reduction in public investment spending. We study the soundness of this proposal by investigating both the correlation between public infrastructure and the private sector variables (private output, labour and capital) as well as the causal relationship between public infrastructure and the private variables. Public infrastructure comprises of physical (e.g., roads and ports) and social (e.g., academic institutes) infrastructure. For the first objective we employ the translog production function to determine the nature of the relationship between public infrastructure and the private variables. We find that total public infrastructure (physical plus social) has a positive and significant relationship with private output in the magnitude of 1.03%. Additionally not only do we find that all types of infrastructure impact positively on private sector output but also that social infrastructure had a greater impact on private sector output (0.58% higher).  Regarding the second objective we employ the Granger no-causality test procedure developed by Toda and Yamamoto (1995).  We establish that public infrastructure Granger causes private labour and private capital. While private capital and private labour Granger cause private output. Also there is a bi-causal relationship between social public infrastructure and private capital. There exists reverse causality between public infrastructure and private output. As such public infrastructure affects private output indirectly through its impact on the private inputs.