Public infrastructure and economic growth in Pakistan: a dynamic CGE-microsimulation analysis

The role of infrastructure in economic growth and welfare has been studied extensively across the literature over the past three decades. We use a dynamic CGE model linked to a microsimulation model to estimate the macro-micro impact of public infrastructure investment. Two approaches to public investment are considered in our simulations. In the first, production taxes finance the additional public infrastructure investment and in the second, foreign borrowing provides resources. Our results reveal that public infrastructure investments have the same direction of impact whether funded by taxation or international borrowing, particularly when looking at macroeconomic gains and poverty reduction in the long run. However, in the very short run, tax financing puts a strain on output in the industrial sector and thus reduces economic growth in the short run. The financing from international borrowing has a Dutch disease-like impact in the short run, as indicated by a decline in exports.