The Construction-Development Curve: Evidence from a New International Dataset

Using a new dataset of construction investment in countries across the world for the period 2000-2011, this paper provides novel evidence of a bell-shaped relationship between the share of construction in GDP and economic development. The relative level of construction activity tends to increase in developing countries, to peak during industrialization and to decrease at a slowing pace in industrialized countries, approaching stabilization in mature economies. The curve fits better if economic development is measured by alternative indicators instead of per capita GDP, namely, life expectancy and an Economic Development Index (EDI) which takes into account per capita income, life expectancy, maternal mortality ratio and the share of agriculture in employment. On average, the peak in construction activity is reached at a per capita income level of almost €5,000 (at PPP, 2011 prices), or when life expectancy in the country has reached around 67 years. At its peak, construction accounts for about 14% of a country’s GDP. The curve is robust to the inclusion of control variables. Population density, demographic growth and credit expansion do not explain cross-country variation in the share of construction in output, while there is weak evidence that a less concentrated income distribution is positively related to the size of the construction sector.