Identifying Priorities in Infrastructure Investment in Portugal

Abstract

In this paper we use a vector autoregressive approach to analyze the effects of infrastructure investment on economic performance using a newly developed data set for Portugal. Our overall goal is to identify priorities in infrastructure investments, i.e., areas of infrastructures investments with virtuous economic and budgetary effects. We find that investments in other transportation infrastructures—railroads, ports and airports—and social infrastructures—health and education infrastructures—have the largest effects with long-term multipliers of 15.00 and 8.45, respectively. Investments in road transportation—roads and freeways—and on utilities—electricity, gas, water, refineries, and telecommunications—induce much smaller effects with multipliers of 2.75 and 3.52, respectively. We also show that for other transportation and social infrastructure investments, the short-term effects are small relative to the accumulated effects and yet, in absolute terms, they exceed the long-term effects for road transportation and utilities. Finally, we show that investments in other infrastructures and in social infrastructures will pay for themselves in the form of long-term enhanced tax revenues under rather reasonable effective tax rates. Overall, we have clearly identified other transportation infrastructures and social infrastructures as the key target areas for policy intervention in this context.