Conferences at Department of Economics, University of Toronto, RCEF 2012: Cities, Open Economies, and Public Policy

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Population Density, Optimal Infrastructure and Economic Growth

Sumit Shrikant Deole*

Last modified: 2012-07-15


This paper develops an OLG model with endogenous fertilityand education decisions to analyze the impact of transportation infrastructure on economic growth. This study argues that there is an optimal distribution of infrastructure in the region to boost the transition of an economy from economic stagnation towards the developing phase. The study assumes that the population induced productivity improvements and provision of optimal infrastructure in the region will form the two necessary conditions for thistransition. In line with what is actually seen during the process of development, if the transportation costs as a fraction of labor income are assumed to be decreasing, results obtained under section 2 imply a paradox. At a macro-economic level, the model proposes simpler micro-foundations of the geographical interpretations of economic growth in order to study the effect of population density on growth. The higher population density enables the set-up costs of additional infrastructure in that region to be created, opening the possibility of enhanced welfare. But lagging behind on additional investments in infrastructure could prolong the transition. Using time series data for years 1960-2010 on India, the study examines the role of transportation infrastructure on economic growth. Empirical evidences, with the help of OLS estimations, suggest that there is a negative impact of infrastructure costs on the fertility decisions of the parents and similarly, a positive impact of population density on economic growth. With the help of Granger causality test, study confirms the unidirectional causality between population density and economic growth. The study also reflects the governmentís emphasis on building new roads than building new railway tracks considering the costs involved. (JEL: J13, O40, R28)

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