The Case of Korea

This paper estimates a stochastic production frontier using time-series data for the aggregate Korean economy in 1977-2005 to examine whether public infrastructure stock reduces aggregate technical inefficiency in the gross domestic product. A stochastic production frontier is estimated in first-differenced form, and the one-sided residuals are regressed against the stock of public infrastructure per labor. We show that estimated the extent of technical inefficiency is negatively related to public infrastructure and suggest that public infrastructure stock reduces technical inefficiency in gross domestic production function, but does not directly affect gross domestic product. Our results suggest that public infrastructure enhances economy-wide technical efficiency. The public infrastructure stock increases private sector output both directly and indirectly. The public infrastructure comprises government or local government capital goods. It includes high-ways, streets and roads, mass transit and airport facilities, electric, gas, and water supply facilities and distribution system, wastewater treatment facilities. In conventional view on public infrastructure, one effect of public infrastructure arises, because public infrastructure stock provides intermediate services to private sector firms, or the marginal product of public infrastructure stock in the private sector is positive. On the other hand, another effect stems from an assumption that public and private infrastructure are complements in production. There are numerous previous empirical studies investigating the role of technical progress and public infrastructure as an input in the production process since Arrow and Kurz (1970). These results reports that the values of the marginal product of infrastructure are positive and statistically significant, but often implausibly large and that the model includes various econometric problems. Specifically, Aschauer (1989) and Munnell (1990) reported that output elasticities with respect to public capital are 0.39 and 0.34, respectively. These findings are higher than the consensus output elasticity for private capital of 0.30 and invoke a useful discussion on the importance of public infrastructure. Recently Achim and Stephan (2001) proposed a simultaneous-equation approach to estimate the contribution of infrastructure accumulation to private production using panel data of large German cities for the years 1980, 1986, and 1988. Their results show that the simultaneity between output and public capital is weak, and feedback effects from output to infrastructure are also negligible. These studies assume that an increase in public infrastructure upwardly shifts an average production function in a neutral respect. This implies that, in determining the level of private output, such infrastructure should not be included as an direct input in an average production function. To reconcile this problem, as an alternative approach, public infrastructure plays an role on reducing the technical inefficiency of private sector production, or decreasing the difference between actual and potential output. For example, Mullen, Williams, and Moomaw (1996) presented a model of a translog stochastic production frontier to estimate the direct (output) and indirect (efficiency) effects of public capital for manufacturing across USA. states and over time using panel data. Their result reveals that public capital increases both output and productive efficiency in manufacturing and that the estimated, direct output elasticity of public capital is very small. Delorme, et al. (1999) analyzed a stochastic production frontier including a public capital for the private USA. economy using time-series and reported that estimated technical inefficiency is negatively correlated with the stock of public capital. There are several researches about infrastructure stock in Korea. First, (2002). Other researches estimated the effects of infrastructure on Korean economy. For example, Park and Jun (1994) investigated the marginal effect of infrastructure on manufacturing productivity using polynomial distributed lag model and annual data 1970-1992. Their results pointed out that the stock of infrastructure has significantly positive effect on manufacturing productivity. Park, Jun and Park (1996) examined the marginal effect of infrastructure on regional economic productivity using OLS (Ordinary least squares) model and regional panel data 1972-1991. Their results showed that the stock of infrastructure also has significantly positive effect on regional economic productivity. Kim, Lee, and Koo (1997) also examined the marginal effect of social overhead capital on manufacturing productivity in regional economy using stochastic frontier model and regional panel data 1977-1992. Their results also show that social overhead capital stock significantly increases regional economic productivity. This paper is organized as follows. In Section 2, first, we examine the previous finding by estimating an average production function including public capital as an input and then estimate a model of stochastic production frontier. Finally, section 3 contains concluding remarks. 2. Model and Analysis Our analysis examines the finding that public infrastructure affects real gross domestic product (GDP) in Korea economy. Following several studies, for example, Ratner (1983), Aschauer (1989), Munnell (1990), Gramlich (1994), Otto and Voss (1996), and Delorme, et al. (1999), this paper introduces an aggregate Cobb-Douglas production function augmented by Hicks neutral technical change with a constant-returns-to-scale technology. This model also includes the capacity utilization rate to control the phase of the business cycle because the dependent variable in this model (output per worker) varies procyclically over time. Annual data from the period 1977-2005 are used in the empirical analysis, and are described in . The model can be written