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The role of infrastructure in

macroeconomic growth theories
a a a
Robert Carlsson , Alexander Otto & Jim W. Hall
a
Environmental Change Institute, University of Oxford, Oxford
OX1 3QY, UK
Published online: 16 Dec 2013.

To cite this article: Robert Carlsson, Alexander Otto & Jim W. Hall (2013) The role of infrastructure
in macroeconomic growth theories, Civil Engineering and Environmental Systems, 30:3-4, 263-273,
DOI: 10.1080/10286608.2013.866107

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 Civil Engineering and Environmental Systems, 2013
Vol. 30, Nos. 3–4, 263–273, [Link]

The role of infrastructure in macroeconomic growth theories

Robert Carlsson∗ , Alexander Otto and Jim W. Hall
Environmental Change Institute, University of Oxford, Oxford OX1 3QY, UK
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(Received 30 October 2013; accepted 6 November 2013)

Investment in infrastructure is widely regarded as promoting economic growth. Moreover, infrastructure

has a critical and often irreversible role in locking in patterns of development. Therefore, it is surprising
that macroeconomic growth theories do not explicitly incorporate the notion of infrastructure systems.
This lacuna is studied here, exploring the mechanisms via which infrastructure can impact an economy’s
growth rate and how these mechanisms may be represented in existing macroeconomic growth theories.
We confirm the important role of transport and digital communications infrastructure in reducing the cost
of trade, thereby facilitating economies of scale as well as knowledge accumulation. We also consider the
limiting effect that inadequate infrastructure can have on economic growth. Some, but not all, economic
functions of infrastructure can be represented in current macroeconomic models due to their inherently
non-spatial nature: Romer models include knowledge accumulation and energy economics tackles resource
flows in the economy. New economic geography with growth, finally, allows for a representation of transport
infrastructure due to a more spatial approach. Alterations to the standard investment feedback cycle,
allowing for hybridisation of current theories, are identified. These provide the basis for a future programme
of work which will include explicit implementations of infrastructure in macroeconomic growth theories.

Keywords: investment; spatiality; economic growth; development

1. Introduction

National infrastructure systems (NIS) are fundamental to our developed socio-economic system.
Every day, the energy-, transport-, water-, wastewater-, solid waste-, and information and commu-
nication technology (ICT) systems provide infrastructure services to economic agents (e.g. firms,
households, and end-users) that allow a higher level of resource use than would normally be
permitted by the local endowments. This is achieved by a continuous, large-scale spatial redistri-
bution of resources, products, services, externalities and people, thereby underpinning production
processes, economic activity, and also directly contributing to human welfare.
Because of this ‘special foundational role, supporting other factors of production’ (Baldwin
and Dixon 2008) of NIS as well as its long gestation periods, long lifetime, and strong associated
lock-in effects (Batten and Karlsson 2012), the structure of our economy, to an extent, is bound
by the current infrastructure. Therefore, if there is a need to fundamentally change the structure of
the economy and the way that resources are used, to respond to challenges from socio-economic-,
demographic-, and climate changes, then changes in NIS are required to facilitate, lead, and
implement these changes. This argument takes NIS right to the centre of modeling structural
change and economic growth. Beyond NIS role in facilitating and implementing structural change

∗ Corresponding author. Email: [Link]@[Link]

© 2013 Taylor & Francis

 264 R. Carlsson et al.

and growth, there is a long-standing debate about infrastructure investments actually causing
economic growth. Most recently, this notion has been adopted with the idea that the challenges
of decarbonising the economy and stimulating economic growth can be tackled synergistically,
by the argument that infrastructure investments themselves are generating economic growth. The
current emphasis of the importance of NIS is highlighted by the publication of the first ever
national infrastructure plan for the UK (Treasury 2011).
This paper will explore the mechanisms via which infrastructure impacts the economy and by
extension economic growth. Historically, there has been a lively debate about the role of NIS in
the economy. There are proponents of the idea that NIS investments are associated with positive
rates of return (Aschauer 1989; Macdonald 2008), where the rate of return is defined as the ratio
of money gained or lost on an investment relative to the money invested. Others take a more
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cautious view claiming that infrastructure is of second-order importance in economic growth, and
the associated impacts vary greatly according to what kind of NIS decisions are taken (Banister
and Berechman 2000) or what provision level is already supplied (Ter-Minassian 2005). Many
analyses are based on empirical data, trying to infer causality effects via statistics. Actually, there
exists no prominent single macroeconomic growth theory (MGT) that fundamentally deals with
the economic effects of NIS. Often, infrastructure simply forms part of an aggregate capital stock.
The aggregation is problematic because different types of capital perform different functions and
have different productivities. Therefore, sometimes infrastructure capital is separated out as its
own type of capital.
However, too often, there is the tendency to assume that all infrastructure provision promotes
growth. Experts in the field say that ‘the efficacy of infrastructure spending in practice is at
best mixed’ (McKibbin and Henckel 2010). One of the key differences between infrastructure
capital and other forms of capital is that it is subject to network externalities (Égert, Kozluk,
and Sutherland 2009) and spatial effects so that the relative positioning of new infrastructure and
connectivity in the network matters (Braess 1968). This additional dimension has to be taken
into account when new infrastructure is added or removed, intentionally or by a disaster, from the
network. Moreover, infrastructure also carries economies of scale effects (Holtz-Eakin and Lovely
1995), meaning cost advantages arise due to the fixed costs being spread over a larger output.
MGTs deal with the structure, behaviour, and performance of the economy on an aggregate
scale. The different branches of macroeconomic theories have been trying to explain various
aspects of the economy. MGTs form one of those branches with the aim to explain how economic
growth arises in the long run. MGTs always contain an investment cycle that forms a feedback loop.
A fraction of the output, as prescribed by the production function, is returned into the economy as
investment that supports a growth mechanism. The nature of the actual growth mechanism varies
between theories.
In all MGTs, economic production is represented by an aggregate production function that
relates the factors of production (inputs in the production process) to the output; here, the produc-
tion function is used to describe the maximum output (a single consumption good) possible when
a set number of factors of production as well as a set level of technology are given. The factors of
production could, in principle, represent anything deemed to be a fundamental variable required
for the production process, but almost exclusively capital and labour are used as the variables
in the function. The production function is not a detailed model of the production process itself,
but rather an abstraction of the potential of production that a specific set of goods may have.
Some common production functions include the: Linear, Cobb–Douglas, Leontief, Translog, and
Constant Elasticity of Substitution functions used for various situations and for different sets of
assumptions.
There exist only a few economic models that include NIS effects to some extent. One class
of MGTs considers developing countries and how infrastructure changes human health (Glomm
and Ravikumar 1994). The argument is that infrastructure service provision induces changes in
 Civil Engineering and Environmental Systems 265

life expectancy, which modify the inter-temporal preference of consumption and thus alter the
long-term investment patterns, potentially impacting long-term growth. However, in a developed
economy, the majority of people already have access to these health-improving infrastructure
services. Therefore, this model does not accurately capture the impacts of improving NIS in
already developed nations.
A second class considers the congestion effect that different constraints have on the levels of
publicly supplied NIS and how this affects growth (Fisher and Turnovsky 1998). The notion of
congestion is general in the sense that it relates to the cost associated with under-capacity. This
is an important aspect of economic thinking about infrastructure, which is often only noticed
when under-capacity in the NIS results in shortages (for example of energy or water) which
increases costs and can, in extreme cases, prevent production altogether. However, the problem
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with these theories is that they do not consider key aspects of spatiality. In traditional MGTs,
space is homogenous, i.e. location of a firm is non-important as points in space are not bestowed
with any unique characteristics such as different local endowments.
The problem does not lie in the theories’ lack of treatment of infrastructure capital per se but that
the economic theories underlying the models are inherently non-spatial. In current neoclassical and
endogenous growth theories, this is resolved by introducing spatial heterogeneities that counteract
this fundamental property (Behrens and Thisse 2006). The only branch of macroeconomic theories
that deals with spatiality, to some extent, is that of new economic geography (Krugman 1991;
Fujita, Krugman, and Venables 1999), which forms a network of linked regions; however, these
models do not include long-run growth mechanisms – a shortcoming overcome by a proposed
extension of this model, the new economic geography with growth (NEGG) (Cerina and Pigliaru
2007).
None of the extant frameworks allows for a comprehensive treatment of the economic effects of
large-scale infrastructure system and/or infrastructure investments. The assessment of the benefits
of large-scale infrastructure investments, currently, is done by cost–benefit analysis (Lakshmanan
2011). It has been argued that this is the only viable approach that can be implemented in order
to ‘determine which projects should be implemented’ (Munnell 1994). Although useful on a
case-to-case basis, this approach does not reach the overarching goal of understanding, in a
more fundamental way, why an infrastructure asset is economically useful. Actually, cost–benefit
analysis exemplifies the inability of current economic practice to account for agglomeration
effects, re-emphasising the need for MGTs that incorporate space.
This points to the need to get beyond the bottom-up marginal analysis and consider network and
structural effects of infrastructure, hence the need for a macroeconomic theory. Acknowledging
the need to include infrastructure explicitly into MGTs, this paper will review the economic effects
NIS have on the economic agents (households and firms) and explore how the important economic
roles of infrastructure could be better included in MGTs.
The paper will first examine the economic roles of NIS in Section 2. This is done by looking at
various economic effects that NIS have on the economic agents. It also seeks to clarify the links
between these effects and MGTs in Section 3. Section 4 discusses how to implement the findings
of Section 3. The final section contains the conclusion and discusses paths for future research.

2. Economic roles of infrastructure

This paper considers energy, transport, water, waste, and ICT NIS, and includes the system-specific
subsystems: fuels and electricity (for energy), freight and passengers (for transport), and solid
waste and sewage (for waste) (Figure 1). These five main systems supply numerous services and
resources to economic agents for the smooth running of our society. The main economic agents
considered throughout this study are households and firms.
 266 R. Carlsson et al.
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Figure 1. Diagram showing the taxonomy used when classifying the infrastructure sectors considered within the scope
of this paper.

Energy infrastructure, in the form of fuels and electricity, provides economic agents with the
essential energy needed for heating, lighting, and production purposes (Kümmel 1989; Trench and
Miesner 2006). Energy provision to households and firms means that technology can be employed
in tasks, freeing up time for people to partake in other activities (Buhr 2003), thereby further-
ing specialisation through division of labour. Moreover, energy infrastructure allows agents to
consume energy (it is actually exergy that is consumed, as energy is conserved in all transforma-
tion processes) produced far away from the point of production, allowing clustering of economic
activity to occur (Ottaviano and Thisse 2002; Combes, Duranton, and Overman 2005). Because
of the relatively intermittent nature (and inelasticity) of demand, there are high marginal costs
at the supply limit. Energy can therefore, in principle, become a significant cost for agents, thus
reducing their disposable incomes and savings rates. Modern advanced economies have a reliable
energy infrastructure with ample capacity margins. The reliability is because the economic costs
of supply interruptions are high, potentially bringing large swathes of supply and consumption to
a standstill. In economic terms, energy infrastructure manifests itself when supply is interrupted.
It also manifests as a factor that brings cost to the production process.
Transportation infrastructure allows for a redistribution of people, resources, services, and
goods across space, thus lowering transportation costs and thereby mitigating the constraints of
local factor endowments, making economic development more dependent on spatial structures
instead (Barbier 1999; Rodrigue, Comtois, and Slack 2009). It allows for more agglomeration
(Fujita, Krugman, and Venables 1999); here agglomeration is defined as the act of pulling agents
together to form larger clusters. It also gives agents access to larger markets (including the labour
market) for buying and selling goods, therefore increasing competition (Combes, Duranton, and
Overman 2005; Brakman, Garretsen, and van Marrewijk 2009) and causing price convergence
(Lakshmanan 2011). At the supply limit, firms will experience problems purchasing intermediate
inputs for their production process as well as problems distributing the final products, while
households will experience access limitations to labour markets. All in all, a capacity constraint
of transportation infrastructure will limit agglomeration potential.
Water infrastructure provides a source of water for economic agents. This is used by households
to clean and cook, and is used for hygiene purposes, while firms use water for these same purposes
as well as for production processes (Gatto and Lanzafame 2005). A secure supply of water allows
people and firms to operate in areas where local water sources are relatively scarce. This means that
a secure water supply allows for both firms and households to agglomerate. Supply constraints
can mean higher costs for firms and households and in a worst-case scenario they might have
to relocate. Temporary water shortages can disrupt the production processes and thus reduce
productivity and efficiency.
 Civil Engineering and Environmental Systems 267

Waste water and solid waste removal infrastructure is key in maintaining sanitary conditions in
cities and a thriving environment. It enables firms and households to get rid of the pollution gener-
ated when they consume and produce goods and services. Effectively, it redistributes or removes
(at a cost) the negative externalities associated with production and consumption in space. If the
supplies of services provided are constrained, then negative externalities will accumulate locally
which cause health problems and higher costs, as well as limiting the quantity of goods produced.
If proper resource extraction programmes are put in place then waste water and solid waste can
prove to be a source of resource extraction which increases the total availability of resources and
increases the overall resource usage efficiency in the economy. In industrialised economies, there
is a high level of provision of water, waste, and sewage services which means that the marginal
health benefit is low.
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ICT infrastructure provides agents with a fast and efficient way to communicate, gather infor-
mation, and consume services as well as access to a larger market (a role classically played by
the transport system). It can also substitute commuting, often referred to as telecommuting, to an
extent. It reduces the propensity to consume physical goods, which increases energy efficiency
in the economy and reduces the resource intensity of the economy. A simple example of this
is downloading a film as opposed to buying a physical DVD. Capacity constraints could mean
that agents lose access to information and markets, which would lead to inefficiencies and utility
losses. In modern advanced economies, consumer technologies have been a mechanism of growth,
which has co-evolved with the provision of ICT infrastructure (e.g. mobile telephone networks
and fibre-optic cables).
In the discussion above, numerous effects of infrastructure have been identified. However, four
economic impacts of infrastructure service provision have been identified as particularly important
as they affect all economic agents: connectivity, information exchange, agglomeration, and energy
efficiency. These effects have been identified as central in other studies as well (McKibbin and
Henckel 2010). Other effects, such as access to cultural activities or increasing the leisure time
of households by reducing home chores, affect households directly but not firms. On the other
hand, ease of trade, capital mobility, and access to factors of production affect firms directly but
not households.
There are some general comments to be made about all forms of infrastructure. Due to exter-
nal economies of scale (from the firms’ point of view), infrastructure reduces firms’ costs and
thus enables increased productivity (Holtz-Eakin and Lovely 1995). However, not only does it
reduce costs in monetary terms but it also increases efficiencies in transmission and processing
of energy and goods; this way it aids economic growth by increasing the amount of useful energy
(Lindenberger and Kümmel 2011; Warr and Ayres 2012). This increase in efficiencies may be
linked to new technology implementations and new forms of infrastructure as described by Grübler
Nakićenović (1991) and Grübler, Nakićenović and Victor (1999). Infrastructure also reduces
the dependence on local endowments and thus reduces the spatial aspects of our economy
(Barbier 1999; Rodrigue, Comtois, and Slack 2009). This way the comparative advantages of
different regions are exploited in a more efficient manner. It shifts households’ activities from
‘unspecific tasks’ such as water extraction and energy production to allow them to partake in
‘specific tasks’, thus engaging companies to increase production of capital and consumables
(Buhr 2003).
We think of information exchange as the extent to which agents have access to knowledge. This
knowledge can be included in goods or services and can be represented by a variety of media or
by experts. Access to knowledge is important in many economic theories, be it game theory or
Schumpeterian innovation. Different forms of infrastructure, such as ICT and transportation, aid
information exchange by allowing agents to meet physically, virtually, and exchange data with one
another. Information exchange influences the total stock of knowledge available to households and
firms, and reduces information asymmetries, which cause transactional inefficiencies. In many
 268 R. Carlsson et al.

MGTs, the rate of innovation is proportional to the total stock of knowledge. Thus, access to a
larger stock of knowledge increases the rate of innovation.
Connectivity is the ability of agents to exchange resources, goods, services, and labour across
space. The connectivity between the two regions allows them to physically trade with each other.
Transportation infrastructure is important when moving goods and people across space while
water, energy, and waste infrastructure is important when moving resources across space. The
potential for resource exchange implies that regions can utilise their comparative advantages and
hence expand their joint production possibility frontier. The production possibility frontier is the
loci of the maximum output level of two or more goods given a fixed amount of inputs. This link
between transport, trade, and productivity is often taken as the prime effect of infrastructure on
growth (Lakshmanan 2011) but has mostly been addressed via empirical studies (Cohen 2010).
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An example is two regions, one located in the mountains with many rivers flowing through it
and one located on a vast plain. The first region could supply plentiful cheap hydroelectricity while
the other region could produce the food for both regions as land is bountiful. The classical idea of
comparative advantage assumes no barriers to trade, i.e. no trade costs. In the real world, however,
costs do occur: taxes, administration costs, transportation cost, and depreciation of the good being
transported. The level of infrastructure provision affects the trade costs, ceteris paribus, which in
turn influences to what extent trade would be possible and thus how efficient the utilisation of the
effect of comparative advantage would be.
Agglomeration is the ability to relocate more people and firms to a specific location, thus
increasing the density of agents. Each region is associated with a natural limit of water abstraction,
resource extraction, and waste disposal capacity that can be supported – determining how large a
population that can be supported in a sustainable fashion. In order to propel the local population
above this natural limit (and allow for agglomeration, specialisation, and thus economic growth),
resources must be redistributed so that the constraints of the factor endowments can be mitigated.
This is the process by which waste, water, and energy infrastructure supports agent agglomeration.
If two regions are considered again, the naturally supported population would be relatively
low. An example of this would be if all people in a neighbourhood rely on wells for their water
abstraction; then the groundwater levels can only support a certain number of people per area. Now
let us assume that an ideal level of water, sewage, fuel pipes, as well as electricity transmission
lines have been constructed; then a much larger population of agents can be supported (and a
higher density). Ideal in this case means that it can comfortably support the entire population with
requisite services. However, if the extant infrastructure is imperfect, in the sense that it cannot
support the population level, then there will be a form of efficiency reduction. A concrete example
of this is the under-provision of electricity that would cause a factory to only run for a sub-optimal
number of hours each day. Even if there is enough access to labour and capital, it still cannot run
without energy; hence total output is reduced.
Note that it is not as simple as saying that there is a certain level of water, waste, and energy
that needs to be supplied for the economy to function properly. The supply-side constraints for
these infrastructure systems only kick in when demand is peaking. The natural variability over the
daily, seasonal, and economic cycles means that infrastructure provision cannot be normalised
according to average rates but to a higher peak demand level. Therefore, there must always exist
an overhead level of excess capacity to avoid catastrophic failure of the various systems.
Energy efficiency associated with the production and consumption of goods in the economy
is affected by what NIS is present. Furthermore, alternative technologies can be employed to
improve energy efficiency, further potentially improving it. So if a region had no infrastructure
systems, then all agents would have to produce their own energy, deal with their own waste, and
fetch their own water. This would be a highly energy-inefficient way of producing things. It would
also be economically inefficient in the sense mentioned earlier because of the relative abundance
of ‘unspecific’ rather than ‘specific’ tasks.
 Civil Engineering and Environmental Systems 269

Although the above examples are instructive in order to be able to understand how infrastructure
affects economic variables, there is an issue of scale. The examples here are given on a small
scale and in binary levels of infrastructure service quality. However, as virtually everyone in a
developed economy makes use of these infrastructure systems, it is a matter of quality of provision
rather than increased extent of provision. Rather than relying on national averages of performance
indicators, a subdivision of the country into separate regions with different performance indicators
can provide more meaningful insights. This points to a need to shift from aggregate growth models
to network-like geographic models.

3. Evaluating the links between infrastructure and economics

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In order to make use of the economic roles of NIS identified previously, the effects must be
embedded into an economic growth model. This way it will be possible to study, within the
scope of an MGT, how NIS provision influences the development of an economy. The choice of
MGT(s) is critical, as the fundamental assumptions of each theory will influence the scope of
NIS inclusion. The three types of MGT considered are given in Table 1. These are: the Romer
model, energy economics, and NEGG. The table displays the similarities and differences in terms
of factors of production and growth mechanisms.
The previous section, discussing the economic roles of NIS, identifies a multitude of factors
potentially affected by infrastructure. However, in each MGT, there exists a core of important
variables in each theory that consists of consumption, investments, savings, utility, and price
level. These variables directly link to the feedback loop that drives the growth mechanism, as
described below.
The core variables should be contrasted to the differentiated growth mechanisms that vary
between the MGTs. Consumption, investment, and savings are inextricably linked to each other
in all the theories. The savings are the resources put aside, i.e. not used for consumption, which
are re-invested in the economy. It is the investments that drive the development mechanism in
each theory that promotes long-run growth.

Table 1. A summary of the three growth theories considered.

Class Assumptions, key variables, and source of growth Sources

Romer Assumptions: Human capital is the aggregate measure (Romer 1990; Barro and
of an educated workforce. Indefinite investment into Sala-i-Martin 2004)
human capital counteracts the diminishing returns
of capital accumulation. Key variables: Capital and
labour. Source of Growth: Endogenous growth rate
due to technological change due to an innovation
sector
Energy economics Assumptions: Useful energy is a fundamental factor of (Lindenberger and Kümmel 2011;
production and production is a multistep process. Warr and Ayres 2012)
Useful energy equates to a measure of technology of
how sophisticated and efficient the production process
is. Key variables: Knowledge, Energy, Capital,
and Labour. Source of Growth: Long-run growth
via capital accumulation and useful energy usage
increases
NEGG Assumptions: NEG framework that embeds a capital (Cerina and Pigliaru 2007)
sector. In effect, the drivers of growth are due to
a bridging between NEG and Solow–Swan model.
Key variables: Capital, labour, and transportation
costs. Source of Growth: Long-run growth via capital
accumulation and technology improvements
 270 R. Carlsson et al.

Figure 2. The primary and secondary feedback loops, both positive (left-hand side) and negative (right-hand side),
in the infrastructure-linked MGT. Y is the total output, I the total investment level, J the investment level in infrastructure,
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D the demand for infrastructure services, S the supply of infrastructure services, M the mechanism by which infrastructure
influences the growth, G, and N the standard mechanism in the model by which growth is caused. The primary loop is
the loop formed via N, and the secondary infrastructure loop is the one formed via M.

In order for infrastructure to influence the economic growth of the economy in the long run, it
must interact with this feedback. It could do so by influencing the already established (primary)
feedback or it could do it by forming a complementary feedback. In addition to this growth
mechanism, the economy could of course simply become larger by growth in the factors of
production (i.e. population growth or capital accumulation). This, however, is not covered in the
set of effects that infrastructure has on the primary growth mechanism.
If infrastructure forms an additional feedback, it can actually do so in two different ways – a
positive feedback or a negative feedback. Positive feedback arises when additional infrastructure
enables further economic growth. An example of this is increasing the connectivity between two
regions, thus making better use of comparative advantages. On the other hand, negative feedback
is associated with infrastructure assets that do not drive additional growth by providing more
services but rather limits growth when there is an under-provision. An example of this is water
provision. Additional water supply does not drive growth if the market already has sufficient
water resources but an under-provision will prevent factors of production from being employed.
Moreover, a particular NIS does not necessarily always form a positive or negative feedback within
an MGT, as different models can facilitate different type of economic roles of infrastructure. The
effect is dependent on which economic framework is employed and whether or not congestion
exists. A clear example is energy infrastructure. In the Romer model, energy is treated as an
intermediate input and so it does not feature as a growth driver. Therefore, in the Romer model,
energy infrastructure investment would give a negative feedback in the MGT because a limitation
of energy would prevent production from occurring. On the contrary, in the energy economics
model, energy is a driver of growth; hence, there it forms a positive feedback mechanism (note that
the same negative feedback processes associated with congestion and under-provision would still
apply here). This is a clear example of how different MGT models are suited to model different
infrastructure roles and why it is important to study several in parallel. The two infrastructure
feedback mechanisms can be seen in Figure 2.

4. Implementing infrastructure in MGTs

The key to successfully constructing an infrastructure-linked MGT is to arrive at important

formalised ideas as to how this can be done. In the following passages, we consider the four
infrastructure effects identified earlier.
In order to account for how a change in provision of infrastructure alters information exchange,
a performance index of access to other regions’ stocks of knowledge needs to be introduced. If
there exist n regions, each with their own stock of knowledge, Aj , then the maximum stock of
 Civil Engineering and Environmental Systems 271

knowledge accessible by region i is Ai = A1 ∪ A2 ∪ · · · ∪ An . To represent the imperfect nature

of infrastructure provision, there should exist an index, aij , smaller than unity, which is a function
of the index of infrastructure provision γi , which factors in the unavailability of the information in
the regions outside of i. This means that the total stock of knowledge available to the households
and/or firms in region m would be the sum of the other regions’ stock of knowledge times the
index of information exchange quality between i and the other regions. The effect of this could be
incorporated in the Romer model, for example, because it uses total knowledge as an input and
to estimate the rate of innovation.
Connectivity can be a measure of the freedom of trade. In the NEGG model framework, the
freedom of trade is given by ϕ. So if the connectivity itself is influenced by the infrastructure, then
clearly ϕ must be a function of the index of infrastructure affecting the connectivity, γt . Therefore,
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in the NEGG framework, the freedom of trade would become ϕ(γt ).An alternative idea would be to
envision the productivity inefficiencies that arise due to regions not being perfectly connected. In a
standard production function model, all agents act with exactly the same opportunity to distribute
the goods that they have. This is clearly not true in the case of imperfect infrastructure provision.
Some firms can distribute better in one area and some in another. Therefore, the overall production
function will be lowered by some factor. Now if the economy is divided up into regions, as done in
the information exchange example, then each region, i, will have a specific connectivity parameter,
bij , in relation to another region, j, associated with each link. The connectivity parameter will have
a value ranging from zero to unity that depends on the infrastructure provision, γt . Given that the
production function, in the Romer model for example, is a non-spatial function that summarises
the output of the entire economy, then a net factor must be composed by the aforementioned
connectivity parameter. One possible way of constructing this factor would be by giving each
region a weighting, according to their Gross Regional Product to Gross Domestic Product ratio
and then accounting for how well connected it is with the rest of the country. This would mean
that the net factor would range from zero to unity and be a function of all the connections between
the regions of the economy.
NIS helps support higher population densities (i.e. allowing for agglomeration), thereby reduc-
ing the dependence on local endowments. This can be accounted for in two ways. First, in the
NEGG framework, the number of people who can move into a region can be limited. This could
be achieved by imposing a constraint on the population level that can be supported, given a per
capita demand for infrastructure services. This would limit the size of the labour force and degree
of specialisation and thus the output level.
The second way is very similar to a suggestion by Glomm and Ravikumar (1994). The idea
is that an under-provision of infrastructure reduces the productivity by limiting the production
function. In order to describe the total efficiency reduction, one takes the total population level, pt ,
and subtracts the maximum population level that the extant NIS can support, pm , thus obtaining
the excess population level that is causing the additional strain. Note that the intermittency of NIS
demand by the population has to be accounted for in order to model NIS provision in a realistic
way. Because the maximum population level is dependent on the infrastructure provision, γl ,
effectively one can describe the population excess via the infrastructure provision. This value is
then related to a reducing factor, pe (γl ), which in turn can be included in the production function.
The last effect that has not yet been mentioned is that of energy efficiency. In the energy
economics framework, the production function explicitly contains the total energy used in the
economy as one of the primary factors of production. This total energy used is a function
of the energy efficiency, given by the parameter f , which in turn is dependent on the energy
infrastructure put in place. Infrastructure influences this parameter in two ways. First, the over-
all production and transmission efficiency across the network determines the average f in the
economy. The second effect is if the network transmits high-grade or low-grade energy. Elec-
tricity is of higher grade than oil for example. However, the different energy vectors and forms
 272 R. Carlsson et al.

of energy are different in how easily they can be transmitted (e.g. grid and pipelines). There-
fore, the energy parameter becomes dependent on the level of energy infrastructure provision
via these two mechanisms. Therefore, the energy efficiency would be dependent on the type of
energy being used by the agents and how far it is being transmitted and by what mode it is being
transmitted.
Within this framework, the total exergy used (the maximum useful work possible in a thermo-
dynamic system) in the economy is the proxy measurement for the Solow residual. The Solow
residual is the discrepancy between the theoretical output of the Solow–Swan model and the
real-world measured output. Therefore, the model would be able to represent how energy supply
levels are a function of infrastructure.
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5. Conclusions

Infrastructure systems play essential roles in mechanisms of economic growth. They affect the
economic agents directly and therefore we regard incorporation of infrastructure systems in the
theory of macro-economic growth as being an important project.
We have identified several important roles that infrastructure plays in the economy and ways
in which these processes contribute to economic growth. Frequently one infrastructure class can
exhibit multiple effects simultaneously. Several of these processes operate at different levels
of spatial and sectoral resolution than is commonly incorporated in MGT. This discrepancy in
resolution provides a dilemma, as we would not wish one aspect of a theory to be much more
detailed than other aspects. We have however been able to identify roles of infrastructure that are
to some extent already included in the three MGTs studied closely, namely the Romer model,
NEGG theory, and energy economics. We have presented ways in which functions of infrastructure
are, or could (with modest modification) be, incorporated within these theories. However, some
theories lend themselves better than others to certain infrastructure classes. This is a step in the
right direction, but in no theory do we identify a route to incorporate the full set of positive and
negative feedbacks by which infrastructure systems, we postulate, interact on a macroeconomic
scale. Achieving that objective is our project for further work.
The representations of the effects are rudimentary, but they do provide a starting point for
including NIS effects in MGTs. They are deliberately simple in order to account for the fact that
the true functional form is not known. However, as work continues and an infrastructure-linked
MGT is actually proposed, these suggested forms can be improved and adapted for each MGT
employed in order to increase the complexity of the model.

Acknowledgements
This work was supported by the EPSRC (Engineering and Physical Sciences research Council of the UK) under Program
Grant EP/I01344X/1 as part of the Infrastructure Transitions Research Consortium (ITRC, [Link]).

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