Effects of Infrastructure Investment on Structural Change and Productivity Growth in China

The rapid growth of infrastructure investment is a salient feature of China’s economy since the reform and opening-up in 1978, contributing to not only the aggregate demand but also the structural change and productivity growth on the supply-side. This paper builds a multi-sector general equilibrium model to show how infrastructure investment influences structural change through price, investment and income effects, and influences productivity growth through the intensive and extensive marginal effects. By quantifying the model with China’s economy for the period 1981-2017, the paper finds that the infrastructure investment restrained the rise of services, but boosted productivity growth over the period. The policy implication is that China should ramp up infrastructure investment to increase productivity as it pursues high-quality development, but give priority to new infrastructure and public-interest infrastructure to promote industrial structural upgrade.