THE IMPACT OF PUBLIC INFRASTRUCTURE
INVESTMENT ON ECONOMIC GROWTH IN
THAILAND

Thanapat Reungsri
Bachelor of Arts in Economics (Thammasat University, Thailand)
Master of Management in International Business (Monash University, Australia)
Thesis submitted in fulfilment of the requirements for the degree of
Doctor of Philosophy School of Economics and Finance
Faculty of Business and Law
Victoria University
Australia January 2010
i

Abstract

ii

The results indicate that public infrastructure investment has a mixed effect on
domestic growth. A positive result is found in lagged public investment as a proportion of
GDP at the third quarter, confirming that infrastructure capital has a positive significant effect
on economic growth. However, a negative impact is found in lagged real government
investment at the second quarter. As public investment increases, the demand for resources
also increases and, given full capacity for the economy, this may lead to increased costs of
private investment, resulting in a fall in private investment and thus reduce economic growth
(crowding-out effect). Hence, under conditions of full capacity, an increase in public
investment could result in negative impact on growth. The Infrastructure Finance model is
therefore a useful indicator of private sector intentions for resource expenditure. iii

Declaration
“I, Thanapat Reungsri, declare that the PhD thesis entitled The Impact of Public
Infrastructure Investment on Economic Growth in Thailand is no more than 100,000 words
in length including quotes and exclusive of tables, figures, appendices, bibliography,
references and footnotes. This thesis contains no material that has been submitted previously,
in whole or in part, for the award of any other academic degree or diploma. Except where
otherwise indicated, this thesis is my own work”.

Signature Date Dedication

Dedicated to the three ladies of my life
Mother, Sutusanee Reungsri
Wife, Patama Suchikul Reungsri
Daughter, Napaskul Suchikul Reungsri
vi

Table of Contents
Abstract i
Declaration iii
Acknowledgements iv
Dedication v
List of Abbreviations ix
List of Tables xi
Chapter 1 Introduction to Study 1
1.1 Research Antecedents 1
1.2 Statement of Purpose 5
1.3 Study Objectives 6
1.4 Research Scope and Significance 7
1.5 Methodology 9
1.6 Chapter Summary 10
Chapter 2 Context of the Research 12
2.1 Economic Growth 12
2.1.1 Economic Growth Theory 13
2.1.2 Determinants of Economic Growth 16
2.2 Infrastructure Development 18
2.2.1 Definitions 19

4.1.5 Fifth Plan 1982–1986 68
4.1.6 Sixth Plan 1987–1991 69
4.1.7 Seventh Plan 1992–1996 70
4.1.8 Eighth Plan 1997–2001 73
4.1.9 Ninth Plan 2002–2006 74
4.1.10 Summary of Plans and Infrastructure Investment 75
4.2 Thailand‟s Infrastructure 77
4.2.1 Expenditure 77
4.2.2 International Competitiveness 78
4.3 Sources of Infrastructure Finance 80
4.3.1 Public Revenue 82
4.3.2 Deficit Financing 100
4.4 Summary 106
Chapter 5: Methodology and Analytic Model 108
5.1 Methodology 108
5.2 Conceptual Framework 109
5.3 Model Structure 110
5.4 Model Components 111
5.4.1 Budget Overview 112
5.4.2 Defined Revenue Streams 116
5.4.3 Direct Tax Equations 118
5.4.4 Indirect Tax Equations 123
5.5 Raw Data and Sources of Data 129
5.6 Data Transformation 131
5.7 Estimation Issues 132
5.7.1 Stationary and Non-stationary 132
5.7.2 Testing for Unit Roots 134
5.7.3 Error Correction Model 137
5.7.4 Cointegration 137
5.7.5 Autoregressive Distributed Lag 138

7.7 Final 194
References 196

ix

List of Abbreviations
ADF
Augmented Dickey-Fuller
AEC
Asian Economic Crisis
ARDL
Autoregressive Distributed Lag
BIBF
Bangkok International Bank Facility
BOB
Bureau of the Budget
BOT
Bank of Thailand
C-D
Cobb-Douglas
CGE
Computable General Equilibrium
CIT
Corporate Income Tax
CPI
Consumer Price Index
CRTS
Constant Returns to Scale
DB
Domestic Borrowing

IMF
International Monetary Fund
IMGPI
Import Goods Price Index
IPPI
Private Investment Price Index
JJ
Johansen and Juselius
LM
Lagrange Multiplier
L-R
Long-Run
MOF
Ministry of Finance
NBER
National Bureau of Economic Research
NEDB
National Economic Development Board
NESDB
National Economic and Social Development Board

1
Fiscal Year in Thailand starts from October to September
x

Abbreviations (cont.)

NIEs
Newly Industrialising Economies
OECD

Total Factor Productivity
THB
Thai Baht
TL
Transcendental Logarithmic
UNESCO
United Nations Educational Scientific and Cultural Organization
VAR
Vector Autoregression
VAT
Value Added Tax xi

List of Tables
Page
1.1 Fiscal sustainability framework 4
1.2 Retained Income from Non-financial SOEs and GDP, 1993-2006 5
4.1 First Plan GDP 1961-1966 61
4.2 Second Plan GDP 1967-1971 65
4.3 Third Plan GDP 1972-1976 66
4.4 Fourth Plan GDP 1977-1981 67
4.5 Fifth Plan GDP 1982-1986 68
4.6 Sixth Plan GDP 1987-1991 70
4.7 Seventh Plan GDP 1992-1996 71
4.8 Critical Infrastructure Response Plan 1990-2001 72
4.9 Eighth Plan GDP 1997-2001 73
4.10 Ninth Plan GDP2002-2006 75
4.11 Summary of GDP During the Nine Plans 1962-2006 75

6.2 PIT on Interest: Unit Root Test Results 146
6.3 Other PIT: Unit Root Test Results 148
6.4 Annual CIT: Unit Root Test Results 151
6.5 CIT Service Sector and Repatriated Foreign Profits: Unit Root Test Results 153
6.6 Withholding CIT: Unit Root Test Results 155
6.7 Other CIT: Unit Root Test Results 157
6.8 Petroleum Tax: Unit Root Test Results 159
6.9 Domestic VAT: Unit Root Test Results 161
6.10 Import VAT: Unit Root Test Results 163
6.11 SBT: Unit Root Test Results 165
6.12 SBT: Long Run Variable Relationships 166
6.13 Public Infrastructure: Unit Root Test Results 169

xiii

List of Figures
Page
2.1 Transition Mechanism of Public Investment 21
3.1 Structure of Reviewed Approaches 38
4.1 North and Central Thailand: Water Infrastructure, 2006 64
4.2 Public Expenditure to GDP, 1976-2006 77
4.3 Sources of Infrastructure Investment 2006-2011 81
4.4 Withholding Tax: Monthly Patterns FY2005–2006 88
4.5 Personal Income Tax (Interest): Monthly Patterns FY2005–2006 89
4.6 CIT on Repatriated Profits Out: Monthly Patterns FY2005–2006 93
4.7 Customs Department Revenue, 1993 – 2006 96
4.8 Non-tax Revenue and Retained Income as Percentages of GDP, 1993-2006 100

rail and road networks; utility services such as water, power and waste services. Infrastructure
in all its commercial manifestations is viewed by governments as the means to attract
substantial private sector investment. This empirical research considers the manner by which
a country‟s infrastructure program is funded, and the interrelationships between infrastructure
development and economic growth experienced by developing countries, in particular,
Thailand.
This introductory chapter provides the research elements. First, the preparation for the
thesis is presented. Extant research on public infrastructure and its relationship to economic
growth is noted, together with an overview of the Thai financial environment. Next is the
statement of purpose followed by research objectives, explaining the framework of this
empirical research. The scope of the research and its significance within the literature are next
presented, followed by the methodology employed, based on quantitative analysis.
1.1 Research Antecedents
There is a high cost, both financial and national, to infrastructure capital development.
Governments may choose their projects unwisely, or conditions may change which render
their efforts obsolete, or, indeed, the infrastructure may not appear attractive to private
industry. The challenge for governments, including the Royal Thai Government (RTG), is to
balance infrastructure development planning and its expenditure to meet, but not exceed, the
objectives of social capital, or socio-economic growth, and those of the private sector.
Public infrastructure strategies are of great interest to economic researchers. Using a
range of methodologies, they explore the relationship between infrastructure and economic
growth. Primary in the literature is a sequential work by Aschauer (1989 references) where,

2
using production function method, the researcher finds high output elasticities for public
infrastructure capital. This triggered a well-documented debate, generally empirically based,
to define the relationship between public infrastructure and economic growth performance.
Confirming Aschauer‟s results, a majority of studies
2
find a strong and positive relationship

3
Ford & Poret 1991; Holtz-Eakin 1994; Holtz-Eakin & Schwartz 1995a & 1995b; Hulten & Schwab 1991b; Sturm & De
Haan 1995). 3
As countries are subject to international scrutiny, the International Institute for
Management Development (IMD) is one organisation that reports on the competitiveness of
nations. Its World Competitiveness Scoreboard for 55 nations compares four competitiveness
factors: economic performance, government efficiency, business efficiency and infrastructure.
In 2008, Thailand was middle ranked at no. 27, index of 63, nevertheless up from no.33 the
year before. Its ranking, and therefore its competitiveness, was less than Japan‟s index 70;
Malaysia, index 73; China, index 73.8; Taiwan, index 77; Australia, index 83.5; Hong Kong,
index 95; and Singapore‟s index of 99. USA‟s index was 100. The results show that Thailand
should focus on public and private sector efficiency and performance, and especially plan for
infrastructure development (IMD 2008).
A country‟s infrastructure expenditure may reach a percentage of Gross Domestic
Product; it is thus discretionary, and vulnerable in times of budgetary restraint. This point is
illustrated by the 1997-1998 Asian Economic Crisis (AEC) when the majority of Thailand‟s
infrastructure projects, both planned and in construction, were affected by budgetary restraint
and subjected to a massive withdrawal of funding. This resulted in adverse social issues
regarding inadequate public facilities, made worse by infrastructure deterioration and
increasing population pressures. As part of its strategy to recover from the debilitating
economic effects of the crisis, RTG used infrastructure investment as a means to revitalise the
Thai economy; however, as noted, the government could not fund sufficient projects to meet
its infrastructure program.
In the years following the AEC, Bangkok pursued preferential trade agreements with a
variety of partners in an effort to boost exports and achieve high economic growth. Thailand
became one of East Asia's best performers in 2002-2004. Then the economy, and
infrastructure, was sequentially affected by the devastating 2004 Boxing Day tsunami, and the

the RTG‟s budget, which, third, should be balanced. The last item of the framework is that
capital expenditure must be at least 25 per cent of the annual budget. The Framework thus
restricts the MOF‟s flexibility in deficit financing (MOF 2005). A further financial response
adopted by the RTG was the Public Debt Management Act 2005, which, inter alia, controls
government debt. When budgetary expenditures exceed revenue, the MOF may borrow up to
20 per cent of budgetary expenditures plus allowance for extraordinary expenditures, and 80
percent of approved budgeting on debt principle repayment (RTG 2005).
Besides taxation, as noted above, public funds are sourced from retained income, that
is, the revenue from state-owned enterprises (SOEs), minus expenditure, corporate income
tax, dividends and distribution, and bonuses paid to employees. A history of retained earnings
is shown at Table 1.2 Retained Income from Non-financial SOEs and GDP, 1993-2006,
below.

5
Table 1.2
Retained Income from Non-financial SOEs and GDP, 1993-2006
Year
Retained
Income
(Billion Baht)
GDP
(Billion Baht)
Per cent
of GDP
1993
87.92
3,165.20
2.78
1994
108.79

2002
183.48
5,446.04
3.37
2003
197.53
5,930.36
3.33
2004
201.71
6,576.83
3.07
2005
263.34
7,195.00
3.66
2006
233.85
7,820.93
2.99
Average 2.97
Source: BOT (2007)

At Table 1.2, retained income from public enterprises external to the financial sector
shows a retraction and then slow growth after the 1996-1997 AEC, accelerating as the
economy recovers. Similarly, retained income as a percentage of GDP rises until 2002 and
then remains relatively stable, averaging 2.94 per cent over the decade.

different conditions. The second question is answered using 1993 to 2006 government
investment data, analysed by Aschauer‟s production function approach.
As public investment outflows are continuous, the study, to answer the primary
question on funds raising, simulates time-paths for investment capacity and economic growth.
In such simulation processes, various scenarios are generated by placing parameters for
government debt, including domestic and foreign borrowing variables. This methodology
confirms the consistency of the model performance.
1.3 Study Objectives
The aim of this research is to identify the inputs and the processes comprising public
infrastructure investment in Thailand. This study includes a literature survey, identification of
relevant public finance data, then a quantitative analysis leading to conclusions and findings
for the following objectives:

7
 define the effects of public infrastructure on economic growth in Thailand
 develop a public revenue generation model to determine the country‟s capacity to
invest under fiscal policy constraints; acting through alternative public financing
methods
 simulate the effects of public infrastructure on economic growth due to variations
in fiscal policy constraints; again acting through alternative financing methods.
1.4 Research Scope and Significance
This study examines the effects of public infrastructure investment on economic
growth in Thailand, by means of empirical research and quantitative analysis. It should be
noted that, as the social consequences of infrastructure investment are difficult to measure and
little data are available, the financial aspects of public infrastructure investment alone are
analysed.
The scope and design of the research is as follows. First, a literature review is
undertaken to identify the nature of extant research on infrastructure inputs and effects, and to
analyse the themes that emerge from the findings. Further, international research is examined
over the relevant period to find points of comparison with Thailand‟s experiences. Second,

factors illustrate.
 There is no identified research that investigates public infrastructure expenditure‟s
impact on Thai economic growth, presumably due to a lack of data. Public
infrastructure-related studies for Thailand tend to rely on Aschauer (1989a) who
found a significant and positive effect of public infrastructure on economic
growth.
 The Thai literature does not distinguishing between public consumption and public
investment. This research places emphasis on public investment, specifically,
infrastructure investment. The intended effect of this emphasis is to provide
specific knowledge and a deeper understanding of the impact of public investment,
especially infrastructure, on the Thai economy. This facilitates more effective
policymaking for investment-specific policies.
 The literature strongly supports the notion that public infrastructure investments
significantly and positively affect economic growth. However, few studies address
the financing of infrastructure and those that mention this aspect do so
superficially. This study takes the approach that finance is a function of
investment; investment is an indicator of economic growth; and these arguments
may be „located‟ within the RTG‟s fiscal sustainability framework.

4
Espinosa-Vega & Yip 1999, 2002; Hung 2005; Levine & Krichel 1995; Ozdemir 2003; Palivos & Yip 1995

9
 The literature tends to consider only two sources of public financing: taxation and
deficit financing. This study attempts to extend the research by including other
sources of debt financing, and retained income.
 There are few Thai studies, as noted, and those researchers tend to use the market
model equation for analysis without specifically addressing public infrastructure
investment. This study includes infrastructure investment with quantitative
analysis through a recursive supply-side system equation model.

cent of budget; 15 per cent of budget; 10 per cent of budget; 5 per cent of budget; and no
borrowing, or no effect on budget.
1.6 Chapter Summary
This thesis consists of seven chapters, the order of which follows. Chapter 1
introduces the study on the relationship between public infrastructure and economic growth,
and comments on the factors that initiated the research, its purpose and methodology. Chapter
2, a comprehensive literature survey, explores the nature of extant research on public
infrastructure, governments‟ varied means for funding and their preferred strategies, and
differences between fiscal responses based on regional economic environments. Of particular
interest to this study are reported findings and conclusions on the effects of public
infrastructure programs on economic growth.
Considerable research, involving several theoretical approaches and models, focuses
on the relationship between public infrastructure and economic growth, Chapter 3 reviews the
model structures employed for the various analyses of this relationship; further, the chapter
includes extant studies on financing infrastructure programs, the findings of which are used
for later comparison in this study.
Chapter 4 returns to the empirical nature of this research and provides an overview of
Thailand‟s environment, its economic and infrastructure development, together with an
analysis of infrastructure investment demand. To meet the objectives of this thesis, that is,
identifying potential funding (s1.3), the public finance structure in Thailand is reviewed.
The study‟s methodology and its analytical model design structure are discussed in
Chapter 5, together with information on the data sources and the nature of their data. At this
point, the selected econometric model estimation techniques are also discussed in preparation
for the data analysis. Chapter 6 provides the estimation analysis and all results. The model
simulation is conducted using ex-ante and ex-post techniques and the results are compared
with extant research findings.

11
Chapter 7 summarises the major findings of the study, drawing conclusions from the
findings, and notes policy implications for Thailand‟s decision makers. These include