In recent years, public infrastructure investments (PII) in China have grown rapidly, especially after the global financial crisis, and its scale is more than 10% of the total annual government expenditure. Most of the existing studies on the subject focus on its impacts on economic growth, and only a handful of academic studies consider their distributive effects. An integrated macro-micro simulation method is applied to qualitatively assess both the growth and distributive effects of PII in China. An inter-temporal dynamic general equilibrium model with heterogeneous agents and public capital, developed by Dissou and Didic (2011), is employed to trace the impact channels of the increased public infrastructure in China. One important feature is that PII has been introduced as a public capital stock variable in the production function. Another distinguishing characteristic of the model is that both households and firms are divided into constrained and non-constrained households/firms according to their liquidity constraints. The macro effects, such as the changes in wage and non-wage revenues, commodity prices and saving rate are transferred to a micro-simulation model to analyse the poverty and inequality effects using household survey data.

The study simulates a 20%increase in the ratio of PII to GDP using two different financing mechanisms (foreign borrowing and production tax). The increase in PII drives economic growth. The real GDP would be accelerated by approximately 4 percentage points through the productivity improvement in the long-run. Though different sectors respond differently due to different sector characteristics, the construction  and the nonmetallic mineral products sector gain significantly from the increased PII, while the labour intensive textiles sector loses its competitiveness. There are also positive effects of the increased PII on poverty in both the short- and long-run. The national poverty headcount ratio is decreased by more than 2 percentage points using the international poverty line ($1.25 per day) in the long-run. And more rural poor people get out of poverty than that of urban and migrant households. The rising wage rate contributes the most to poverty reduction. Equality is improved when the PII is increased not only within rural and urban households, but also between the rural-urban households.

Public infrastructure development should be considered as a key strategy for inclusive growth. In particular, China could consider investing more in rural infrastructure to reduce inequality by promoting equal access to basic public services.

 [1] The authors would like to acknowledge the support of the following the Partnership for Economic Policy (PEP) Network;  Australian Agency for International Development (AusAID) and the Canadian International Development Agency (CIDA; Jean-Yves Duclos, John Cockburn, Yazid Dissou, Luca Tiberti and Selma Didic.