ROAD INFRASTRUCTURE AND ECONOMIC

GROWTH IN UGANDA 1980-2010

BY

MUKIIBI PAUL

2009/HD06/15161U

A THESIS SUBMITTED TO THE DIRECTORATE OF RESEARCH

AND GRADUATE TRAINING IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE AWARD OF MASTER OF ARTS

DEGREE IN ECONOMICS OF MAKERERE UNIVERSITY

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 DECLARATION

I Mukiibi Paul hereby declare that this piece of work I have presented here is solely the result

of my efforts apart from the work cited from other authors and that it has never been

submitted to any university or institution of higher learning for the award of a degree.

Signed …………………………………… Date ……………………………………..

Mukiibi Paul

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 CERTIFICATION

This certifies that the under-signed supervisors have read this thesis in the process of guiding

the author and thereby recommend it for submission to the Directorate of Research And

Graduate Training Makerere University in partial fulfillment of the requirements for the

award of Masters of Arts in Economics, Degree of Makerere University.

Signed by…………………………….…………. Date ……………………………………..

DR. Fred Matovu

Signed by………………………………………… Date …………………………………..

DR. James Muwanga

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 DEDICATION

This work is dedicated to my beloved parents who gave me parental guidance to pursue this

course. May the Lord reward you with a meaningful life. I also dedicate this work to my late

sister Nasaka Betty I know that you always wanted me to succeed in life. May your soul rest

in eternal peace

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 ACKNOWLEDGEMENT

I thank the Almighty God for the power and energy he has given me including the knowledge

and ability to produce this piece of work. I also extend my sincere appreciation to the African

Economic Research Consortium (AERC) for their partial scholarship that relieved me from

much of the financial stress. I thank them so much otherwise without them, I may not have

reached this level.

I am also grateful to my supervisors for their tireless guidance throughout the period I was

working on this study. Despite their numerous responsibilities, they were always ready to

offer their parental and professional advice towards the successful completion of this study. I

thank you for the sacrifice you rendered to me throughout the time I needed you. May the

creator bless you abundantly.

Special thanks go to my wife who encouraged me to do this work plus all her financial and

moral support that helped me to survive, may God reward you in plural. Special regards to my

children Paulson and Bettina especially the elder one for his continued inquisitiveness about

what I was studying and what for; My siblings Mary, Helen, Christopher and Francis and all

my nieces and nephews thanks a lot for your support

I also want to acknowledge the efforts of all my colleagues who contributed to the

successfulness of this study in one way and the other.

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 Table of contents

DECLARATION ......................................................................................................................... i
CERTIFICATION ...................................................................................................................... ii
DEDICATION .......................................................................................................................... iii
ACKNOWLEDGEMENT ......................................................................................................... iv
LIST OF TABLES ................................................................................................................... vii
Acronyms ................................................................................................................................ viii
Abstract...................................................................................................................................... ix
CHAPTER ONE ......................................................................................................................... 1
1.0 Background to the study ................................................................................................... 1
1.1 Statement of the problem.................................................................................................. 5
1.2 Objectives of the study ..................................................................................................... 6
1.2.1 Main objective ........................................................................................................... 6
1.2.2 Specific objective ...................................................................................................... 6
1.3 Hypotheses ....................................................................................................................... 6
1.4 Scope of the study ............................................................................................................ 6
1.6 Organization of the study. ................................................................................................ 7
CHAPTER TWO ........................................................................................................................ 9
THE ROAD SUB-SECTOR IN UGANDA ............................................................................... 9
2.1 The Road Network, Vehicle Fleet and Traffic ................................................................. 9
2.2 The Road Transport Industry............................................................................................ 9
2.3 Road Administration and Training ................................................................................. 10
2.4 Road Financing:.............................................................................................................. 11
2.5 Road Engineering and Construction. .............................................................................. 13
2.6 Road Maintenance .......................................................................................................... 13
2.6.1. Organization of Maintenance: ................................................................................ 13
2.6.2 Maintenance Financing: .......................................................................................... 14
CHAPTER THREE .................................................................................................................. 17
LITERATURE REVIEW ..................................................................................................... 17
3.1 Definition of infrastructure ............................................................................................. 17
3.2 Empirical studies on infrastructure development and economic growth ....................... 18
CHAPTER FOUR .................................................................................................................. 36
METHODOLOGY .................................................................................................................... 36
4.0 Introduction .................................................................................................................... 36
4.1 Data type and source ...................................................................................................... 36
4.2 Model specification ........................................................................................................ 36
4.4 Data analysis ................................................................................................................... 41
4.3.1 Unit root test ............................................................................................................ 41
4.3.2 Co-integration and the ECM ................................................................................... 41
4.3.3 Granger causality test .............................................................................................. 43
CHAPTER FIVE ...................................................................................................................... 46
PRESENTATION AND DISCUSSION OF RESULTS .......................................................... 46
5.1 Descriptive Statistics ...................................................................................................... 46
5.3 Cointegration test............................................................................................................ 49
5.4 Error Correction Mechanism .......................................................................................... 51

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 5.5 Impact of road coverage on economic growth rate. ....................................................... 52
5.6 Estimation of the direction of causality between road coverage and GDP. ................... 55
CHAPTER SIX .......................................................................................................................... 57
CONCLUSIONS, RECOMMENDATIONS AND AREAS FOR FURTHER RESEARCH .. 57
6.1. Introduction ................................................................................................................... 57
6.2. Conclusion ..................................................................................................................... 57
6.3 Recommendations .......................................................................................................... 57
6.4. Areas for further research .............................................................................................. 59
REFERENCES ..................................................................................................................... 60
APPENDIX 1 ....................................................................................................................... 66

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 LIST OF TABLES

Table 2.1: Financial allocation to the road sector…………………….……… 12

Table 5.1: Descriptive statistics ………………………………………….….. 43

Table 5.2: Test results of unit root test………………………………….…… 44

Table 5.3: Results for residual test from OLS estimation…………………….. 45

Table 5.4: Johansen co integration test results………………………………….. 46

Table 5.5: Results for the error correction mechanism…………………..…….. 48

Table 5.6: Results for the long run relationship…………………………….…. 49

Table 5.7: Shows results for the long run relationship with shocks ….…….…. 50

Table 5.8 Shows results for granger causality test……………………………. 52

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 Acronyms

ADF Augmented Dickey-Fuller

ECM Error Correction Mechanism

EU European Union

GDP Gross Domestic Product

MFPED Ministry of Finance Planning and Economic Development

MWOT Ministry of Works and Transport

ODA Official Development Agency

OECD Organization of Economic Cooperation and Development

PPP Public-Private-Partnership

MLG Ministry of Local Government

MTEF Medium Term Budget Expenditure Framework

PEAP Poverty Eradication Action Plan

RAFU Road Agency Formation Unit

NRM National Resistance Movement

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 Abstract

Uganda is a land-locked country with road infrastructure constituting the main mode of
transport. However, by 2010 road coverage both paved and unpaved remains low (3112 km
and 16888 km respectively), with all-weather paved roads accounting for just 16 percent of
entire national road coverage in the country. The low road coverage constrains economic
growth in terms of transportation of goods and services but the effect of road infrastructure on
GDP has not been empirically investigated. This study fills this gap in knowledge by
examining the effect of government spending on road infrastructure development on the
economic growth of Uganda for the period 1980-2010. The study employed a Cobb-Douglas
production model specifying the functional relationship between government spending on
infrastructure development and economic growth. Road coverage in kilometers (sub-divided
into paved and unpaved roads) was used as a proxy for government expenditure on roads.

Ordinary Least Square (OLS) method was used for the analysis. Error correction mechanism
was used to establish short term equilibrium between road infrastructure and economic
growth. Granger causality was also conducted and established a unidirectional causality from
GDP to unpaved road infrastructure (using secondary data obtained from various issues of
statistical abstracts, Background to the budget from UNRA, UBOS, MFPED as well as World
Bank data base).

The results indicated that in the long-run a 1 percent increase in the number of kilometers of
paved roads lead to 2.8 percent increase in GDP. Similarly, a 1 percent increase in the
unpaved roads leads to 0.4 percent increase in GDP. Basing on the findings of the study
government should commit more resources to increase provision of roads especially paved
since they are relatively durable as well as making efforts for the unpaved roads to reach all
parts including the rural areas to further stimulate economic growth through the multiplier
effect. Also, both public and private sectors should increase on the directly productive capital
in order to enhance sustainable economic growth in the country.

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x
 CHAPTER ONE
INTRODUCTION

1.0 Background to the study

Uganda, the “Pearl of Africa” is a country of contrasts. Its economy has expanded at an average

rate of 7 percent per year in the last 20 years. But its poverty rates remain significantly high and

unimpressive in reflecting this growth rates (Douglas and Richard,2010). It had experienced 15

years of devastating political instability, social and economic collapse that reversed the

optimistic situation inherited at the time of independence in 1962. At this time Uganda, had a

stable and growing economy and a promising physical and human capital development, superior

to that of its neighbouring countries. This optimism gave way to economic destruction,

international isolation and emergence of uncompetitive subsistence production system with

limited participation in both domestic and international markets coupled with civil struggles in

most parts of the country which created insecurity. In 1986, the National Resistance Movement

(NRM) after a five year protracted civil war, captured power and initiated a reign of relative

political stability, economic reforms that laid a foundation for sustained economic growth and

expansion seen to date. Over the period the current government has strived to improve on the

infrastructure in the country with emphasis on the energy and transport sectors as a way of

stimulating economic growth.

The transport sub-sector contributes immensely to the economic growth and poverty eradication

in the country through various ways. An efficient transport infrastructure is vital in supporting

economic growth and improvement of the quality of life of the populace (Owen, 1987; Queiros

and Gautam, 1992). This can be looked at in line with improvement in mobility especially the

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case of access to the rural areas where the majority of the population derives its livelihood from

and also stimulating production through linking of markets to production centers. It is worth

noting that provision of a road facility is on the basis of any of these two reasons; that is

construction following the rate of return a particular road is likely to have or following

government promise of awarding a particular community for being loyal to the regime. The

former reason justifies an efficient transport system that will provide the multiplier effect of road

infrastructure consequently leading to increased effect of the road variable to the economic

growth of the nation.

Government has a cardinal responsibility of providing public services where private sector is not

able to invest in order to sustain economic growth linkages especially those related to National

Development Plan (NDP). This is because the undertakings in this sector require a huge capital

outlay with long term benefits and are not normally attractive to the private sector. It is therefore,

imperative that the Uganda Government provides these public facilities to stimulate development

of other sectors, which addresses needs of the poor and the vulnerable groups’ consequently

economic growth (Matovu, 2000).

Identifying the determinants of long-run economic growth remains central to the Uganda’s

economic policy debate. A number of studies have investigated the changing structure of

economic growth in Uganda since the early 1980s (Sennoga and Matovu, 2010; Fan et al, 2007;

Musisi, 2007). However, despite these studies, little work has been done to evaluate the

importance of road infrastructure towards economic growth.

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According to Nyende et al. (2010), since 2007/08, the National Resistance Movement (NRM)

Government has accorded significant importance to the provision of a sound and

well‐coordinated transportation system. Thus road infrastructure has been considered as a

pre‐requisite for ensuring sustainable socio‐economic development and consolidation of both

national unity and security of the country. The linkages of transport to poverty reduction and to

long term economic growth are significant and need not to be re-emphasized. Their absence or

inadequate provision of them stands out as a stark barrier to economic growth. Road

Infrastructure has been a priority in the government’s comprehensive development strategy and

its benefits were anticipated to be reflected in better incomes and higher economic growth.

The road sector has been identified as one of the six critical sectors that require substantial

budget expenditure if the objective of the GOU’s National Development Plan is to be achieved.

The sector contributes to increasing rural incomes and supports the private sector and continues

to be one of the fastest growing programs with budget allocation accounting for about 6.5

percent of total Government expenditure. GOU’s spending increased from a level of USD 89.53

million in 2001/02 to USD 93.96 million in 2006/07 while Development Partners contribution

increased from USD83.5 million to USD111.12 million during the same period. On average the

Government contribution accounted for about 54.6 percent between 2001/02 and 2006/07. The

donor agencies/ financial institutions hence contributed the 45.4 percent of the road investment.

According to Musisi (2007) the Ugandan government should invest 24 percent of the gross

domestic product in physical infrastructure. Then in the mid to long term the investment will

have a highly positive effect on various sectors. It is argued that there is insufficient road

3
infrastructure in Uganda probably the hindrance to economic growth (Mwakali 2008).

Infrastructure investment has the effects of contributing to increased productivity and it is

expected to contribute to future economic growth in developing countries where transport system

is still insufficient. At the micro level, field studies of immobility among women and men in

rural settlements in Africa with poor road access illustrate the frustrations and the high costs of

living due to poor road infrastructure (Porter, 2002)

Figure 1; The trend of national roads in the country

Source; Various issues of Background to the Budget MFPED

It’s quite evident that there has been minimal increase in the number of paved roads in the

country in the period as compared to the unpaved, given the durability of these roads the

government needs to increase the construction in order to achieve sustainable growth. For a clear

insight to the subject matter, this research examined Uganda’s experience in developing its road

infrastructure for economic growth. The patterns of infrastructure supply i.e. expenditure on the

transportation sector which is a key infrastructure in national development was analyzed

annually from 1980 to 2010 that is looking at the expenditure on roads in the country during this

period.

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Uganda has gone through a series of reforms which can be categorized into two that is the framework

of Uganda’s SAP, which focused on the stabilization of the exchange rate and elimination of trade

barriers such as tariffs, export taxes and other indirect distortions to trade. The second generation of

reforms follows immediately after Uganda had achieved a considerable integration in the global

economy and are related to government interventions in order to implement an efficient (no

necessarily minimal) regulation system for trade -avoiding excessive non-tariff barriers(NTBs)-, to

stimulate the incorporation of non-traditional export sectors and to pursuit agreements promoting

regional integration. These reforms are thought to have had considerable effect on the economy of

the country starting from 1987 and 1988 respectively. However, Evaluation of these reforms is

beyond the scope of this study but due to their effect on GDP the study incorporated dummy

variables to assess their contribution.

1.1 Statement of the problem

Road infrastructure remains the main mode of transport within Uganda and as a main gateway to

neighboring countries. Therefore the quantity and quality of roads impacts greatly on economic

activities in the country. Poor road infrastructure has a negative effect on the production of goods

and services leading to increased prices which limits the competitiveness of the country’s exports

and consequently the returns from international trade. Despite the key role of road transportation,

the growth in kilometers of roads for both paved and unpaved has been low over the years. This

slow growth affects economic growth of the country but there is limited empirical evidence on

the linkage between road infrastructure and economic growth in Uganda. The study hence sought

to establish the link between national income and road infrastructure.

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1.2 Objectives of the study

1.2.1 Main objective

To examine the effect of road infrastructure on the economic growth of Uganda for the period:

1980-2010.

1.2.2 Specific objective

 To establish the causality between economic growth and expenditure on road

infrastructure.

 To examine the effect of expenditure on paved and unpaved roads on economic growth.

1.3 Hypotheses
 Investment in roads infrastructure does not cause economic growth

 An increase in the coverage of paved and unpaved road infrastructure doesn’t lead to an

increase in economic growth.

1.4 Scope of the study

The study sought to establish the effect of road infrastructure on economic growth of Uganda

and considered all national roads, that is, paved and unpaved roads. However, district roads are

excluded due to lack of data for the entire period of the study. The emphasis on national roads is

both due to data availability and the multiplier effects associated with these roads towards

economic growth. As such, the study sought to find out the effect of road infrastructure provision

in terms of coverage of paved and unpaved roads onto the country’s economic growth from 1980

to 2010 and also whether the road infrastructure coverage is at its ideal level to bring about the

desired growth.

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1.5 Significance of the study

The purpose of this research was to highlight what is understood (and what is not understood)

about the linkage between road infrastructure and economic growth and the implications about

this for the management of road infrastructure in Uganda. The importance of road infrastructure

towards economic growth is observed through directly availing employment opportunities to

people carrying out the activity of construction and maintenance. Also, improved road

infrastructure greatly improves accessibility as well as linking up of markets. This is motivated

in a way that factors of production are easily moved from one location to another and a cross

borders consequently improving the country’s competitiveness. Considering Uganda being an

agricultural economy with most of the cultivation being carried out in the rural areas,

improvement of the road sector will greatly enhance production by way of cheap linkage of

markets to the farm lands brought about by reduced transaction costs. The research findings will

hence help policy makers determine how much government needs to spend on the road sector to

bring about the desired sustainable economic growth rates and also help to decide on which road

category to lay much emphasis.

1.6 Organization of the study.

The study is organized in six chapters that is Chapter one which presents the background of the

country in relation to its economic performance as well as the boundary within which the

variables are analyzed. Chapter two presents the transport sector in regard to funding

maintenance and coverage in the country. Chapter three shows the various write ups and

publications in line with the contribution of road infrastructure to economic growth. The fourth

chapter presents the various methods that were used in the analysis of the data and testing of the

7
hypothesis. Chapter five presents the findings that were obtained in the analysis and

consequently used for recommendation in chapter six.

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 CHAPTER TWO

THE ROAD SUB-SECTOR IN UGANDA

2.1 The Road Network, Vehicle Fleet and Traffic

The total road network in 2007 in Uganda was estimated to be 68,800km and was classified into:

(i) The national road network of 10,800km of which 3,000km is paved and 7,800km gravel

surfaced; (ii) The district road network of 25,000km (mainly unpaved); (iii) Urban road network

of approximately 3,000km (mostly paved); and (iv) The community access roads of 30,000km

(unpaved). Uganda has a road density of 285 km per 1000 km sq. This is higher than that of

Tanzania of 90 km/1000 km.sq but lower than that of Kenya with a density of 334km/1000

sq.km (UBOS, 2006). The number of vehicles on the road in Uganda was 189,105 in 2000 and

rose to 363,658 in 2007. Out of the total vehicle fleet, 45.2 percent (164,506) are motorcycles.

The average annual growth rate of the fleet is about 9.85 percent, which indicates a good

recovery and rapid growth of the economy. The total vehicle-km travelled on the entire road

network increased from 4.69 billion in 2000 to 12.06 billion in 2006. The weighted annual

average daily traffic volume (AADT) was 3,624 vehicles/day on the paved roads in June 2007

according to the 2005/2006 UNHS (UBOS, 2006).

2.2 The Road Transport Industry

The Transport Licensing Board of the Ministry of Works and Transport (MOWT) licenses

vehicles and operators regulates passenger routes, minibuses and sets tariffs. The passenger

transport services are provided by 90 local and 16 interstate licensed bus operators. There are

15,000 licensed minibuses that are privately operated and form the Uganda Taxi Operators and

Drivers Association, providing about 89 percent of road passenger services. Freight traffic is less

9
organized in the private sector and operates independently on a negotiated basis with suppliers or

producers.

2.3 Road Administration and Training

MOWT statutorily has the overall responsibility for the development, management and

maintenance of the national road network. In line with the Government policy of rationalizing

the management of sector agencies and restructuring the civil services, Road Agency Formation

Unit (RAFU), a unit accountable to MOWT (but outside the ministry's structure), was

established in September 1998 as a transitional semi-autonomous institutional arrangement to

manage the implementation of RSDP. RAFU’s establishment was financed under an IDA Credit

(Road Sector Institutional Support Technical Assistance Project- RSISTAP) that was closed in

December 2007. The GOU was supporting RAFU’s establishment until 30th June 2008, after

which RAFU was replaced by Uganda National Roads Authority (UNRA), as per UNRA Act of

2006. UNRA is an autonomous body responsible for overall planning, construction, maintenance

and management of the country's national roads. UNRA is headed by an Executive Director who

is also a member of the Board. Other members consist of Permanent Secretaries of MOWT and

MFPED, National Planning Director, Representative of Engineers Association and two

representatives of the private sector.

Facilities for training of staff in the field of civil engineering are well established in Uganda. The

college of engineering, designing art and technology of Makerere University and Kyambogo

University offer training in areas of civil, mechanical and electrical engineering. In addition, four

other technical colleges, thirty-one technical institutes, and twenty-seven public and thirty-six

10
private technical schools also train staff in the transport sector. The MOWT has a Public Works

Training Centre that offers training for the whole construction industry.

2.4 Road Financing:

Uganda receives large amount of concessional loans and grants from the US, Japan, Western

Europe and international organizations for building economic infrastructures mainly roads and

power stations. This is in an attempt to give the country an advantage of overcoming the high

prices that reflect an increase in cost of production resulting from poor infrastructure especially

roads. Good infrastructure helps to raise productivity and lowers costs in the directly productive

activities of the economy, but it has to be expanded fast enough to meet the demand for

infrastructure in the early stage of development. Construction expense for infrastructure such as

energy and transportation sector is enormous and construction period is also long. Prediction of

demand pattern and investment allocation, which are the key factors of infrastructure

development planning, must be based on a long term economic Development trend and land use

planning, which predicts the country’s temporal and spatial demographics and economic

structure. Dormant as they may seem, road infrastructure propels the economy to the growth path

through its multiplier effect for example reduced cost of production and easy factor mobility.

The road sector has been identified as one of the six critical sectors that require substantial

budget expenditure if the objective of the GOU’s PEAP is to be achieved according to the

Republic of Uganda road sector appraisal report 2007. The sector contributes to increasing rural

incomes and supports the private sector and continues to be one of the fastest growing programs

with budget allocation accounting for about 6.5 percent of total Government expenditure. Table

2.1 shows the details of the sector funding by components of the program. GOU’s spending

11
increased from a level of USD 89.53 million in 2001/02 to USD 93.96 million in 2006/07 while

Development Partners contribution increased from USD83.5 million to USD111.12 million

during the same period. On average the Government contribution accounted for about 54.6

percent between 2001/02 and 2006/07.

Table 2.1 Financial allocation to the road sector in Uganda.

Implementation of (US$ MILLION)

RSDP2–
Maintenance ACTUAL
Year 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2008/09 2009/10 2010/11 2011/12
A) Road
Maintenance (US$
million )
i) National Road 37.66 29.85 30.93 37.16 37.65 37.98 74.93 74.31 72.64 72.05
Maint. – GOU

ii) District and 13.04 9.77 11.44 11.54 11.21 11.52 30.89 30.68 30.19 29.94
Urban Roads Mtc. –
GOU
iii) National & 13.61 3.54 3.25 2 0.07 0 5.41 6.80 6.79 6.73
District – Dev.
Partners
Total Maintenance 64.31 43.16 45.62 50.70 48.92 49.51 111.23 111.79 109.61 108.73

vi) Percentage of 79% 92% 93% 96% 100% 100% 95% 94% 94% 94%
GOU's Mtc
contribution
vii) Percentage of 21% 8% 79% 4% 0% 0% 5% 6% 6% 6%
Dev. Partners
contribution

B) Road
Development
v) National Road. – 24.82 14.93 16.24 20.12 9.10 11.73 19.42 66.06 24.58 N/A
GOU
vi) District and 4.83 4.57 12.40 10.02 8.65 6.34 10.68 12.21 8.96 N/A
Urban Roads –
GOU
National & Districts 62.38 21.77 109.56 102.82 31.1 90.57 174.39 199.88 150.42 N/A
- Dev. Partners
Sub - total Dev. 92.03 41.27 138.20 132.96 48.85 108.64 204.49 278.15 183.96 N/A

Grand Total 173.18 115.75 214.50 216.59 115.42 205.08 341.53 413.69 320.14 N/A
Total – GOU 89.68 32.80 89.08 98.21 81.44 93.96 148.61 193.37 152.59 N/A
Total-Donors 83.50 32.95 125.42 118.38 33.98 111.12 192.92 220.32 167.55 N/A

Source: Adapted from MFPED 2012

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2.5 Road Engineering and Construction.

The Engineering Division of RAFU usually undertakes minor works and designs, while the

major ones are contracted to consultants and contractors. International consulting firms normally

carry out major road feasibility and detailed engineering design. The contracting capacity of the

country has improved over the years with the training of small and medium-scale contractors. To

date, the domestic contractors that have registered with MOWT are 49 large-scale contractors, 62

medium-scale contractors and 111 small-scale contractors. The overall number of local

contractors has increased by 25 percent when compared with the number in 2003. Even though

the domestic contracting capacity for civil works has improved considerably, the industry still

lacks equipment leasing facilities to foster its development, capacity building to bid for large

works in excess of Ushs 10 million either directly or through developing strategic partnership

with foreign firms.

2.6 Road Maintenance

2.6.1. Organization of Maintenance:

The Road Maintenance Section of MOWT is directly responsible for maintaining the classified

road network and has divided the country into four regions. The regions operate under the

regional engineers and are sub-divided into 22 field stations, which are managed by district

engineers. The Maintenance function is still under the Ministry and is expected to be transferred

to UNRA not later than 1st July 2009.

Routine and periodic maintenance activities are carried out by direct labour (force account) and

by contractual service of small scale local contractors that are usually supervised by the

13
Ministry's personnel at the district or area offices. The district roads are maintained by district

administrations with the supervision of the MOWT in liaison with the MLG.

2.6.2 Maintenance Financing:

The amount allocated for maintenance of the road network is contained in the Transport Sector

Investment & Recurrent Expenditure Programme (TSIREP) that is revised annually within the

Government’s MTEF. Table 2.1 above shows that over the last six years maintenance budget

allocation by GOU and Donor’s has declined from USD64.31 million in 2001/02 to USD49.51

million in 2006/07, though the allocation by GOU has remained around USD50.0 million per

annum. According to the MOWT, the maintenance requirement for the national, district and

urban roads per year is about USD 100.0 million. Comparing this maintenance requirement with

actual allocation, the historical funding gap has increased from about USD 35.7 million

(2001/02) to USD 50.5 million (2006/07), indicating that only about 50.4 percent of the

requirements are met. This could be attributed to the decrease in Development Partners’ support

for maintenance and Government failure to increase its maintenance allocation annually by

USD2.0 million (as agreed) starting 2003/04 until self-sufficiency in funding is achieved in

2008/09. This under funding has reflected in the national road condition of the country, which

has declined from 60 percent in good to fair condition in 2003 to 47.5 percent in 2007. This is

very low when compared with the road condition in acceptable condition in Kenya and Tanzania,

which are 67percent and 84percent, respectively (UNRA, 2012). The maintenance issue is a

concern of Donors including the Bank that is being addressed by the creation of the Road Fund

and UNRA.

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GOU has recently agreed to the establishment of a fund to cover the maintenance requirements

for all public roads. To ensure that individuals contribute to the provision of road infrastructure

in the country the GOU agreed to the establishment of the fund to cover maintenance

requirements for all public roads. The Road Fund Bill was approved by the Cabinet on 24 th June

2007 and later sent to Parliament for approval. Road Fund based on road user charges is

expected to guarantee a regular and steady flow of funds for maintenance. As of July 2007, the

GOU had increased the fuel excise duty by 18 percent, that is 130 UGX (from 720 to 850) and

80 UGX (from 450 to 530) on petrol and diesel respectively. Up to now, the revenue from the

excise duty on fuel has been channeled to the consolidated fund and apportioned through the

normal budget process. Thus, the GOU maintenance contribution is expected to double with the

introduction of the dedicated road fund from USD49.51 million in 2006/07 to USD105.82

million in 2007/08 and sustained at an average of about USD102.0 million per year till 2010/11.

During the same period, it was planned that Donors contribute about USD7.0 million per year for

clearing maintenance backlog.

As per the Act establishing the Road Fund, statutory allocation will be on the basis of 63.5

percent of its annual revenue to UNRA for maintenance of the national roads, 14.5 percent for

districts roads, 7.5 percent for Kampala roads, 5.7 percent for other urban roads, 7.0 percent for

UNRA administrative and operational costs and 1.8 percent for the Fund’s administration. The

other sources of revenue for the Road Fund include international transit fees/cross border

charges, axle load fines; weight - distance charges and others will be determined by the Board of

the Fund, when it is fully operational in January 2008 (African Development Fund, 2007). The

Board will have nine members (four from public and the remaining 5 from the private sectors).

15
The Secretariat would be headed by an Executive Director, with three directorates for financial

management, audit and information and support services. In addition to the establishment of the

Road Fund, the establishment of UNRA and the transfer of maintenance, axle load control and

other activities from MOWT to UNRA by July 2009 would strengthen the institutional aspect of

road maintenance.

In conclusion the chapter has presented the various roles of the various parties charged with the

road sub sector in Uganda that is what the ministries and the different authourities are charged

with in regard with construction and maintenance. It has also highlighted the various avenues

through which the funds are obtained and allocated as well as the various coverage of roads in

the country.

16
 CHAPTER THREE

LITERATURE REVIEW

3.0 Introduction

This chapter presents the definitions of the key terms used in the study and the various empirical

studies done on infrastructure and economic growth.

3.1 Definition of infrastructure

Infrastructure is referred to as social overhead capital by many development economists.

Hirshman, (1958) provided appropriate definition of infrastructure for the discussion1, as social

overhead capital encompassing activities that share technical features such as economies of scale

and economic features like spillovers from users to non-users. The social capital acts as a

principal to expand private sector investment, and in contrast, social capital becomes relatively

lacking along with the expansion of private capital and productive activities.

Social overhead capital contributes to enhancing productivity and assists in the realization of the

potential ability of human capital, and creates situations in which that potential can fully

function. It also contributes directly and indirectly to improving the safety and quality of

people’s lives. Within the scope of infrastructure, electric power, ports, roads, and

telecommunications are often used as the services and intermediate goods that are essential for

the productive processes of private sector Hirshman, (1958).

1. Hirshman proposed the concept of social overhead capital, which supplements direct productive capital, and commented the
relationship between direct productive capital of the private sector and social overhead capital, which is mainly built by public
bodies. Definition of infrastructure is also discussed in detail in Yoshida (2000).

17
Infrastructure has been defined in terms of the physical facilities (roads, airports, utility supply

systems, communication systems, water and waste disposal systems etc.), and the services

(water, sanitation, transport, energy) flowing from those facilities according to Sida (1996). Fox

(1994) defines public infrastructure as ‘those services derived from the set of public works

traditionally supported by the public sector to enhance private sector production and to allow for

household consumption’. He further states that the importance of infrastructure as an instrument

of economic development and potentially, poverty reduction, is reflected in the high level of

investment which national governments and international donor agencies put into infrastructure

development.

3.2 Empirical studies on infrastructure development and economic growth

Uganda is a land locked country with road infrastructure constituting the main mode of transport,

however insufficient allocation have been directed to the road sub sector. Poor road conditions

and transportation system hinder movement of goods and people in the urban areas. Lack of

adequate infrastructure could also be a disincentive to both local and foreign investors in our

country. According to (World Bank, 1992), inadequate infrastructure Constrains productivity at

all levels, as such infrastructure reduces the productivity of firms and households and this affects

the aggregate productivity of the economy. Transportation plays a major role in economic

development both urban and national. It also has a broader role in shaping development and the

environment. The interface between transportation investment and economic development has

broad ramification that goes beyond the basic purpose of moving goods and people.

Transportation facilities located in a specific place provide services to businesses (and

households) within a specific geographic area, and their use is directly related to moving goods

and people between two points. It is also essential in the operation of a market economy

18
According to Matovu, (2000), it is important to note that, when government prioritizes road

infrastructure spending, the growth effects have been shown to be substantial due to the

increased household productivity which results from the positive externality effects associated

with good infrastructure, for example, linking up of markets as well as employment. Williamson

and Canagarajah, (2003) and World Bank, (2002) also argue that roads, agriculture, water and

sanitation may yield higher returns for employment and income creation in Uganda than primary

health care, education and that the poverty action fund, through the promotion of a narrow

interpretation of pro-poor programmes has led to the skewing of budget allocations away from

programmes that may have resulted in greater poverty reduction.

One of the important aspects of infrastructure investments is that they have different short and

long-run effects. Most of the studies on infrastructure productivity and economic growth

analyses suggest that short term effects are in the form of increases in employment and long-term

effects include both changes in employment and private output. A study by (Shah, 1992) tested

these effects using a system of non-linear equations consisting of variable cost functions and

derived input demand equations for 26 Mexican three-digit industries between 1970 and 1986.

The findings revealed that public infrastructures (electricity, communication, and transportation)

have a weak complementarity with private capital only in the long run. However, labour shows

complementarity with infrastructure in both short-and long-run with the degree of

complementarity being higher in the short run as opposed to long run

19
The evidence in the literature shows that infrastructure plays a critical and positive role in

economic growth in an attempt to enhance to development. Infrastructure interacts with the

economy through multiple and complex processes (Adeola, 2005). Infrastructure represents an

intermediate input to production, thus changes in road infrastructure quality and quantity affects

the profitability, production and invariably the levels of income, output and employment

(Adeola, 2005). Moreover, infrastructure services raise the productivity of other factors of

production (Kessides, 1993). The provision of infrastructure in most developing countries is the

responsibility of the government. This is because of the characteristics of infrastructure

investment. Road Infrastructure supply is characterized by high set-up costs, its lumpiness and

indivisibility precludes the private sector from investment in the developing countries.

Studies have demonstrated a positive link between improvements in the road infrastructure and

economic growth. Nworji and Oluwaiye (2012), showed that expenditure on roads, power or

communication reduces production costs, stimulate private sector investment and profit margin

of firms, create increased employment and wealth; thereby improving the growth in the

economy. Consequently inadequate transportation limits a nation's ability to utilize its natural

resources, distribute food and other finished goods, integrate the manufacturing and agricultural

sectors, and supply education and medical services. However, there is little empirical evidence

linking transportation improvements to economic growth more especially in developing

countries as opposed to developed countries where the link has been established

(Aschauer,1989a,b,c), (Gramlich,1994; Sanchez.,1998; Canning et al,1994; Easterly and

Rebelo,1993). In developing countries it is not generally known whether an investment in

transportation infrastructure is more productive than investments in other sectors of the economy

20
nor is it known whether capital expenditures on one mode of transportation is more productive

than those spent on another.

Viggo, Jean and Hansen (2012), in their study for a proposed construction of a new road

infrastructure in Helgeland, used a cost benefit analysis in which costs like construction expense,

resettling of people and so on were weighed against benefits of reduced time on the road,

reduced maintenance costs and increased traffic on the road. They found out a positive ratio

consequently implying that the project was feasible. A similar analysis was carried out by

Asensio and Roca (2001) and Daegoon et.al (2012) all establishing that investment in the road

infrastructure was feasible for the respective countries investigated. However, it’s important to

note that the CBA by its self doesn’t take into account the whole set of economic effects.

Emphasis is on assessing the benefits against the costs of such investments for example in the

UK the awareness about the discussion led to the re-discussion of the main project evaluation

techniques by the Leitch committee consequently calling for a more broader framework

(Glaister,1999).

Ndulu (2006) drew from the existing literature of the various channels or means through which

infrastructure affects growth. In his study, he argued for the big push in promoting infrastructure

that is necessary not only to break out of under development but, more importantly, to be on the

path to sustainable growth. Focus on infrastructure is now seen in the purview of implementing

public investment in social services, which are geared towards attainment of the Millennium

Development Goals (MDGs) rather than competing for the government’s scarce resources.

21
Yoshino and Nakahigashi (2000) estimated the productivity effect of social capital stock by

industry, sector and region, and clarified the relationship between social capital stock and

economic development. As a result, (1) by industry, the productivity effect of social capital stock

is large in the tertiary industry, (2) by sector, the productivity effect of social capital stock is

large in information and telecommunication, and environment sectors, and (3) by region, and the

effect is large in regions with large urban areas. To see the result of their analysis from the view

point of the development of developing countries, relationship between social capital and

economic growth is examined from statistical data hence the need for this study.

Byoungki, (2006) argues that road infrastructure development is one of the most integral parts of

public policies in developing countries. Supporting infrastructure development in developing

countries by advanced countries is extremely an important field towards enhancing economic

growth consequently development. This can be inferred from the fact that many international

organizations such as World Bank and OECD are actively promoting the improvement of

infrastructure by providing various support programs to developing countries. However, the

precise relationship between infrastructure and economic growth is still frequently debated upon.

Yoshida (2000) presented a positive analysis from various angles of the correlations between

economic growth and the infrastructure in Japan, such as the energy, electricity, and

transportation sectors over the last century in order to derive lessons that can be useful to

developing countries. He divided Japan’s economic development phase into five with major

characteristics, and discussed the patterns of demand and investment in infrastructure over one

century. He found out that the growth rate of demand in infrastructure was much higher than that

22
of per capita GNP in the early stage of development, and public investment in infrastructure was

big. He also found that infrastructure investment in rural areas had a trend to correct the regional

income disparities. He insisted that the lessons learned from Japan’s development experience are

a major intellectual asset for developing countries. He emphasized that developing countries

expect Japan and Korea, (former developing countries), to take reasonable leadership in

international aid.

Canning and Pedroni, (1999) investigated the long run consequences of infrastructure provision

on per capita income in a panel of countries over the period 1950-1992. They used simple tests

devised for the existence and sign of the long run impact of infrastructure on economic growth

allowing for non-stationarity and co integration in the time series, they found out that

infrastructure induced long run economic growth. Nevertheless, they also found a great deal of

variation in the results across individual countries with a great deal of heterogeneity in the results

across countries. It is however, important to note that panel data is usually associated with

heterogeneity as a result of aggregating (pooling) data with similar characteristics in an attempt

to come up with series data.

Somik (1999) carried out an empirical analysis that employed the modified Cobb- Douglas

production function to test the efficacy of public infrastructure investments in the development

process of 15 Indian lagging, intermediate and leading states. He found out that the composition

of public investments is important in facilitating growth, and that public investment is a

necessary but not sufficient condition for regional economic growth.

23
Devarajan, Swaroop and Zou (1996) drew analytical conclusions about developing countries

based on the endogenous growth theory in order to verify which type of government

expenditures promotes economic growth. They estimated the relationship between the

composition of public expenditure and economic growth using data from 43 developing

countries over 20 years. This estimation showed that an increase in the share of current

expenditure has positive and statistically significant effects on economic growth and that

infrastructure has a negative effect on the economic growth rate because infrastructure in

developing countries is oversupplied compared to the economic scale. Its however, important to

note that most developing countries’ are financed by external sources as a matter of fact an

endogenous growth theory doesn’t bring out the concrete relation.

Calderon and Chong, (2004) investigated the impact of infrastructure development on economic

growth and income distribution using a large panel data set encompassing over 100 countries and

spanning the years 1960‐2000. The authors used a variety of generalized method of moments

(GMM). It was found out that growth is positively affected by the stock of infrastructure assets.

Furthermore, income inequality declines with higher infrastructure quantity and quality.

Bougheas, et al. (1999) in their analysis of a symmetric two-country model, that examines the

effects of road infrastructure on specialization and the volume of trade. In their analysis, they

convey the message that upgrading of transport and communications networks, which reduces

transport costs and facilitates trade of goods both within and across national borders. Any

investment in infrastructure by the domestic economy is likely to benefit not only domestic but

also foreign producers and consumers. The symmetric nature of their model used, does not allow

24
the authors to address coordination issues, such as the question of how countries might share the

costs and benefits of infrastructure provision, which give rise to the possibility of either

overinvestment or underinvestment.

Kocherlakota and Yi (1996) presented evidence supporting endogenous growth models using

time series data for the United States and the United Kingdom for over a period of 100 years.

They investigated the relationship between shocks to public capital and subsequent changes in

GDP. This was mainly based on empirical evidence from UK and US. They incorporated in

various policy variables that raised the economic variables including the infrastructure. They

found out that policy variables do not improve economic growth rate permanently.

World Bank, (1994) reported that there was a close relationship between road infrastructure and

economic growth in Asia and in many case studies, such as those on the direct and indirect

economic impact of infrastructure in farming sector in India. In the case of China, the coverage

of intercity transport networks is one of the thinnest in the world. China’s transportation

investments amounted to only 1.3 percent of GNP annually during 1981-90, a period of rapid

growth in transportation demand. Since the onset of China’s open door policy in 1979, economic

growth averaging 9 percent a year has resulted in an unprecedented expansion in intercity traffic

with growth averaging 8 percent a year for freight and 12 percent a year for passengers.

Easterly and Rebelo, (1993) verified whether or not changes in the level of various policy

variables permanently increased the economic growth rate, and clarified whether or not

investments related to information and telecommunications raised the economic growth rate.

25
They found that public infrastructure investment is a large fraction of both total and public

investment, and infrastructure in transportation and communication is consistently correlated

with economic growth. The rate of return in these sectors is 63 percent and elasticity of change in

output with respect to a 1 percent change in the level of infrastructure is 0.16.

Considering Aschauer, (1989a, 1989b, 1989c), there has been a reappearance in the debate about

the productivity effects of infrastructure towards economic performance. This debate is reviewed

in the World Bank’s World Development Report (1994) which finds a large range of empirical

results on the importance of infrastructure for economic growth, with estimates ranging from no

effect, to rates of return in excess of 100 percent per annum. The results are far tempting

especially for a growing economy like Uganda that has consistently expanded its expenditure on

provision of road infrastructure but still gets disappointing contributions.

According to Haynes (1991), the role of infrastructure in regional economic development has

often been examined since the Second World War. Definitions of infrastructure vary widely from

economic and social overhead capital to the general provision of public goods. The concept of

social infrastructure has been traditionally linked to education, health, social and recreational

support and partly to environmental concerns. This human capital perspective is augmented by a

direct orientation to the welfare of human re-sources and its consequences, which is assumed to

increase labour productivity. Economic infrastructure is also viewed as a complement to

productivity. The availability and quality of reliable economic infrastructure appear to

influence economic productivity and social welfare in at least two basic ways. These are: Direct

26
contribution to output (augmenting the productivity of private in-puts) and enhancing a region's

amenities and influence location decision of private industries.

Seitz and Licht (1992) examined the relationship between infrastructure and public capital for 11

federal states in (West) Germany for the period 1970-1988 using a trans-log cost function. Their

study concluded that public capital (infrastructure) formation encourages private investment. The

study also empirically demonstrated that a distinction between investment infrastructures versus

equipment is of critical importance in the context of private capital because the effects on the

former are of far greater importance than the effects on the latter.

Greene and Villanueva (1991) analyzed private investment data for 23 developing countries over

the period 1975-87 and showed that the ratio of public sector investment to GDP had a

significant positive effect on the ratio of private sector investment to GDP. Panel data for nine

countries Barbados, Costa Rica, the Dominican Republic, Guatemala, Haiti, and Honduras.

Mexico, Panama, and Trinidad and Tobago - for the period 1971-79 showed that the level of

public sector investment has a positive effect on private investment (Blejer and Khan, 1985).

Specifically, the study concluded that infrastructure investments exert a positive influence on

real private investment.

Many researchers have attempted to examine the effect of government expenditure on economic

growth. For instance, Laudau, (1983) examined the effect of government (consumption)

expenditure on economic growth for a sample of 96 countries, and discovered a negative effect

of government expenditure on growth of real output. Komain and Brahmasrene, (2007)

27
examined the association between government expenditures and economic growth in Thailand,

by employing the Granger causality test. The results revealed that government expenditures and

economic growth are not co-integrated. More so, the results indicated a unidirectional

relationship, as causality runs from government expenditures to growth. Contrary to Laudau,

(1983), the results also illustrated a significant positive effect of government spending on

economic growth.

Olugbenga and Owoye, (2007) investigated the relationships between government expenditure

and economic growth for a group of 30 OECD countries during the period 1970-2005. The

regression results showed the existence of a long-run relationship between government

expenditure and economic growth. In addition, the authors observed a unidirectional causality

from government expenditure to economic growth for 16 out of the countries, thus supporting

the Keynesian hypothesis. They also found out that, causality run from economic growth to

government expenditure in 10 out of the countries, confirming the Wagner’s law. Finally, the

authors found the existence of feedback relationship between government expenditure and

economic growth for a group of four countries.

Liu Chih-HL, Hsu, Younis, (2008), examined the causal relationship between GDP and public

expenditure for the US data during the period 1947-2002. The causality results revealed that total

government expenditure causes growth of GDP. On the other hand, growth of GDP does not

cause expansion of government expenditure. Moreover, the estimation results indicated that

public expenditure raises the US economic growth. The authors concluded that, judging from the

causality test Keynesian hypothesis exerts more influence than the Wagner’s law in US.

28
Loizides and Vamvoukas, (2005), employed the trivariate causality test to examine the relationship

between government expenditure and economic growth, using data set on Greece, United

Kingdom and Ireland. The authors found that government expenditure granger causes economic

growth in all the countries they studied. The finding was true for Ireland and the United

Kingdom both in the long run and short run. The results also indicated that economic growth

granger causes public expenditure for Greece and United Kingdom, when inflation is included

Donald and Shuanglin (1993), used a semi-log model and a linear trend model to examine the

growth rate of selected macroeconomic variables in the Indian economy. Granger Causality Test

has been employed to test the direction of causality between national income, public expenditure

and its various selected components. The results showed that the public expenditure had

registered a higher growth rate than the national income. Among the various components of

public expenditure, debt obligations in the form of interest payments registered a higher growth

as compared to others. The Granger Causality Tests confirm a bi-directional relationship

between national income and public expenditure and economic services. However, the causality

between national income and India’s expenditure on social and defense services were found to be

independent and finally, a unidirectional relationship between GDP and interest payments was

also established.

Kalam and Aziz (2008), investigated, the empirical validity of ‘Wagner's law,' the relationship

between ‘social progress' and ‘growth of state activity' in an economy, using Bangladesh data

from 1976 to 2007 in a bivariate as well as a trivariate framework incorporating ‘population size'

as a third variable. The estimated results provided evidence in favour of Wagner's law for

Bangladesh in both the short-run and long run. There was a long-run cointergration relation

29
among real government expenditure, real GDP and the size of population. The government

expenditure was positively tied with the real GDP (1.14), per capita GDP (1.51) and population

size (0.21). Both the real GDP and GDP per capita Granger caused total government expenditure

to change. Population size also came up as a significant stimulus for public spending to grow in

both the long-run and short-run.

Ziramba (2009) tested Wagner's law by analyzing the causal relationships between real

government expenditure and real income for South Africa for the period 1960-2006. The paper

tested the long-run relationship between the two variables using the autoregressive distributive

lag approach to procedure developed by Toda and Yamamoto, which uses a vector auto

regression model to test for the causal link between the two. Evidence of cointergration was

sufficient to establish a long-run relationship between government expenditure and income.

However, support for Wagner's law would require unidirectional causality from income to

government expenditure. Therefore, co-integration was seen as a necessary condition for

Wagner's law, but not sufficient. The research did find a long-run relationship between real per

capita government expenditure and real per capita income. Results for the short-run causality

found bidirectional causality. On the basis of empirical results in the paper, one may tentatively

conclude that Wagner's law finds no support in South Africa.

Guisan and Aguayo (2005), analyzed the causality between real values of expenditure on

Research and Development,, and Gross Domestic Product, (GDP), in 15 countries of European

Union and the United States for 1993-2003, they employed the Granger causality test and an

interdependent dynamic model. They found out the that RD expenditure had lower averages per

inhabitant of many European countries, in comparison with the US, to them this played an

30
important role to explain lower levels of real GDP per inhabitant and lower rates of Employment

in the European counties studied. They concluded that the counties should foster support to

research in several European countries in all fields in order to bring about significant growth of

their economies.

Tatum (1993) addressed the question of whether public investment effects economic growth or

whether economic growth affects public investment by analyzing lagged data from both

perspectives. He concluded that there is essentially no impact of infrastructure capital on

productivity. If anything, reductions in economic growth lead to reductions in infrastructure

capital. In contrast, Otto and Voss (1996, 1998) analyzed quarterly data from 1959 through 1992

for the Australian economy and concluded that public capital does contribute significantly to

productivity. Moreover, they found no evidence of causality from private production to public

capital stocks. Holtz-Eakin (1994), also studied this question. He analyzed data for the

contiguous 48 states, which covered 1969 to 1986 and found no relationship between

productivity and public sector capital from either the state level or regional level. However, his

study, just as those mentioned above (Aschauer, 1989; Munnell, 1990; Lynde and Richmond,

1993; Tatum, 1993; Otto and Voss 1996), also used aggregate measures of government capital.

Prabia De (2006) used recent literature to examine the importance of transaction costs in

explaining trade, access to markets, and regional cooperation under globalization. In his study,

he argues that in most Asian countries, transaction costs are a greater barrier to trade integration

than import tariffs. By estimating a structural model of economic geography using cross‐country

data on income, infrastructure, transaction costs and trade of selected Asian economies, the

results showed that the transaction costs are statistically significant and important determinants

31
in explaining variation in trade in Asia. Calderon and Serven (2004) showed that in Peru, for

instance, if infrastructure was improved in Costa Rica, it would increase the income share of the

poorest quartile of the population from 5.6 percent to 7.5 percent in the country.

Cooray, (2009), used an econometric model that takes government expenditure and quality of

governance into consideration, in a cross-sectional study that includes 71 countries. The results

revealed that both the size and quality of the government expenditure are associated with

economic growth.

Abu-Bader, Abu-Qarn AS (2003), employed multivariate co-integration and variance

decomposition approach to examine the causal relationship between government expenditures

and economic growth for Egypt, Israel, and Syria. In the bivariate framework, the authors

observed a bi-directional (feedback) and long run negative relationships between government

expenditure and economic growth. Moreover, the causality test within the trivariate framework

(that included share of government civilian expenditures in GDP, military burden, and economic

growth) illustrated that military burden has a negative impact on economic growth in all the

countries. Furthermore, civilian government expenditures have positive effect on economic

growth for both Israel and Egypt.

Folster and Henrekson, (2001) studied the relationship between government expenditure and

economic growth for a sample of wealthy countries for 1970-95 period, using various

econometric approaches. The authors submitted that more meaningful (robust) results are

generated, as econometric problems are addressed. In India, Ranjan and Sharma, (2008)

32
examined the effect of government development expenditure on economic growth during the

period 1950-2007. The authors discovered a significant positive impact of government

expenditure on economic growth. They also reported the existence of cointergration among the

variables. Al-Yousif, (2000) indicated that government expenditure has a positive relationship

with economic growth in Saudi Arabia. On his part, Ram, (1986), studied the linkage between

government expenditure and economic growth for a group of 115 countries during the period

1950-1980. The author used both cross sectional and time series data in his analysis; he

confirmed a positive influence of government expenditure on economic growth. Such studies

motivated the researcher to establish the link between economic growth and government

expenditure on roads for Uganda’s case for effective policy formulation and implementation.

Addus (1989) examined road transportation in 15 African countries for 1982-83. He presented

an overview of facilities which when compared to the U.S. highlighted the severity of an

inadequate road network and a severe shortage of vehicles. However, no linkage of

improvements to economic growth was provided. He explored the reasons for the inadequate

road conditions indicating the problems presented by climate, terrain, difficult roadway

engineering, high construction costs, and circuitous routes. Additionally, the problems of

political instability were noted. Not only do regional conflicts and civil wars divert important re-

sources (financial and human) away from road construction, they have also resulted in the

destruction of existing bridges and roads. This study is an improvement of Addus’ study since

the researcher in incorporating in a long time scope and concentrates on one country

consequently avoiding variations brought about by aggregating countries. This is because

different countries have different political, climatic and administration situations.

33
Feltenstein and Ha (1995) studied the relationship between the public infrastructure and private

output in sixty-three sectors in Mexico, aggregated into sixteen groups over the years 1970-1990.

The dependent measure was sectoral gross domestic product. Independent measures included

wages, the cost of capital, and the nominal values of the stocks of three types of infrastructure:

electricity, transport, and communications. Public expenditures on infrastructure in electricity

and communications tend to reduce sectoral production costs whereas expenditures on

transportation infrastructure increase those costs. They note that they can offer, “No good

explanation for the counterintuitive results for transport.

Devarajan, Swaroop and Zou (1996) drew analytical conclusions that road infrastructure

negatively affected economic growth and attributed this to the tendency of developing countries

over supplying roads. This study is an improvement on the other studies on economic growth-

government expenditure relationship in Uganda for a couple of reasons which include;

consideration of government expenditure on road infrastructure reflected by coverage in

kilometers to be a very important variable that affects economic growth. Secondly, this study

employs a methodology that captures causality as well as cointegration that many studies have

not incorporated. Consequently, the findings reveal the true effect of the road infrastructure on

the economy as opposed to the regularly used CBA which mainly weighs costs against benefits

and in much situations neglect to incorporate the environment aspect in its analysis due to the

hardships of correctly attaching a right estimate (Glaister, 1999).

34
In conclusion, it’s important to note that the various studies reviewed, used different

methodologies and consequently came up with relatively divergent results, for example, Laudau,

(1983) and Komain and Brahmasrene, (2007). Similarly, Donald and Shuanglin (1993) used a

semi-log model on government expenditure and economic growth and established a bi-

directional causality as opposed to Komain and Brahmasrene, (2007) who established

unidirectional causality.

35
 CHAPTER FOUR

METHODOLOGY

4.0 Introduction
This chapter presents the methodology the researcher used in the study of road infrastructure and

economic growth. It includes the data type, source and sample selection procedure that were used

to show the methods of data collection, data processing and analysis

4.1 Data type and source

The study used secondary data. Secondary data entailed the already collected data on the relevant

variables specified in the model that were acquired from World development indicators (World

Bank data base) that is data for labour, gross domestic product and other direct physical capital

stock (acquired by subtracting the expenditure on roads from the gross capital stock). The data

on road coverage both paved and unpaved were obtained from various key economic indicators

from MWHC as well as from statistical abstracts compiled by the UNRA. World Bank provides

data on gross capital stock which includes the road sector expenditure, in order to obtain the

required data for other direct physical stock; the study reduced the gross capital stock by the road

expenditure data as shown in the appendix 2.

4.2 Model specification

There is growing demand for transport infrastructures and the scarcity of the public resources to

match it, the government has been under growing pressure to establish priorities among different

investments. In order to do this the most commonly used method is the Cost- Benefit Analysis

which has an advantage of quantifying in monetary terms different advantages and disadvantages

of various projects (i.e. costs and benefits), however the method has a weakness of failing to

36
incorporate in the environmental effect of the projects undertaken (Glaister, 1999). Secondly, the

CBA does not adequately tell whether the road infrastructure is at its optimal level to bring about

simultaneous economic growth. As such there was need for a broader framework of analysis to

cover the general road network of the country rather than the CBA which is mainly specific for a

particular project, consequently the application of a Cobb-Douglas production function that

optimizes government spending and also satisfies the natural condition for production efficiency

according to (Barro, 1990). The production function employed is as below;

 
Yt  At K t Lt …………………………………………..………..………….(4.1)

Where

A is the total factor productivity

K is expenditure on capital stock

L is the labour and

Y is the national income

It’s worth noting that population has been included as a proxy for labour in its aggregate form

due to the fact that it’s difficult to precisely determine the productive labour and secondly,

whether directly involved in production or not still that population has an effect on overall

production whether positive or not. It’s also worth noting that the study aimed at assessing the

contribution of road infrastructure (that is to say it’s not directly involved in the production

process) on the GDP of the country as such the study disaggregated the capital stock variable in

order to be specific, that is having two forms of capital stock one being directly involved in the

production process and the other playing an indirect role in production Consequently the new

production function becomes a simple model exhibiting constant returns to scale which was

adapted by Barro (1990) as specified below.

37
   1  
Yt  At H t Gt Lt ………………..…………………..….…… (4.2)

Where; Y is the national income

A is the total factor productivity

H is expenditure on other types of physical capital

G is expenditure on road infrastructure

L is the population

Supporting Barro’s model, Morrison and Schwartz (1996) provided evidence that infrastructure

provision improves the productivity of both the private sector and the public sector and that it

also increase output. Introducing in natural logarithm yields expression (4.3); it is worth noting

that after the introduction of natural log the respective coefficients represent elasticities. That is

the degree of responsiveness of a unit change in the independent variable onto the dependent

variable.

ln Yt  A0   ln H t   ln Gt  1     ln Lt  et ……………………….. (4.3)

Where; α is elasticity of other direct physical stock variable

β is the elasticity of the road expenditure variable

(1- α - β) is the elasticity of labour variable on output

e is the error term

Currently the road infrastructure is broadly categorized into two that is paved and unpaved as

such the study further disaggregated the road expenditure variable into two sub components that

is expenditure on paved and un paved. Incorporating the sub categories into equation (4.3) yields

equation (4.4) below.

38
 ln Yt   0  1 ln H t   2 ln M t   3 ln N t   4 ln Lt  et ……………….……… (4.4)
Where; M represents expenditure on unpaved roads

N expenditure on paved roads

The preceding expression is a double logarithmic model which states that national income

depends on direct capital expenditure, road expenditure and labour. It is important to note that

the coefficients in this model represent elasticities as stated earlier. However, due to the problem

of acquiring data on road expenditure and the inflationary nature of this data, the study used road

coverage in terms of kilometers as a proxy for road expenditure. This because what is spent on a

particular road is to increase on the length in way of kilometers implying that the longer the

length of a particular road implies increased spending from government on that particular road.

Secondly, there is a high variability in terms of expenditure in different regions arising from

different costs as such the study used coverage to minimize on this variability. In addition to that

a kilometer of a road in an area could serve the same purpose as the same kilometer in another

region as opposed to say same expenditure allocation in two different areas.

Similarly important to note is that expenditure on the road today has no impact on the current

GDP but rather on next period’s GDP; consequently to measure the contribution of road

infrastructure on the economy, the study incorporated in lagged values of the respective log

variables as shown in equation (4.5) below representing road network in terms of coverage. Lags

were incorporated in the study to cater for the period spent from the initial expenditure on the

road and the time when it’s finally available for use. This differs between the paved and unpaved

with the former taking a longer period of construction than the latter.

39
 yt  o  1ht  2mt  3mt i   4nt  5nt i  6lt  et .. (4.5)
Due to the non stationarity nature of time series data, the study transformed all the variables into

growth rates and this does not only make variables stationary but also makes the regression

results non spurious (Gujarati, 2003 pp822). Thus variables below indicate growth rate of each of

the variable.

yt *  o  1ht *  2mt * 3mt i *  4nt * 5nt i * 6l * et ……. (4.6)

Where * are included to mean growth rate of variables.

i represents the respective periods being lagged

Due to the reforms that took place, the study investigated any effect caused by such reforms. For

example trade liberalization and foreign exchange reform in 1987 and 1988 respectively. The

reforms are assumed to have an impact on the variables of concern through their effect on the

flow of goods in and out of the country. The study mainly investigated the change in trend of

growth rate due to such reforms and as a result the above equation was modified to cater for such

reforms by including a dummy variable to examine the change in the trend of growth. This yields

equation (4.7).

…. (4.7)
yt *   0  1ht *  2 mt * 3mt i *  4 nt *  4 nt i * 5lt *  6 dl   7 dj  et

Where dl is dummy variables trade liberalization

dj is a dummy for foreign exchange reform

40
4.4 Data analysis

This was done using the statistical package of Eviews that is, testing for the unit roots of the

time series data that were used. The unit root test was intended to determine the stationarity

status of the series data. Due to the common characteristic of time series data being non

stationary at level (Cheung and Lai, (1999) and Pedroni, (1998a)), the test helped evaluate the

stationarity status. As such equation (4.7) was differenced and this led to obtaining of stationary

data series. It is also important to note that after differencing the logarithmic model the sets

obtained represented growth rates of individual variables. The study also employed a granger

causality test to determine what variable leads to the other, co integration as well as an OLS

regression analysis in an attempt to test the hypotheses.

4.3.1 Unit root test

According to Cheung and Lai ,(1999)and Pedroni,(1998a) there are considerable evidence for

presence of unit roots in GDP time series data as such there was need to make the data

stationary. There are various statistical ways of testing for unit roots of time series data;

specifically the researcher employed the Dickey-Fuller (DF) and Augmented Dickey-Fuller

(ADF) test. Since it is a common characteristic of time series data to be integrated of order one

(Gujarati, 2003 pp822). The study simply differenced the series to make them stationary

consequently easy to work with. The differencing was done independently for the respective data

series

4.3.2 Co-integration and the ECM

It’s important to note that expenditure on road infrastructure comes as a result of diversion of

funds from directly productive capital investment, as such there was need to determine the

41
growth maximizing level of road coverage to bring about sustainable growth in the economy.

(Granger,1986) states it that’ a test for cointergration can be thought of as a pre-test to avoid

‘spurious’ situations, from the economic point of view we aim at exploring whether variables

have an equilibrium or a long run relationship (Gujarati, 2003). In an attempt to determine

whether there exists equilibrium between road infrastructure and national income the researcher

found out that the respective infrastructure data series were integrated of the same order with the

income data series. Secondly apart from being non stationary the researcher also evaluated the

residuals obtained after regressing (infrastructure and income) the variables and ascertained that

they were stationary. This was accompanied with likelihood ratio test for confirmation.

yt   0  1mt   2 nt  ut …………………………..……...……………….(4.8.1)

The expression assessed is written as;

ut  yt  1mt   2 nt  0 ………..………………………………………... (4.8.2)

Where; the parameters are defined as before.

After determining that the variables were co-integrated (had a long run relationship) it was

crucial to establish the short run behavior of the variables as well. To do this the researcher used

the ECM first developed by Sargan, (1984) and later popularized by Engel and Granger, ( 1987)

in an important theorem known as Granger representation theorem. According to the theorem

ut in equation (viii) becomes the equilibrium error. The ECM is represented as in the proceeding

equation.

yt  0  1mt  2nt  3h  4l  5ut 1   t …………… (4.9)

Where;

42
 Denotes the first difference operator of the respective variable

 t is the random error term

ut 1 is the one period lag value of the equilibrium error

The ECM above states that differenced natural logarithm income depends on the specific

differenced log road infrastructure coverage and also the lagged value of the equilibrium error

term. Ho; 5  0 , that is GDP growth instantaneously adjusts with changes in road coverage

infrastructure in the short run that is the level road infrastructural coverage is in line with the

growth rates of the country.

4.3.3 Granger causality test

According to Gary, (2000), time does not run backward implying that a precedent event has an

effect on the successive event and this is a common characteristic of most time series data. As a

result of this fact it was imperative to carry out a causality test. Policy wise we needed to know

which variable caused what such that the emphasis is targeted towards the causing variable to

influence the other variable. In this regard the researcher carried out a granger causality test

between income and the respective road infrastructure variable. The fact that the research

incorporated in lags to determine causality, the Schwarz and Akaike information criterion were

used to determine the lag length for the respective data series. The following Schwarz formula

was used to guide in lag determination P max= 12(n/100) ^0.25 where p is the number of lags to

be incorporated and the number of observations. The expression below represents the causality

equation.

n n
yt  mt 1  yt 1  t  dl  dj …………………..………… (4.10.1)
i 1 i 1

43
H 0 :   0

This null hypothesis was examined using the F- statistic test to determine whether lagged values

of the unpaved road infrastructure had links to (caused) national income. A similar causality test

was examined for the case of the paved road as in the expression below.

n n
yt   nt 1   yt 1  t  dl  dj ………………………..……. (4.10.2)
i 1 i 1

H 0 :   0
This null hypothesis was examined using the F- statistic test to determine whether lagged values

of the paved road infrastructure had links to (caused) national income. Similarly a counter

regression was analyzed to determine the type of causation that is evaluating national income on

the unpaved road infrastructure as represented in the equation (xiii) below.

n n
mt  mt 1  yt 1  t  dl  dj
i 1 i 1 ……..…………………...…. (4.11.1)

dl Is dummy for financial liberalization

H 0 :   0
n n
nt   nt 1   yt 1   t  dl  dj ...................................... (4.11.2)
i 1 i 1

H0 :   0

Similarly for the above expressions xiii and xiv for national income to cause the respective

infrastructure variables the null hypotheses are rejected implying that the coefficients are

44
statistically not equal to zero. Due to the reforms that took place, the study also incorporated in

dummy variables to cater for such reforms. In this case, the study examined if the trend of

growth was also influenced by these reforms.

45
 CHAPTER FIVE

PRESENTATION AND DISCUSSION OF RESULTS

This chapter presents and discusses results on the impact of road expenditure on economic

growth plus the direction of causality between the two. It also includes results from the unit root

test and error correction model for establishing the long run relationship between economic

growth rate and growth rate in road infrastructure. All the variables that were used in this chapter

were transformed into logarithms and therefore, their first difference represents growth rates.

5.1 Descriptive Statistics

Table 5.1 Shows the descriptive statistics of the percentage growth rates of the variables used in

the study.

% Growth rate of % Growth rate % Growth rate % Growth % Growth

direct capital stock of unpaved roads of Paved roads rate of rate of

population GDP

Mean 25.453 3.709 2.148 3.3107 9.146

Median 12.165 0.085 2.090 3.359 5.0347

Maximum 245.639 125.849 4.808 3.645 62.828

Minimum -71.544 -14.842 0.048 2.990 -41.814

Std .Dev. 52.571 22.973 1.509 0.181 23.684

Skewness 2.4155 5.067 -0.009 -0.099 0.634

Kurtosis 11.259 27.541 1.623 2.3097 3.665

Observation 31 31 31 31 31

Source; Own computations based on data from World development indicators (World Bank) and

Background to the Budget MFPED (various issues)

Unpaved road coverage has a mean growth rate of 3.7 percent with some periods registering a

decrease of -15 percent up to a maximum of 126 percent. It can be noted that the deviation from

46
the mean growth rate is 23 percent implying variability in unpaved road coverage. The negative

value may be attributed to the rain seasons which on many occasions wash away some roads and

Secondly, as a result of the gradual increase in the length of paved roads bringing about

reduction in coverage of the Unpaved road. Paved road coverage has a mean growth rate of 2.1

percent with minimum road coverage of 0 percent up to a maximum of 4.8 percent. It can be

noted that the deviation from the mean growth rate is 1.5 percent implying variability in paved

road coverage. The positive skewness values, in the three variables indicate that there are higher

chances of the variables increasing than falling. The negative skewness in the paved road growth

and population are almost insignificant.

It can be noted that population growth rate has a mean value of 3.3percent with a maximum

value of 3.6 percent and lowest value of 2.9 percent (this may be as a result of continued

government effort to encourage the population through continued medical facilities and birth

controls). Labour growth rate also has a standard deviation of 0.2 and this figure is relatively

small compared to that of other forms of capital growth rate with a standard deviation of 52

percent and the rest of the variable. Growth in other direct physical capital has the largest

standard deviation implying that it has more variability compared to the rest of the variables and

also registered the highest growth rate.

5.2 Unit root test

According to Cheung and Lai (1999) and Pedroni (1998a) there is considerable evidence for

presence of unit roots in GDP time series data as such there was need to make the data

47
stationary. The study hence tested for unit root test in the process of cleaning data and this was

mainly carried out to get the appropriate characteristic form of the data that was used. In most

cases, most of the time series data is non-stationary and this was confirmed by the data that was

used. ADF and DF tests were carried out to test for the presence of unit root in the data. None of

the variables was stationary at level apart from population. All the variables that were used apart

from population were stationary after first difference meaning that they were integrated of the

same order one and also the numbers of lags were different for different variables. The computed

ADF values or the tau statistic were more than the critical values in absolute sense meaning that

they are stationary. This implies that working with the new differenced data set didn’t yield

spurious results.

The appropriate number of lags were chosen basing on Akaike and Schwarz info criterion by the

Schwarz formula of P max= 12(n/100) ^0.25 and also considering the lowest AIC information

criteria. That is including the number of lags where Akaike info criterion is lowest. The major

implication is that capital expenditure, gross domestic product and road coverage are not

stationary however, their growth rates are stationary, since the study transformed the variables

into logarithms and therefore, the first difference represents growth rate in these variables. Lags

are mainly considered to reduce auto-correlation that may exist among variables over time.

Table 5.2 unit root test results of the of the variables before any transformation

Variable Critical value at 1% ADF computed I(d) Constant Trend

GDP -2.645 -2.756 I(1) No No

CAPITAL -3.675 -4.611 I(1) Yes No

POPULATION -4.295 -4.341 I(0) Yes Yes

48
UNPAVED ROAD -2.645 -5.052 I(1) No No

PAVED ROADS -3.675 -3.722 I(1) Yes No

Note constant and trend were considered at 5% level of significance

5.3 Cointegration test

Following the unit root test of the variables presented in Table5.2 it was established that the

respective logs of the variables were also all integrated of order one (I (1)), except for the labour

variable which was I (0) that is though they were non stationary, their first differences are

stationary. Although there was a high possibility of obtaining spurious regressions when working

with non-stationary time series data sets first discovered by (Yule, 1926), it was quite tempting

that regressing the log of national income against log of road coverage that is equation (4.8.1)

could lead to residuals which were stationary. According to Granger and Newbold, (1974) the

rule of thumb to suspect whether the estimated regression is spurious is when the coefficient of

determination is more than the Durbin Watson (R2>d) from results.

The study tested for the stationarity of residuals and found out that they were stationary implying

that though individual variables were not stationary the combination of the variables yielded

stationary residuals that were stationary thus there exist a long run relationship between the road

coverage and GDP variable. The researcher hence concluded that the variables are co integrated.

This also implies shocks that happen in any of the variables can be traced in the long run. Testing

for stationarity of the residuals is one of the simplest tests that can be carried out to test for the

cointergration of variables and once the residuals are stationary then variables are co integrated.

The results are presented in table 5.3.

49
Table 5.3 Residuals test for unit root from OLS estimation equation (4.8.1)

ADF Test Statistic -2.456 1% Critical Value* -2.642

5% Critical Value -1.953

10% Critical Value -1.622

From the Table 5.3, it is shown that the unit root test of the residual obtained after running

equation (4.8.1) are stationary at 5 percent and to be exact at 2 percent, this is because the

absolute value of the computed test result is higher than that of the critical value consequently we

reject the null for presence of unit root as shown in the appendix attached. The results indicate

that there is existence of a long run relationship from the cointegration test. This result is in line

with findings of (Ziramba, 2009) who established a long run relationship between government

expenditure and national income in South Africa. The study also conducted a Johansen

cointegration test to compliment the residual test above. Whenever the likelihood ratios exceed

the critical values at either 5 percent or 1 percent then the variables are cointegrated. In this case

at 5 percent at most one cointegrating equation hypothesis is rejected consequently the

alternative of at least one cointegrating equation is failed to be rejected and the results are

presented in the Table 5.4.

Table 5.4 Johansen Cointegration Test

Series: Y M N H

Warning: Critical values were derived assuming no exogenous series

Likelihood 5 Percent 1 Percent Hypothesized

Eigen value Ratio Critical Value Critical Value No. of CE(s)
0.867 89.294 47.21 54.46 None **
0.574 32.731 29.68 35.65 At most 1 *
0.249 8.8266 15.41 20.04 At most 2
0.0276 0.7858 3.76 6.65 At most 3

50
*(**) denotes rejection of the hypothesis at 5% (1%) significance level

L.R. test indicates 2 cointegrating equation(s) at 5% significance level.

From the results above the study establishes that there exists a long run relationship between

economic growth and road infrastructure. This has been proven by both the residual test and the

Johansen test. Due to this output there was need to investigate the behavior of the variables in

the short run and this called for the ECM as in the proceeding section.

5.4 Error Correction Mechanism

Table 5.5 Short run relationship

Variable Coefficient t-Statistic Prob.

∆ unpaved Road growth rate 2.39 2.056 0.050
∆ paved Road growth rate 0.085228 0.495 0.626
∆ Capital growth rate 0.236 3.029 0.006
DJ -0.29 -1.983 0.058
ECM(-1) 0.237 1.732 0.000
Dependent variable change in growth rate of GDP

Following the cointegration test results, the study also conducted a short run relationship

between growth rate in road coverage and growth rate in GDP in which the ECM was employed.

After employing the ECM, changes in growth rates in unpaved road infrastructure was found to

be significant in the short run. That is, a percentage change in the coverage of unpaved roads

leads to a 2% increase in the GDP, this can be attributed to the fact that the rural areas where the

biggest proportion of the population resides is engaged in agriculture and these areas are linked

by unpaved roads consequently easing transportation of produce.

Paved road was not significant and this could be due to the fact that since we are talking about

the short run, the period could be short to realize any contribution of the paved road since they

normally need relatively longer period for completion. Among other short run determinants of

growth rate in GDP included: direct physical capital with a positive effect. The labour variable

51
was found to be insignificant consequently dropped from the model, this may be as a result of the

nature of the population with the biggest proportion of about 85 percent in 2010 (UBOS, 2010)

residing in rural areas and engaged in subsistence agriculture which mainly has no great impact

on GDP.

Secondly, since Uganda’s population growth is not accompanied with the improvement in labour

it leads to retardation in GDP as a result of the majority being dependants. The lagged error term

is also significant at 1 percent level of significance implying that the variation between the

observed and the expected results don’t take up time to be equal. The gap between the estimated

and the expected rate will not take time to be covered up. This instantaneous adjustment can be

mainly attributed to employment opportunities that arise during the construction of roads

especially in the ground breaking process for both the paved and unpaved. The structural breaks

represented by the dummy variables are seen to have no impact on the growth rate in the short

run. The short run constant is significant implying that there are other factors that are significant

though not included in the model such factors may include the political environment.

5.5 Impact of road coverage on economic growth rate.

Table 5.6 OLS analysis without the dummy variables

Variable Coefficient Std. Error t-Statistic

C 13.797** 4.475 3.085
unpaved Road 0.266 0.142 1.874
paved road 2.189 1.264 1.733
Capital stock 0.488** 0.075 6.504
labour -1.221 0.781 -1.564
R-squared 0.927274
The values with asterisks are statistically significant at 1% level of significance.

52
The study investigated the effect of road infrastructure provision on economic growth. Table 5.6

presents the findings obtained before the dummy variables for liberalization and currency

reform of 1987/88 were incorporated. It can be noted that R2 is 0.93 indicating that the variables

explain about 93 percent of the model as shown in the appendix 2. However, this high coefficient

of determination may raise suspicions of multicollinearity but since there was transformations to

natural logarithms as well as differencing to make the variables stationary the high value of the

R2 does not affect the interpretation of the results. Expenditure on other types of directly

productive capital, for example machinery, has a significant positive effect on current GDP.

Similarly, coverage unpaved road infrastructure has a positive and statistically significant effect

on the GDP. It is important to note that the lags to the variables of interest were all statistically

insignificant and as such were excluded from the model. This implies that the most contributing

factor to growth rate in GDP is the current expenditure on directly productive capital stock and

road infrastructure. The major reason for the significancy of capital stock is that capital stock

involves a number of components which cut across different sectors for example the direct

investment in energy; other means of transport by government as well as direct investment by the

private individuals greatly have an effect on GDP. Unpaved roads do have a positive effect on

GDP due to fact that they create a link between the production centres (especially for agricultural

production) and the market outlets. The effect of paved roads on GDP, though positive is not

statistically significant. This is perhaps because paved roads only account for 16 percent of total

national road network in the country. The effect of investment in roads on GDP is more

significant for unpaved roads.

53
These results are partly in agreement with results of other scholars for example Olugbenga and

Owoye (2007) who established a long term relation between government expenditure on

infrastructure on economic growth. Also in line with (Fan et al, 2007) who covered road

expenditure amongst different regions in Uganda and found out that expenditure on marrum and

tarmac were not significant at all however expenditure on feeder roads played a vital role on

growth and poverty reduction using the cost benefit analysis approach. The results are however

contrary to (Ziramba, 2009), (Laudau, 1983) and (Devarajan, Swaroop and Zou, 1996) also

found a negative effect of government expenditure on roads towards economic growth.

The study also catered for structural breaks by incorporating dummies for trade liberalization and

foreign exchange reform in1987 and1988, respectively. This was in order to see how such

reforms influenced both road expenditure and growth; the results indicate that such reforms have

not impacted much on growth. These results are presented as in the table below.

Table 5.7 OLS analysis with structural shocks

Variable Coefficient Std. Error t-Statistic

C 17.313** 5.512 3.141

paved road 2.828* 1.392 2.031

Unpaved road 0.377* 0.185 2.042

Capital stock 0.486** 0.076 6.395

Population -1.786 0.920 -1.941

DJ 0.014 0.015 0.974

DL 0.111 0.149 0.741

The values with asterisks are statistically significant at 1% and 5% level of significance.

54
These results when the dummy for foreign exchange liberalization and trade reform were

incorporated were compared with those without the dummies there were no significant changes

in the coefficients. Still it was expenditure on other direct capital stock as well as road

infrastructure that could explain growth rate in GDP as well as road infrastructure.

5.6 Estimation of the direction of causality between road coverage and GDP.
Table 5.8 presents the results for Granger causality test.
Pairwise Granger Causality Tests
Sample: 1980 2010
Lags: 1
Null Hypothesis: F-Statistic Probability
Y does not Granger Cause N 1.79990 0.19090

N does not Granger Cause Y 1.38455 0.24960

N(-1) does not Granger Cause Y 1.38455 0.24960

Y does not Granger Cause N(-1) 1.79990 0.19090

Y does not Granger Cause M 3.05835 0.09169

M does not Granger Cause Y 2.26657 0.14380

M(-1) does not Granger Cause Y 2.26657 0.14380

Y does not Granger Cause M(-1) 3.05835 0.09169

The study investigated the direction of causality between the growth rates of the variables. When

we look at GDP not granger causing the paved road variable both in current and previous period

we reject the null consequently establish a unidirectional causality between GDP and road

coverage on current unpaved road as well as on lagged unpaved road infrastructure. That is

causality moves from GDP to the unpaved road variable but not the reverse. From Table 5.8 we

can see that we reject the null that expenditure on GDP does not granger cause unpaved road at

9 percent and fail to reject the alternative. Similarly we reject the null for GDP granger causing

lagged unpaved road coverage at 9 percent and fail to reject the alternative this result is in line

55
with that of Kalam and Aziz, (2008). These results are also partly in agreement with Olugbenga

and Owoye, (2007) who established a unidirectional causality from GDP to government

expenditure thus confirming the Keynesian hypothesis. This is due to the fact that as national

income increases government automatically realizes the need to increase on accessibility of those

areas which could have led to the increase in income. Secondly, the construction of unpaved

roads is relatively cheap, may explain why the country has more coverage than the paved road.

They are however, in disagreement with Liu Chih-HL, Hsu, Younis, (2008), and Donald,

Shuanglin (1993) who established a unidirectional causality from total government expenditure

to GDP.This may be a case especially looking infrastructure in terms of the amounts rather than

the coverage on ground in terms of kilometers.

56
 CHAPTER SIX
CONCLUSIONS, RECOMMENDATIONS AND AREAS FOR FURTHER RESEARCH

6.1. Introduction

This chapter presents a summary of the findings and draws conclusions on effect of road

infrastructure on economic growth based on the findings. It also includes policy

recommendations and areas for further research.

6.2. Conclusion

This study focused on the effect of government expenditure on road infrastructure (both paved

and unpaved) would have on economic growth of the country. It was established that in the long

run a percentage increase in both paved and unpaved road had effects on the economic growth.

Short run analysis too established a positive effect from road infrastructure to economic growth.

This helped to test the hypothesis which confirmed that government expenditure on road

infrastructure would accelerate the growth of the economy and this is strengthened by the

positive causal relationship. It is however, important to note that the study only concentrated on

national roads and left out district roads due to the difficulty in obtaining data. Road transport

remains the major mode facilitating movement of goods and people across the country to

accelerate economic and business activities given the fact that Uganda is land locked. Similarly

important to note is that the other capital stock variable has a very high significant value to GDP.

6.3 Recommendations

Arising from the conclusion are the following recommendations:

57
From the findings, the study recommends for increased construction and regular maintenance of

the unpaved roads. This has an advantage in way that the paved roads have a long life span

compared to the unpaved roads. It will also help in providing increased access of rural areas to

the various markets consequently stimulating the agricultural sector and also will increase the

country’s competitiveness especially in the East African region through the reduced transaction

costs brought about by increased access across borders. Putting much emphasis on the paved

road has a great advantage in that the road can be used throughout the year as opposed to the

unpaved that become dusty during the dry season which impact health hazards to the populace

and impassable during heavy rains seasons. Following the granger causality test its clear that

unpaved road which connects most rural areas should be increased in terms of length due to the

multiplier effect of the unpaved roads, brought about by boosting up tourism, increasing access

to medical facilities, as well as linking up markets to farmland. Similarly due to the long duration

periods of paved roads the government needs to increase its coverage in order to sustain its

economic growth.

Directly productive capital has been found out to have a positive effect on GDP as such there is

need for both government and the private sector to increase their investment. On the side of

government, it needs to concentrate on investments which require lump sum capital with low

rates of returns for example in the energy sector ,railway reconstruction to supplement road

transport as well as provide a conducive investment atmosphere to attract foreign investors. This

may be in form of ensuring security in all parts of the country, tax incentives as well as availing

relatively affordable investment loans to investors

58
6.4. Areas for further research

This study examined the effect of the infrastructure provision to the economic growth of Uganda

and established a positive relation between paved road and economic growth. It was also

established that, the country has low supply of road infrastructure to bring about sustainable

growth of the economy. It is also important to note that the study mainly concentrated on

national roads leaving out district and local council roads, future studies are therefore encouraged

to find out the effect of all roads on the economic performance of the country.

59
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65
 APPENDIX 1

Table 5.3 Unit root test on residuals

ADF Test Statistic -2.455671 1% Critical Value* -2.6423

5% Critical Value -1.9526

10% Critical Value -1.6216

*MacKinnon critical values for rejection of hypothesis of a unit root.

Augmented Dickey-Fuller Test Equation

Dependent Variable: D(E)

Method: Least Squares

Date: 12/03/14 Time: 20:44

Sample(adjusted): 1981 2010

Included observations: 30 after adjusting endpoints

Variable Coefficient Std. Error t-Statistic Prob.

E(-1) -0.274957 0.111968 -2.455671 0.0203

R-squared 0.165117 Mean dependent var 0.016685

Adjusted R-squared 0.165117 S.D. dependent var 0.184172

S.E. of regression 0.168281 Akaike info criterion -0.693594

Sum squared resid 0.821239 Schwarz criterion -0.646888

Log likelihood 11.40391 Durbin-Watson stat 1.451445

66
Table 5.4 Cointegration test Johansen Test

Date: 5/02/15 Time: 22:06

Sample: 1980 2010
Included observations: 29
Series: Y M N H P
Lags interval: 1 to 1
Data Trend: None None Linear Linear Quadratic

Rank or No Intercept Intercept Intercept Intercept Intercept

No. of CEs No Trend No Trend No Trend Trend Trend
Log Likelihood by
Model and Rank
0 242.903910662 242.903910662 293.343884347 293.343884347 302.477283044
1 296.787243885 296.795481395 310.211363562 310.347252684 319.389392722
2 310.988635466 313.602307887 323.904313642 324.167968032 332.374826538
3 321.98353107 327.273070378 333.393326359 337.13849066 339.307290523
4 327.15718835 333.904171061 335.964179914 344.058186418 344.058187428
5 327.519119561 336.296013765 336.296013762 346.263005803 346.263005803
Akaike
Information
Criteria by Model
and Rank
0 -15.0278559077 -15.0278559077 -18.1616471964 -18.1616471964 -18.4467091754
1 -18.0542926817 -17.9858952686 -18.6352664525 -18.5756725989 -18.9234063946
2 -18.3440438253 -18.3863660612 -18.889952665 -18.7702046919 -19.129298382
3 -18.4126573152 -18.5705565778 -18.8547121627 -18.9061028042 -18.917744174
4 -18.0798060931 -18.2692531766 -18.3423572354 -18.6247025116 -18.555737064
5 -17.4151116938 -17.6755871562 -17.675587156 -18.0181383313 -18.0181383313
Schwarz Criteria by
Model and Rank
0 -13.849152606 -13.849152606 -16.7472032343 -16.7472032343 -16.796524553
1 -16.4041080593 -16.2885625142 -16.7493411698 -16.6425991841 -16.8017404515
2 -16.2223778822 -16.1704038539 -16.5325460616 -16.3185018243 -16.5361511182
3 -15.8195100514 -15.8359649178 -16.0258242386 -15.9357704839 -15.8531155896
4 -15.0151775087 -15.0160320639 -15.0419879906 -15.1357407385 -15.0196271589
5 -13.8790017887 -13.9037365907 -13.9037365905 -14.0105471054 -14.0105471054
L.R. Test: Rank = 3 Rank = 3 Rank = 2 Rank = 3 Rank = 1

Error correction mechanism

Dependent Variable: DY
Method: Least Squares
Date: 05/18/15 Time: 08:36
Sample(adjusted): 1981 2010
Included observations: 30 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
DM 2.399020 1.167119 2.055506 0.0504
DN 0.085228 0.172657 0.493626 0.6259
DH 0.235931 0.077890 3.029010 0.0056

67
 DJ -0.290033 0.146231 -1.983388 0.0584
E(-1) -0.118512 0.109777 -1.079573 0.2906
R-squared 0.490057 Mean dependent var 0.085190
Adjusted R-squared 0.408466 S.D. dependent var 0.188795
S.E. of regression 0.145205 Akaike info criterion -0.870334
Sum squared resid 0.527110 Schwarz criterion -0.636801
Log likelihood 18.05501 F-statistic 6.006271
Durbin-Watson stat 1.991756 Prob(F-statistic) 0.001573

Table 5.6 Estimation of the effect of road expenditure on GDP

Dependent Variable: Y
Method: Least Squares
Date: 12/05/14 Time: 18:55
Sample(adjusted): 1981 2010
Included observations: 30 after adjusting endpoints
Variable Coefficient Std. Error t-Statistic Prob.
C 16.73465 5.911820 2.830711 0.0100
M 0.559685 3.003389 0.186351 0.8540
M(-1) 1.748190 2.894844 0.603898 0.5524
N 0.188570 0.248825 0.757841 0.4570
N(-1) 0.008332 0.335715 0.024819 0.9804
H 0.559514 0.101449 5.515211 0.0000
P -1.497450 0.919064 -1.629321 0.1182
DL -0.289051 0.198444 -1.456588 0.1600
DJ -0.172370 0.194771 -0.884990 0.3862
R-squared 0.927566 Mean dependent var 22.42119
Adjusted R-squared 0.899972 S.D. dependent var 0.583092
S.E. of regression 0.184416 Akaike info criterion -0.299919
Sum squared resid 0.714196 Schwarz criterion 0.120440
Log likelihood 13.49878 F-statistic 33.61473
Durbin-Watson stat 1.251922 Prob(F-statistic) 0.000000

Table 5.7 OLS without dummy variables

Dependent Variable: YP
Method: Least Squares
Date: 5/10/15 Time: 18:30
Sample: 1980 2010
Included observations: 31
Variable Coefficien Std. Error t-Statistic Prob.
t
C 13.79696 4.474504 3.083461 0.0048
NP 2.189841 1.263447 1.733227 0.0949
MP 0.265659 0.141758 1.874035 0.0722
HP 0.487544 0.074962 6.503851 0.0000
LP -1.221501 0.781114 -1.563794 0.1300
R-squared 0.928617 Mean dependent var 22.37348

68
Adjusted R-squared 0.917635 S.D. dependent var 0.631851
S.E. of regression 0.181337 Akaike info criterion -
0.430230
Sum squared resid 0.854960 Schwarz criterion -
0.198942
Log likelihood 11.66857 F-statistic 84.55811
Durbin-Watson stat 1.019692 Prob(F-statistic) 0.000000

Table 5.7 OLS relationship with structural reforms

Dependent Variable: YP
Method: Least Squares
Date: 12/11/14 Time: 17:46
Sample: 1980 2010
Included observations: 31
Variable Coefficient Std. Error t-Statistic Prob.
C 17.31335 5.512060 3.140995 0.0044
NP 2.827594 1.391917 2.031438 0.0534
MP 0.376989 0.184585 2.042362 0.0523
HP 0.485957 0.075995 6.394601 0.0000
LP -1.786073 0.920177 -1.941010 0.0641
DJ 0.014437 0.014823 0.973923 0.3398
DL 0.111044 0.149791 0.741327 0.4657
R-squared 0.932662 Mean dependent var 22.37348
Adjusted R-squared 0.915828 S.D. dependent var 0.631851
S.E. of regression 0.183315 Akaike info criterion -0.359539
Sum squared resid 0.806508 Schwarz criterion -0.035735
Log likelihood 12.57286 F-statistic 55.40219
Durbin-Watson stat 1.221499 Prob(F-statistic) 0.000000

OLS estimation without the paved road variable

Dependent Variable: YP
Method: Least Squares
Date: 05/17/15 Time: 11:53
Sample: 1980 2010
Included observations: 31
Variable Coefficient Std. Error t-Statistic Prob.
C 9.850654 4.358848 2.259922 0.0328
MP 0.335639 0.194594 1.724818 0.0969
HP 0.514316 0.079236 6.490962 0.0000
LP -0.055157 0.368523 -0.149669 0.8822
DJ 0.003156 0.014578 0.216480 0.8304
DL 0.066015 0.157133 0.420124 0.6780
R-squared 0.921084 Mean dependent var 22.37348
Adjusted R-squared 0.905301 S.D. dependent var 0.631851
S.E. of regression 0.194441 Akaike info criterion -0.265388
Sum squared resid 0.945185 Schwarz criterion 0.012158
Log likelihood 10.11352 F-statistic 58.35842
Durbin-Watson stat 1.020648 Prob(F-statistic) 0.000000

OLS estimation without the unpaved road variable

Dependent Variable: YP

69
Method: Least Squares
Date: 05/17/15 Time: 12:02
Sample: 1980 2010
Included observations: 31
Variable Coefficient Std. Error t-Statistic Prob.
C 14.97259 5.723344 2.616056 0.0149
NP 2.514103 1.468553 1.711960 0.0993
HP 0.478975 0.080589 5.943400 0.0000
LP -1.286283 0.941622 -1.366029 0.1841
DJ 0.008845 0.015465 0.571959 0.5725
DL -0.075456 0.126044 -0.598652 0.5548
R-squared 0.920959 Mean dependent var 22.37348
Adjusted R-squared 0.905151 S.D. dependent var 0.631851
S.E. of regression 0.194595 Akaike info criterion -0.263807
Sum squared resid 0.946680 Schwarz criterion 0.013739
Log likelihood 10.08901 F-statistic 58.25833
Durbin-Watson stat 0.926776 Prob(F-statistic) 0.000000

Table 5.8 Causality Results

Pairwise Granger Causality Tests

Date: 12/06/14 Time: 06:39
Sample: 1980 2010
Lags: 1
Null Hypothesis: Obs F-Statistic Probability

N does not Granger Cause M 30 6.66183 0.01560

M does not Granger Cause N 3.74001 0.06367

Y does not Granger Cause M 30 1.79990 0.19090

M does not Granger Cause Y 1.38455 0.24960

M(-1) does not Granger Cause M 30 NA NA

M does not Granger Cause M(-1) NA NA

N(-1) does not Granger Cause M 30 6.66183 0.01560

M does not Granger Cause N(-1) 3.74001 0.06367

Y does not Granger Cause N 30 3.05835 0.09169

N does not Granger Cause Y 2.26657 0.14380

M(-1) does not Granger Cause N 30 3.74001 0.06367

N does not Granger Cause M(-1) 6.66183 0.01560

N(-1) does not Granger Cause N 30 NA NA

N does not Granger Cause N(-1) NA NA

70
M(-1) does not Granger Cause Y 30 1.38455 0.24960
Y does not Granger Cause M(-1) 1.79990 0.19090

N(-1) does not Granger Cause Y 30 2.26657 0.14380

Y does not Granger Cause N(-1) 3.05835 0.09169

N(-1) does not Granger Cause M(-1) 30 6.66183 0.01560

M(-1) does not Granger Cause N(-1) 3.74001 0.06367

71
 Appendix Two

Data set used before transformations

Direct K paved
Gross K Road expenditure Roads unpaved
Year Population GDP ($) expenditure($) expenditure($) ($) km km
1980 12549779 1244610000 76600000 49480037 27119963 1632 8605
1981 12930714 1337300000 75000000 25234819 49765181 1685 8541
1982 13324390 2177500000 198000000 25991864 172008136 1733 8428
1983 13738114 2240333333 166000000 17847746 148152254 1768 8367
1984 14181630 3615647464 294307749 23764181 270543568 1828 8273
1985 14661481 3519695203 307340435 11183967 296156467 1829 8261
1986 15180721 3923244143 331393472 5390386 326003086 1902 8014
1987 15736176 6269521859 609285669 3037275 606248394 1979 7937
1988 16320417 6508931651 702466667 1044565 701422101 2050 6759
1989 16922648 5276480933 587600948 388001519 199599430 2079 6413
1990 17534839 4304399516 546834360 216191929 330642431 2080 6149
1991 18156095 3321729208 503948345 131702097 372246248 2096 5958
1992 18788440 2857457786 455448132 80578356 374869775 2097 5960
1993 19430461 3220439178 490981281 70507245 420474035 2099 6253
1994 20081152 3990430537 585868082 86476392 499391689 2105 6727
1995 20740726 5755818793 714413688 110951220 603462468 2149 6797
1996 21407693 6044585327 1219355425 111431229 1107924196 2220 6807
1997 22084527 6269333313 1139674298 116958688 1022715609 2289 6895
1998 22780451 6584972907 1083014215 115605368 967408847 2371 6971
1999 23507800 5973058906 1172666368 103842606 1068823762 2485 6973
2000 24275641 6193246632 1206681132 200882374 1005798758 2565 6987
2001 25088033 5840503703 1127337495 184352788 942984707 2642 7002
2002 25943441 6178563467 1249146299 195490492 1053655807 2700 7009
2003 26838428 6336696289 1329701321 190454851 1139246470 2742 7023
2004 27766986 7940362663 1599640840 206233425 1393407415 2751 7029
2005 28724869 9013834490 2015055848 252714465 1762341382 2781 7031
2006 29711397 9942597753 2100907695 269185117 1831722578 2837 7043
2007 30728747 12292813801 2714628866 345229382 2369399483 2848 7052
2008 31778799 14239026768 3271811368 390596872 2881214496 2968 7532
2009 32864328 14824492062 3254397453 377741692 2876655761 2989 17011
2010 33987213 16030996179 3761451618 379324081 3382127537 3112 16888

72
Data set after transformation to natural logarithms and growth rates

Y Pop % H%
%growth N% M% growth growth
Year lny lnp lng lnN LnM rate growth growth rate rate
1980 20.9421 16.3452 17.1158 7.3976 9.0601 -41.8141 1.0000 1.0000 3.0030 1.0000
1981 21.0139 16.3751 17.7228 7.4295 9.0526 7.4473 3.2475 -0.7438 2.9902 83.5002
1982 21.5014 16.4051 18.9631 7.4576 9.0393 62.8281 2.8487 -1.3230 2.9991 245.6395
1983 21.5299 16.4357 18.8138 7.4776 9.0321 2.8856 2.0196 -0.7238 3.0578 -13.8690
1984 22.0085 16.4675 19.4159 7.5110 9.0208 61.3888 3.3937 -1.1235 3.1773 82.6118
1985 21.9816 16.5007 19.5064 7.5115 9.0193 -2.6538 0.0547 -0.1451 3.3276 9.4672
1986 22.0902 16.5355 19.6024 7.5507 8.9889 11.4655 3.9913 -2.9900 3.4803 10.0780
1987 22.5590 16.5715 20.2228 7.5903 8.9793 59.8045 4.0484 -0.9608 3.5936 85.9640
1988 22.5964 16.6079 20.3686 7.6256 8.8186 3.8186 3.5877 -14.8419 3.6455 15.6988
1989 22.3865 16.6442 19.1118 7.6396 8.7661 -18.9348 1.4146 -5.1191 3.6236 -71.5436
1990 22.1829 16.6797 19.6165 7.6401 8.7240 -18.4229 0.0481 -4.1166 3.5537 65.6530
1991 21.9238 16.7145 19.7351 7.6478 8.6925 -22.8294 0.7692 -3.1062 3.4817 12.5827
1992 21.7732 16.7488 19.7421 7.6483 8.6928 -13.9768 0.0477 0.0336 3.4235 0.7048
1993 21.8928 16.7824 19.8569 7.6492 8.7408 12.7029 0.0954 4.9161 3.3600 12.1654
1994 22.1072 16.8153 20.0289 7.6521 8.8139 23.9095 0.2859 7.5804 3.2940 18.7687
1995 22.4735 16.8476 20.2182 7.6728 8.8242 44.2405 2.0903 1.0406 3.2318 20.8395
1996 22.5224 16.8793 20.8258 7.7053 8.8257 5.0169 3.3039 0.1471 3.1651 83.5945
1997 22.5589 16.9104 20.7457 7.7359 8.8386 3.7182 3.1081 1.2928 3.1127 -7.6908
1998 22.6081 16.9414 20.6901 7.7711 8.8495 5.0347 3.5824 1.1022 3.1026 -5.4078
1999 22.5105 16.9728 20.7898 7.8180 8.8498 -9.2926 4.8081 0.0287 3.1430 10.4831
2000 22.5467 17.0050 20.7290 7.8497 8.8518 3.6863 3.2193 0.2008 3.2141 -5.8967
2001 22.4881 17.0379 20.6646 7.8793 8.8540 -5.6956 3.0019 0.2147 3.2918 -6.2452
2002 22.5444 17.0714 20.7755 7.9010 8.8550 5.7882 2.1953 0.1000 3.3528 11.7363
2003 22.5696 17.1053 20.8536 7.9164 8.8569 2.5594 1.5556 0.1997 3.3916 8.1232
2004 22.7952 17.1394 21.0550 7.9197 8.8578 25.3076 0.3282 0.0854 3.4013 22.3096
2005 22.9220 17.1733 21.2899 7.9306 8.8581 13.5192 1.0905 0.0285 3.3916 26.4771
2006 23.0201 17.2070 21.3285 7.9505 8.8598 10.3038 2.0137 0.1707 3.3767 3.9369
2007 23.2323 17.2407 21.5859 7.9544 8.8611 23.6378 0.3877 0.1278 3.3668 29.3536
2008 23.3793 17.2743 21.7815 7.9956 8.9269 15.8321 4.2135 6.8066 3.3601 21.6010
2009 23.4195 17.3079 21.7799 8.0027 9.7416 4.1117 0.7075 125.8497 3.3588 -0.1582
2010 23.4978 17.3415 21.9418 8.0430 9.7344 8.1386 4.1151 -0.7231 3.3597 17.5715

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