Elsevier

Habitat International

Volume 35, Issue 1, January 2011, Pages 118-125
Habitat International

Role of construction in economic development: Review of key concepts in the past 40 years

https://doi.org/10.1016/j.habitatint.2010.06.003Get rights and content

Abstract

This paper reviews the studies completed in the past four decades which examined the role of the construction industry in economic development. Findings from these studies demonstrated the significant relationship between the construction industry and economic growth in developing countries. These findings also suggested that the relationship appears to be more complicated than originally thought. It was noted that further expansion of the construction industry beyond the adaptive capacity of the economy will only waste national resources. Little is known about the impact that the adaptive capacities of other sectors in the economy have on the construction sector. This knowledge gap requires further study in order to formulate a more effective long-term strategy for construction industry development.

Introduction

Empirical evidence that pointed to the significant role of the construction industry in economic development was first surfaced by D. A. Turin in the 1960s during his tenure at University College London. Since then, many such studies have been completed by others over the past 40 years in further attempts to provide a clearer understanding of the relationship between construction and economic development. This paper reviews the studies completed in the past four decades which evaluated the role of the construction sector, with focus on infrastructural construction, in the process of economic development. Contributions of the construction industry come from the linkages between the construction sector and the economy as a whole, and the intersectoral linkages between construction and other sectors as well. The use of construction investments as a tool for the government to stabilize the economy also shows the industry’s key position in the national development strategy. Despite these prominent roles, some current concerns of the industry’s performance as an economic activity to stimulate economic growth remain. These concerns will be identified in the paper for further research in the Conclusion section.

Section snippets

Capital formation

The productive capacity of an economy is usually described in terms of the complete utilization of factors of production; that is the full employment of the factors of production (labour and capital). Hence, the productive capacity determines the aggregate supply or national output of an economy in the long run. If there are changes in the total capital stock, the fixed amount of national output will change accordingly. One way for an economy to expand production or grow is to invest in capital

Construction and sectoral output

The ability of the construction industry to stimulate economic growth also comes from the strong linkages between construction and other sectors in the economy. The construction industry is one of the top four out of twenty economic sectors in terms of intersectoral linkages, backward and forward linkages (Riedel & Schultz, 1978). The important role of construction through a complex set of inter-relationships was also highlighted by Ofori (1990).

Construction and macroeconomic stabilization

The contribution of construction in the economy has also been measured by construction employment as a share of total employment (Strassmann, 1970, Turin, 1978, Wells, 1985). Turin (1978) suggested that since employment in construction correlated positively with economic growth, there is a potential use of construction to generate sustained employment. Turin (1978) also argued that the misuse of construction by the government as a cheap way to absorb unskilled unemployment through ill-planned

Government institutions for construction industry development

The role of the construction industry in the economy recognized by academics has led to the recommendation of creating a government agency which specifically deals with the development of the construction industry. Having observed the critical role of construction in the developing economies, Turin (1978) suggested the establishment of such a government department. The roles and functions of such an agency were furthered analyzed by Ofori (1985). Several countries have realized the constraints

Conclusion

The key concepts relating to the role of the construction industry in economic development over the past 40 years were reviewed. Much of the existing empirical literature on the linkage between construction and economic growth seeks to capture this effect through observation of the relationship between increases in the construction outputs (measured by the share of construction in GFCF or value added) and some measures of aggregate output (GDP or GNP). Many of the findings from these studies

Recommendations for further research

In the course of this study, several issues were also identified. However, because of length limitations, these issues have not be elaborated further in detail here but are instead recommended for further studies. These issues include:

  • 1.

    The apparent mismatch between the construction cycle and the business cycle can lead to an inadequate or excess supply of infrastructure in the short term. Following the seasonal up-swings and down-swings of the economy, three related scenarios may be discernible

Acknowledgement

This research is supported by the Department of Building, School of Design and Environment, National University of Singapore. The authors would also like to thank the two anonymous reviewers for their very constructive comments and suggestions. The recommended areas for further research, as annotated above, are attributed in the main to them.

References (95)

  • G. Ofori

    Practice of construction industry development at the crossroads

    Habitat International

    (1994)
  • S. Park

    Linkages between industry and services and their implications for urban employment generation in developing countries

    Journal of Development Economics

    (1989)
  • D.A. Turin

    Construction and development

    Habitat International

    (1978)
  • J. Wells

    The role of construction in economic growth and development

    Habitat International

    (1985)
  • J.M. Antle

    Infrastructure and aggregate agricultural productivity: international evidence

    Economic Development and Cultural Change

    (1983)
  • T.J. Bartik

    Business location decisions in the United States: estimates of the effects of unionization, taxes, and other characteristics of states

    Journal of Business & Economic Statistics

    (January 1985)
  • E.R. Berndt et al.

    Measuring the contribution of public infrastructure capital in Sweden

    Scandinavian Journal of Economics

    (1992)
  • R. Bon

    Economic structure and maturity

    (2000)
  • R. Bon et al.

    An input–output analysis of the Turkish construction sector, 1973–1990: a note

    Construction Management and Economics

    (1999)
  • R. Bon et al.

    The future of international construction

    (2000)
  • R. Bon et al.

    Historical comparison of construction sector in the US, Japan, Italy and Finland using input–output tables

    Construction Management and Economics

    (1990)
  • R. Bon et al.

    Some new evidence of old trends: Japanese construction, 1960–1990

    Construction Management and Economics

    (1996)
  • L.S. Burns et al.

    Is public construction countercyclical?

    Land Economics

    (1984)
  • D. Canning

    A database of world infrastructure stocks, 1950–1995

    World Bank Economic Review

    (1998)
  • D. Canning et al.

    The effect of infrastructure networks on economic growth

    (1993)
  • D.W. Carlton

    Why new firms locate where they do: an econometric model

  • S.L. Chan

    Empirical tests to discern linkages between construction and other economics sectors in Singapore

    Construction Management and Economics

    (2001)
  • J.J. Chen

    The characteristics and current status of China’s construction industry

    Construction Management & Economics

    (1998)
  • A. Chhibber

    Raising agricultural output: price and nonprice factors

    Finance and Development

    (1988)
  • A. Chhibber et al.

    Fiscal policy and private investment in developing countries: Recent evidence on key selected issues

    (1990)
  • Commonwealth of Australia Law

    Construction industry reform and development act 1992

    (1992 May)
  • Construction Industry Development Board

    Background and history

    (2000 Oct)
  • D. Crosthwaite

    The global construction market: a cross-sectional analysis

    Construction Management and Economics

    (2000)
  • S. Devarajan et al.

    What do government buy? The composition of public spending and economic performance

    (1993)
  • E.D. Domar

    Expansion and employment

    American Economic Review

    (1947)
  • Donnges, C. (2009 Sep). Addressing unemployment and poverty through infrastructure development as a crisis response...
  • Drewer, S. (1997). Construction and development: further reflections on the work of Duccio Turin. In Proceedings of the...
  • W. Easterly et al.

    Fiscal policy and economic growth: An empirical investigation

    (1993)
  • G.A. Edmonds

    The construction industry in developing countries

    International Labour Review

    (1979)
  • G.A. Edmonds et al.

    Foundations for change: Aspects of the construction industry in developing countries

    (1984)
  • European Conference of Ministers of Transport

    Report of the hundred and nineteenth round table on transport economics held in Paris on 29–30th March 2001 on the following topic: Transport and economic development

    (2002)
  • B. Flyvbjerg

    Public planning of mega-projects: overestimation of demand and underestimation of costs

  • W.F. Fox et al.

    Local public policies and interregional business development

    Southern Economic Journal

    (1990)
  • S. Ganesan

    Employment, technology and construction development: With case studies in Asia and China

    (2000)
  • S.L. Gruneberg

    Construction economics: An introduction

    (1997)
  • R.F. Harrod

    Towards a dynamic economics, some recent developments of economic theory and their application to policy

    (1948)
  • Cited by (164)

    • Biomimicry and Sustainable Building Performance: A Nature-inspired Sustainability Guide for the Built Environment

      2024, Biomimicry and Sustainable Building Performance: A Nature-inspired Sustainability Guide for the Built Environment
    View all citing articles on Scopus
    View full text