"How Big Should the Public Capital Stock Be? The Relationship Between Public Capital and Economic Growth"

Investment in infrastructure is necessary for a strong, flexible, and growing economy. However, the relationship between public capital and economic growth is not linear. At a certain level, the tax burden associated with financing and maintaining public capital reduces the returns to private industry, which, in turn, reduces growth; also, different types of spending have different effects on growth. The short- and long-term growth-maximizing effects of public investment increase as the ratio of public to private capital stock rises to an optimal level (found to be about 61 percent); above that level the growth effects decrease. The public to private ratio is below the optimal level throughout much of the country and government spending is not always directed toward the types of investment that have the most positive effects on growth. Good economic policy requires both increasing the public capital stock and reorienting government spending from consumption to investment in physical capital stock.

The Role of Public Infrastructure Capital in Mexican Economic Growth

This paper develops and empirically implements a neoclassical growth model in which output depends on private capital and human capital as well as the quantity, means of financing, and efficiency of use of public capital. The empirical analysis is based on a cross section of 46 developing countries over the period from 1970 to 1990. In general, the paper finds empirical support for the importance of each of the three dimensions of public capital –quantity, financing, and efficiency– for long run standards of living and for transitional growth rates. The empirical results are applied to the recent performance of the Mexican economy.

Public investment and economic growth in Mexico

Mexico's growth rate began to plummet at roughly the same time that its public investment expenditures declined. That decline also appears to coincide with a slowdown in the growth of infrastructure capital in the electricity, transport, and communications sectors. Because of these parallel developments, many economists have attributed at least part of the blame for the decline in Mexico's growth after 1981 to the decline of public infrastructure investment. The empirical results presented in this report provide only limited support for this argument. They also suggest, in turn, that increases in public investment would not automatically translate into faster output and productivity growth. One reason not to take for granted a positive relationship between more public investment and faster growth is public investment's crowding out effect on private investment. Although the time-series regression results for Mexico all point toward a crowding out coefficient of less than unity, the existence limits the growth impact of public investment by reducing its net effect on capital accumulation. The time-series results also suggest that the economy's total factor productivity growth responds positively to increases in the ratio of public to private investment. In light of that result, increases in public investment should have a positive net impact on economic growth, despite significant crowding out effects. Chow breakpoint tests indicate, however, that the positive productivity effect appears to have weakened significantly in the past decade. A third reason for questioning a stable relationship is that the impact of increased public investment is likely to depend on how it is financed. The cross-country regressions reported here indicate that a general increase in the public capital stock has a positive impact on growth only if financed through savings generated through lower public consumption expenditures, but not if financed through higher public debt, which implies higher current and future taxation levels. The scope for reducing public consumption expenditures in Mexico is very limited, however, since they are already at rock bottom levels. Therefore, the only way to assure that the public investment program makes a significant contribution to growth is by improving its"quality"through careful attention to its rate of return and complementarity with private capital. In Mexico the most important reforms to make public investment more productive came from policymakers'recognition of the need to distinguish more clearly between the roles of the public and private sectors. This led to the privatization of most public enterprises and a reorientation of public investment to a more narrowly focused set of activities. In addition, the government took important steps to strengthen the institutional framework within which the public investment program is determined.Macroeconomic Management,Inequality,Economic Theory&Research,Environmental Economics&Policies,Economic Stabilization

Highway capacity and economic growth

The quality and quantity of highway transportation systems have a direct bearing on economic growth—good roads are good business.Infrastructure (Economics)