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The tyranny of concepts - CUDIE (Cumulated, Depreciated Investment Effort) is NOT capital

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  • Pritchett, Lant

Abstract

The cost of public investment is not the value of public capital. Unlike for private investors, there is no remotely plausible behavioral model of the government as investor that suggests that every dollar the public sector spends as"investment"creates capital in an economic sense. This seemingly obvious point has so far been uniformly ignored in the voluminous empirical literature on economic growth, which uses, at best,"cumulated, depreciated investment effort"(CUDIE), to estimate capital stocks. But in developing countries especially, the difference between investment cumulated at cost and capital value is of primary empirical importance: government investment is half or more of total investment. And perhaps as much as half, or more of government investment spending has not created equivalent"capital."This suggests that nearly everything empirical written in three broad areas is misguided. First, none of the estimates of the impact of public spending identify the productivity of public capital. Even where public capital could be very productive, regressions and evaluations, may suggest that public investment spending has little impact. Second, everything currently said about"total factor productivity"in developing countries is deeply suspect, as there is no way empirically to distinguish between low output (or growth) attributable to investments that created no"factors"and low output (or growth) attributable to low (or slow growth in) productivity in using accumulated"factors."Third, multivariate growth regressions to date have not, in fact,"controlled"for the growth of capital stock, so spurious interpretations have emerged.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2341.

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Date of creation: 31 May 2000
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Handle: RePEc:wbk:wbrwps:2341

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Keywords: Economic Theory&Research; Fiscal&Monetary Policy; International Terrorism&Counterterrorism; Decentralization; Capital Markets and Capital Flows; Environmental Economics&Policies; Capital Flows; Economic Theory&Research; International Terrorism&Counterterrorism; Banks&Banking Reform;

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