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.
|Date of creation:||31 Aug 1998|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barro, Robert J., 1990.
"Government Spending in a Simple Model of Endogeneous Growth,"
3451296, Harvard University Department of Economics.
- Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
- Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
- Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
- Charles R. Hulten, 1996. "Infrastructure Capital and Economic Growth: How Well You Use It May Be More Important Than How Much You Have," NBER Working Papers 5847, National Bureau of Economic Research, Inc.
- N. Gregory Mankiw & David Romer & David N. Weil, 1990.
"A Contribution to the Empirics of Economic Growth,"
NBER Working Papers
3541, National Bureau of Economic Research, Inc.
- Loayza, Norman & Palacios, Luisa, 1997. "Economic reform and progress in Latin America and the Caribbean," Policy Research Working Paper Series 1829, The World Bank.
- Shah, Anwar, 1992. "Dynamics of Public Infrastructure, Industrial Productivity and Profitability," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 28-36, February.
- Nader Nazmi & Miguel D. Ramirez, 1997. "Public And Private Investment And Economic Growth In Mexico," Contemporary Economic Policy, Western Economic Association International, vol. 15(1), pages 65-75, 01.
- Devarajan, Shantayanan & Squire, Lyn & Suthiwart-Narueput, Sethaput, 1995. "Reviving project appraisal at the World Bank," Policy Research Working Paper Series 1496, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1964. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.