Public Capital Formation and Labor Productivity Growth in Mexico
Author(s)
Ramirez, Miguel D.
Abstract
Ramirez addresses the important question of whether public investment spending on economic infrastructure enhances economic growth and labor productivity in Mexico. He presents a modified production function which includes pros and cons generated by additions to the public capital stock. Ramirez then proceeds to estimate a dynamic labor productivity function for the 1955-94 period that incorporates the impact of the growth rate in the stocks of both private and public capital and the economically active population (EAP). The results suggest that increases in public investment spending on economic infrastructure have a positive effect on the rate of labor productivity growth. In addition, the estimates suggest that increases in government consumption expenditures may have a negative effect on the rate of labor productivity growth, thus suggesting that the composition of government spending may also play an important role in determining the rate of labor productivity growth. Finally, the findings call into question the politically expedient policy in many Latin American countries of disproportionately reducing public capital expenditures on economic and social infrastructure to meet targeted reductions in the fiscal deficit as a proportion of GDP.
