Is Public Investment Productive in the Argentine Case? A Single Break Unit Root and Cointegration Analysis, 1960-2007

This paper addresses the important question of whether public investment spending on economic infrastructure enhances economic growth and labor productivity in Argentina. Following the lead of the endogenous growth literature, it presents a simple modified production function that explicitly includes the positive or negative externality effects generated by public investment. The paper estimates a dynamic labor productivity function for the 1960-2007 period that incorporates the impact of public and private investment spending and the labor force (rather than the rate of population growth). Single break (Zivot-Andrews) unit root and cointegration analysis suggest that (lagged) increases in public investment spending on economic infrastructureBas opposed to overall public investment spendingB have a positive and significant effect on the rate of labor productivity growth. In addition, the model is estimated for a shorter period (1970-2007) to capture the impact of foreign direct investment. The estimates suggest that foreign direct investment spending has a lagged positive and significant impact on labor productivity growth, while increases in the labor force have a negative effect . Thus, the findings call into question the politically expedient policy in many Latin American countries, including Argentina during the 1990s and early 2000s, of disproportionately reducing public capital expenditures to meet reductions in the fiscal deficit as a proportion of GDP.