Abstract
This paper addresses the important question of whether public investment spending and inward foreign direct investment (FDI) flows enhance economic growth and labor productivity in Argentina. The paper estimates a dynamic labor productivity function for the 1960-2010 period that incorporates the impact of public and private investment spending, the labor force, and export growth. Single break (Zivot-Andrews) unit root and cointegration analysis suggest that (lagged) increases in public investment spending on economic and social infrastructure have a positive and significant effect on the rate of labor productivity growth. In addition, the model is estimated for a shorter period (1970-2010) to capture the impact of inward FDI flows. The estimates suggest that (lagged) inward FDI flows have a positive and significant impact on labor productivity growth, while increases in the labor force have a negative effect. From a policy standpoint, 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 reducetions in the fiscal deficit as a proportion of GDP. The results give further support to progrowth policies designed to promote public investment spending and attract inward FDI flows.
Highlights
After the onset of the debt crisis in the early eighties, major Latin American countries such as Brazil and Mexico adopted an outward-oriented, market-based strategy of economic growth by liberalizing their trade and financial sectors, as well as dismantling and privatizing their state-owned enterprises
Following the lead of the endogenous growth literature, this paper developed a simple model that explicitly includes the impact of the public capital stock on the supply and demand sides of the economy
The conceptual model laid the groundwork for the empirical analysis of labor productivity growth in the Argentine case for the 1960-2010 period in Sections 3 and 4
Summary
After the onset of the debt crisis in the early eighties, major Latin American countries such as Brazil and Mexico adopted an outward-oriented, market-based strategy of economic growth by liberalizing their trade and financial sectors, as well as dismantling and privatizing their state-owned enterprises. If the complementarity hypothesis is correct, the steep reductions in public capital formation experienced in Argentina and elsewhere in Latin America during the past decade and a half may further depress private investment spending and productivity growth It may undermine some or all of the long-term efficiency gains anticipated from the implementation of market-based, outward-oriented reforms such as privatization of state-owned firms and the liberalization of trade and finance (see [15]).
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