Abstract
In this paper, I estimate the impact on aggregate labor productivity of having government, rather than private industry, produce investment goods. This policy was pursued to varying degrees by Egypt, India, and Turkey, among others. The policy has a large impact because there is both a direct effect (it lowers productivity in the investment sector) and a secondary effect (it lowers the economy-wide capital stock per worker). I estimate that this policy alone reduced Egypt's aggregate productivity by 30% and accounted for 20% of Egypt's aggregate labor productivity gap with the United States during the 1960s.
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