Public and Private Investment in Mexico, 1950-90: An Empirical Analysis

Abstract

During most of the post-World War II era, public investment was the driving force behind the general strategy known as Import Substitution Industrialization (ISI) in Latin America.' Policymakers in countries such as Mexico and Brazil recognized that investment played a crucial role not only as a component of final aggregate demand, but also in terms of determining the size of a country's capital stock, and thus, its future source of growth and employment opportunities. It was also generally believed that private investors would be reluctant to channel needed resources to key industrial projects because of the region's lack of social and economic infrastructure, as well as the absence of fully developed markets for equity, insurance, and information. Government investments in infrastructure and basic industry, with their attendant positive spillover effects, were viewed as necessary by policymakers for achieving optimal rates of investment and growth. However, with the onset and aftermath of the debt crisis in 1982, most countries of the region, particularly Mexico and Chile, have radically changed their overall development strategy. Instead of concentrating on inward-directed growth, under the auspices of state-directed investments, the new growth model is outward-oriented in nature, and more importantly, heavily reliant on market forces as evidenced by the ongoing deregulation of product and factor markets and the privatization of most state-owned enterprises.2 The unprecedented streamlining of the public sector in countries such as Mexico can, in part, be traced to the limited external and internal resources available to governments of the region during the 1980s, but, more importantly, it is also the result of past inefficiencies and failures generated by the public sector's attempt to undertake too many investments in state-owned enterprises producing goods in which the private sector had (and has) a comparative advantage (e.g., steel, chemicals, trucks and buses, cellulose products, food processing, sugar, fertilizers, textiles, banking and tourism services, etc.).3 Nevertheless, in their justified efforts to diminish the government's excessive involvement