Public Debt, Public Investment and Economic Growth in Mexico

Isaac Sánchez-Juárez,Rosa García-Almada

doi:10.3390/ijfs4020006

Isaac Sánchez-Juárez, Rosa García-Almada

Open Access

https://doi.org/10.3390/ijfs4020006

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Abstract

The primary objective of this article is to answer the following two research questions: has the growing public debt of state governments promoted increased public investment? If the answer is yes, then does any increase in public investment lead to more growth in the Mexican states? Dynamic Models of panel data and the Generalized Method of Moments, with information for 32 states from 1993 to 2012, were used for this purpose. The econometric results confirmed that public debt is positively correlated with public investment and that this in turn generates economic growth. This does not mean that a good economic policy strategy has been followed, since the marginal positive impact of public investment, and therefore the public debt on the production per person, is reduced (1% increase in the interaction between public investment and public debt variable causes a 0.0005% increase in economic growth). This suggests deviations from the debt contracted for purposes other than production, which could lead to a situation of unsustainability of state public finances in the medium term.

Highlights

The Mexican economy is underdeveloped and the authorities have not found a way to overcome this; it faces problems as diverse as poverty, informality, low productivity, insecurity, unemployment and a chronic phase of economic stagnation
The first source has not been used recently as a financing mechanism, at least officially, while the second has remained on a path of low stability; with information provided by Robles and Huesca [1] (p. 68), it is known that the collection in Mexico as a proportion of GDP is 18%, taking into account oil revenues, and 14.25% without considering them, when the average of the OECD (Organization for Economic Co-operation and Development) was 25.81% in 2012
Part of the hypothesis of research seems to be confirmed; it is possible to say that public investment is a determinant of economic growth, as well as public debt

Summary

Introduction

The Mexican economy is underdeveloped and the authorities have not found a way to overcome this; it faces problems as diverse as poverty, informality, low productivity, insecurity, unemployment and a chronic phase of economic stagnation. The one that gives most concern relates to the low rates of economic growth. There are at least three sources to finance government spending: printing money, taxes and public debt. The first source has not been used recently as a financing mechanism, at least officially, while the second has remained on a path of low stability; with information provided by Robles and Huesca [1] The third source of funding is the public debt, which has grown at the federal level, but this does not represent a problem, since the gross debt represented 27% of GDP to December 2012, and 80.3% of domestic debt and other external debt [2]. The total gross public debt of the USA for the same year was 106.5%, with 84.1% in Spain and 68.5% in Brazil [3]

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