Public investment and economic activity in Mexico, 1925–1981

Felipe De Jesús Fonseca,Daniel Ventosa-Santaulària,Manuel Gómez-Zaldívar

doi:10.5018/economics-ejournal.ja.2020-6

Felipe De Jesús Fonseca, Daniel Ventosa-Santaulària + Show 1 more

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https://doi.org/10.5018/economics-ejournal.ja.2020-6

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Abstract

Abstract The authors construct a historical database of public investment (both total and broken down into its main components) for the period 1925 to 1981 in order to measure its impact on economic activity. Given the possible presence of crowding-out effects between public investment and private investment, in their analysis they control for the latter. The results suggest that: i) public investment had a significant impact on output, one which varies depending on the category of public investment considered, and; ii) private and public investment are positively related, i.e., public investment has a crowding-in effect on private investment, and both have a positive and significant impact on GDP. The results contrast with those of previous studies that have analyzed this relationship, though using a different time period, one that includes the economic liberalization era. Nevertheless, these differences can be rationalized by the findings of Ilzetzki et al. (How Big (Small?) are Fiscal Multipliers? 2013), who point out that key country-specific characteristics such as trade openness and the exchange rate regime are determinant in the relationship between public investment and output.

Highlights

Mexican economic historiography recognizes the key role that public investment played in the country’s economic performance from the end of its Revolutionary War until the beginning of the economic liberalization period that began in the early 1980s
25 For brevity, we present only selected Impulse-Response Functions (IRF) of the models using total public investment (Gt), industrial development (IIt), and transport and communications (TTt)
By constructing a historical dataset just large enough to allow reasonable empirical analysis, we provide support for the argument that public investment was an important source of growth during this period

Summary

Introduction

Mexican economic historiography recognizes the key role that public investment played in the country’s economic performance from the end of its Revolutionary War until the beginning of the economic liberalization period that began in the early 1980s. According to Mexico’s National Institute of Statistics and Geography (INEGI), between 1925 and 1981 [i.e., prior to the exhaustion of the import-substitution [IS] model), the Mexican economy grew at an average annual rate of 5.0 percent in real terms. The economic literature acknowledges and attributes a central role to public investment in the attainment of the high growth rates observed from the postrevolutionary period up until the early 1980s, the eve of the period of economic liberalization.. The economic literature acknowledges and attributes a central role to public investment in the attainment of the high growth rates observed from the postrevolutionary period up until the early 1980s, the eve of the period of economic liberalization. In Mexico as in other Latin American countries, public investment is considered to be the driving force behind the IS development strategy, due to its contribution to the increase in capital stock and due to its being an important component of the aggregate demand that fostered the growth of major sectors of the economy.

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