Public Investment and Economic Growth in the Three Little Dragons: Evidence from Heterogeneous Dynamic Panel Data

Abstract

Although the investment–growth relationship in the NIEs has been studied rather extensively, the casual connection between public capital and economic growth has not yet been fully explored. This paper makes a novel attempt to study the interactions among these macroeconomic variables with the help of 1971-2000 heterogeneous dynamic panel data from Korea, Singapore, and Taiwan. The premise of this study is that public spending may contribute to economic growth in different ways. We explore this using a variety of econometric techniques. The analysis suggests that both public and private investment and public consumption have a long-term dynamic impact on economic growth in all the countries of our sample and in a panel of sample countries. The pair-wise analysis shows bidirectional causality between public investment and economic growth, and the homogeneous non-causality hypothesis suggests that non-causality results are completely homogeneous in a small sample of these mentioned countries.