Is public investment and inward FDI productive in the Argentine case?

This paper addresses the important question of whether public investment spending and inward foreign direct investment (FDI) enhances economic growth and labor productivity in Argentina. Following the lead of the endogenous growth literature, it presents a simple modified production function that explicitly includes the positive or negative externality effects generated by increases in the stock of public or FDI capital. The paper estimates a dynamic labor productivity function for the 1960-2007 period that incorporates the impact of public and private investment spending, the labor force, and export growth. Single break (Zivot-Andrews) unit root and cointegration analysis suggest that (lagged) increases in public investment spending on economic infrastructure--as opposed to overall public investment spending--have a positive and significant effect on the rate of labor productivity growth. In addition, the model is estimated for a shorter period (1970-2007) to capture the impact of inward FDI flows. The estimates suggest that inward FDI flows have a lagged positive and significant impact on labor productivity growth, while increases in the labor force have a negative effect.  From a policy standpoint, the findings call into question the politically expedient policy in many Latin American countries, including Argentina during the 1990s and early 2000s, of disproportionately reducing public capital expenditures to meet reductions in the fiscal deficit as a proportion of GDP. In addition, the findings support policies to attract inward FDI flows. (JEL C22, O10, O40, O50)