Are foreign and public investment spending productive in the argentine case?
Abstract
This paper addresses the important question of whether public investment spending and inward foreign direct investment (FDI) flows enhance economic growth and labor productivity in Argentina. The paper estimates a dynamic labor productivity function for the 1960-2011 period that incorporates the impact of public and private investment spending, the labor force, and export growth. Single and two-break unit root tests and Gregory-Hansen single-break cointegration analysis suggest that (lagged) increases in public investment spending on economic and social infrastructure have a positive and significant effect on the rate of labor productivity growth. In addition, the model is estimated for a shorter period (1970-2011) to capture the impact of inward FDI flows. The estimates suggest that (lagged) inward FDI flows have a 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. The results give further support to pro-growth policies designed to promote public investment spending and attract inward FDI flows.
Keywords: Argentina, Complemetarity Hypothesis, Endogenous growth, Foreign Direct Investment, Gregory Hansen Single-Break Cointegration test, KPSS(LM) no unit root test, Labor Productivity Growth, Lee-Strazicich two-break unit root, Public Investment, and Zivot-Andrews single-break unit root test.
*Professor of Economics, Department of Economics, Trinity College, Hartford, CT 06106