Are foreign and public investment spending productive in the Argentine case? A co-integration analysis, 1960-2015

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. 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 1960-2015 period that incorporates the impact of public and private investment spending, education, the labor force, and export growth. It tests for both single- and two-break unit root tests, as well as performs cointegration tests with an endogenously determined level shift over the 1960-2015 period. Cointegration analysis suggests that a long-term relationship exists among the relevant variables. The error correction (EC) models 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 (1970-2015) 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 2000s, of disproportionately reducing public capital expenditures to meet reductions in the fiscal deficit as a proportion of gross domestic product (GDP). The results give further support to pro-growth policies designed to promote public investment spending and attract inward FDI flows.