Public and private Investment in Mexico and Chile: An empirical test of the complementarity hypothesis

This paper addresses the important question of whether government investment spending, rather than overall public expenditures, exerts a positive effect on economic growth and productivity. Using time-series data for Chile and Mexico, it estimates a linear growth model that incorporates a number of relevant quantitative and qualitative variables for each country. The empirical results suggest that for both Chile and Mexico, increases in public and private investment spending have a positive and significant effect on the rate of growth in productivity. Moreover, the results for Mexico show that increases in government consumption expenditures have a negative effect on the rate of productivity growth, thus suggesting that the composition of government spending is at least as important as the growth rate of these expenditures in affecting economic growth. From a policy standpoint, these findings call into question the current trend among Latin American countries of indiscriminately reducing public spending because they fall disproportionally on capital expenditures—the type of spending needed to secure the long-term efficiency gains from market-oriented programs.