Public investment and economic
            growth in Mexico
Mexico's growth rate began to
            plummet at roughly the same time that its public investment
            expenditures declined. That decline also appears to coincide
            with a slowdown in the growth of infrastructure capital in
            the electricity, transport, and communications sectors.
            Because of these parallel developments, many economists have
            attributed at least part of the blame for the decline in
            Mexico's growth after 1981 to the decline of public
            infrastructure investment. The empirical results presented
            in this report provide only limited support for this
            argument. They also suggest, in turn, that increases in
            public investment would not automatically translate into
            faster output and productivity growth. One reason not to
            take for granted a positive relationship between more public
            investment and faster growth is public investment's
            crowding out effect on private investment. Although the
            time-series regression results for Mexico all point toward a
            crowding out coefficient of less than unity, the existence
            limits the growth impact of public investment by reducing
            its net effect on capital accumulation. The time-series
            results also suggest that the economy's total factor
            productivity growth responds positively to increases in the
            ratio of public to private investment. In light of that
            result, increases in public investment should have a
            positive net impact on economic growth, despite significant
            crowding out effects. Chow breakpoint tests indicate,
            however, that the positive productivity effect appears to
            have weakened significantly in the past decade. A third
            reason for questioning a stable relationship is that the
            impact of increased public investment is likely to depend on
            how it is financed. The cross-country regressions reported
            here indicate that a general increase in the public capital
            stock has a positive impact on growth only if financed
            through savings generated through lower public consumption
            expenditures, but not if financed through higher public
            debt, which implies higher current and future taxation
            levels. The scope for reducing public consumption
            expenditures in Mexico is very limited, however, since they
            are already at rock bottom levels. Therefore, the only way
            to assure that the public investment program makes a
            significant contribution to growth is by improving its
            "quality" through careful attention to its rate of
            return and complementarity with private capital. In Mexico
            the most important reforms to make public investment more
            productive came from policymakers' recognition of the
            need to distinguish more clearly between the roles of the
            public and private sectors. This led to the privatization of
            most public enterprises and a reorientation of public
            investment to a more narrowly focused set of activities. In
            addition, the government took important steps to strengthen
            the institutional framework within which the public
            investment program is determined.