10 investment. The refocusing of public investment priorities in line with the government's new economic strategy after 1985 was intended to increase the complementarity between public and private investment. It is surprising, then, that this relationship should have weakened. Again, a possible answer is that the reforms are still too recent to have exerted a noticeable impact. Alternatively, this result may be reflecting an interaction with omitted variables that are exerting a downward influence of total factor productivity growth in the early 1990s.1' The finding that public investment generally has been positively related to TFP suggests that the considerations about the potential mismeasurement and relative inefficiency of public capital do not, on average, appear to have been empirically significant in Mexico. Some circumstantial evidence that supports this finding is a reasonably close correspondence between the perpetual inventory-based monetary measures of the capital stock produced by the Banco de Mexico for the electricity, transport and communications sectors and physical measures of public capital capacity in these sectors (e.g., kilowatt hours of electricity production).<sup>12</sup> In each case the monetary measures capture the substantial growth in physical capital which occurred from 1970 to 1990 (or, in the case of telecommunications, from 1975 to 1990). Taking into consideration that the monetary measures of public investment spending include expenditures on capital items that are not directly represented by the particular physical measures (e.g., transportation capital includes more than the number of kilometers of roads and rail), we can conclude that the monetary measures are acceptable proxies for the true public capital stock in the case of Mexico.

# D. **Public Capital and Economic Growth: A Cross-Country Perspective**

A large body of empirical research has investigated the static impact of changes in the stock of public capital on economic performance; Aschauer, 1997. The main focus of that research has been to determine the importance of public infrastructure on the private sector's productive capacity, to its costs of production and/or to its level of profitability. By and large, this research concludes that public capital exerts an important positive influence on the performance of the private sector economy. But these findings - - which are static in nature -- have left open the question of the dynamic, or long run, effects of public capital on the economy."<sup>3</sup> More recent attempts to capture the dynamic

> 1 The existence of such influences is discussed in the 1998 World Bank's Country Economic Memorandum on Mexico: Enhancing Factor Productivity Growth. It draws attention to the failure of Mexico's productivity growth to recover as quickly as in other countries after inflation was stabilized and structural economic reforms had been implemented.

> A note of caution is in order here: The disaggregated capital stock series used for this comparison are based on an earlier constant price series, with base-1970, produced by the Banco de Mexico. These series were recently re-based (to base year 1980), which resulted in significant revisions in some individual series (notably Communications), while the series for the Electricity sector was discontinued.

- 13 The few empirical studies that have focused on the Mexican economy (e.g., Shah, 1992, Feltenstein and Ha, 1995, and Nazmi and Ramirez, 1997) are of this type. They investigate the relationship between