Are Public Investment Efficient in Creating Capital Stocks in Developing Countries?



1 Introduction

Since the seminal works of Aschaner (1989), the measure of the productivity
and the efficiency of infrastructure and public capital has been the subject of
many empirical studies, for OECD countries (see the surveys of Gramlich, 1994
or Sturm, 1998) but also for developing countries (World Development Report for
1994, Canning, 1999, or Easterly and Serven, 2004). The traditional method used
to estimate capital stocks for OECD countries is the Perpetual Inventory Method
(PIM, thereafter). This well known method consists in cumulating historical
series of past investments and in deducting assets which were retired. The PIM
has been used to estimate public capital stocks among others by Sturm and De
Haan (1995) for the Netherlands,Berndt and Hansson (1992) for Sweden, Ford
and Poret (1991) for France and Japan and more recently by Kamps (2004) for
as sample of 22 OECD countries. But Pritchett (1996) showed that in many
poor countries the problem is not that governments do not invest, but that these
investments do not create productive capital. The cost of public investments does
not correspond to the value of the capital stocks. Pritchett estimates that only
slightly more than half of the money invested in investment projects will have a
positive impact on public capital stocks in developing countries.

Consequently, we propose to evaluate the relationship between the increase in
monetary value of stocks and the current monetary value of public investments in
two developing countries, Colombia and Mexico. This relation, called efficiency
function, indicates the value of the public capital produced by one dollar’s worth
of government investment spending. If the PIM is valid, we should verify that
one invested dollar increases the stock value with one dollar. On the contrary,
if it is observed that the stocks value is increased with less than one dollar, it
implies that the PIM overvalues the public stocks. Using infrastructure physical
measures proposed by Canning (1998), we adopt a non-parametric approach to
give an estimate of the portion of public investments that are efficient in creating
capital.

The rest of the paper is organized as follows. Section 2 is devoted to the
measure of public investment efficiency. Section 3 presents tthe results and section
4 concludes.

2 Public Investment Efficiency : Data and Method-
ology

Pritchett (1996) and Canning (1998) state that the same investment flows in
different countries may have very different effectiveness in actually producing
capital, due to the differences in public sector efficiency and differences in the
price of capital. If the investment project is carried out by public sector, actual
and economic costs (defined as the minimum of possible costs given available



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