Academic journal article Economic Inquiry

"New" Public Investment And/or Public Capital Maintenance for Growth? the Canadian Experience

Academic journal article Economic Inquiry

"New" Public Investment And/or Public Capital Maintenance for Growth? the Canadian Experience

Article excerpt

I. INTRODUCTION

In search of the determinants of long-run growth, a strand of the relevant literature has focused on the growth impact of public productive expenditures. The theoretical work of Barro (1990), Barro and Sala-i-Martin (1992), and others and the empirical evidence by several studies (surveyed by Gemmel and Kneller 2001) have stressed the role of government productive activities as key determinants of long-run growth.

The impact of public expenditures typically takes the form of positive production externalities that enhance private sector productivity via private firms' production function either as a flow (government productive services) or as a stock (public or infrastructural capital). (1) The adoption of this framework embeds two central assumptions on the nature of public capital expenditures. First, all expenditures related to the public capital accumulation process of the economy are oriented to the formation of "new" public capital through investment. Second, public capital deterioration is considered as an exogenously given technical relationship. Hence, this approach neglects a crucial choice concerning the implementation of public investment decisions, namely, the choice between investing in new public capital and extending the durability of the existing public capital stock. The cost paid for the latter option is usually called "maintenance expenditures for public capital" and, strictly speaking, should be classified under the budgetary term "public investment" because it fulfills two basic criteria: (1) It is financed by taxation or government borrowing and (2) it does not result in public consumption expenditures, but instead increases the public capital stock available in the economy. (2)

Despite the intuitive consensus on the crucial weight of maintenance expenditures in public capital and the trade-off with expenditures in new public investment, there have been few systematic attempts to investigate their macroeconomic impact. An attempt to analyze this trade-off has been recently made by Rioja (2003), who sets up a growth model where domestic tax revenues finance maintenance expenditures for public capital, whereas public infrastructure is financed solely by foreign donors. The author shows that the optimal maintenance level as a share of output depends on various parameters and presents calibration results from Latin American countries that confirm the importance of maintenance for the pattern of growth in these countries. Along this line, Kalaitzidakis and Kalyvitis (2004) extend Rioja's model by concentrating on the implications of maintenance expenditures for public capital formation on growth. In their model, both types of expenditures are financed by a tax on output; by altering their allocation, the government can use the share of maintenance as a policy instrument and raise the shadow value of private capital, thus leading the economy to a higher growth rate. An appealing implication is that the growth-maximizing share of taxation is higher than the elasticity of public capital in the production function (which reverses a standard argument put forward by, among others, Barro 1990; Glomm and Ravikumar 1994; Devarajan et al. 1998), as the additional positive effect of maintenance expenditure on the accumulation of public capital raises the benefits of taxation compared to the standard models.

Although theoretically sound, these relationships do not translate easily into operational guidelines for policy makers on the growth effects of maintenance and new public capital expenditures. (3) Ideally, one would like to test these implications in the context of a wide cross-country data set consisting of data on each of the two components of public expenditures. Unfortunately, published data on maintenance are very scarce, involving only a handful of private activities due to inherent problems in the measurement of this type of expenditures. McGrattan and Schmitz (1999) describe the difficulties in constructing aggregate measures of maintenance and repair; the authors point out that, for instance, in the United States maintenance activities are largely carried out outside the market and, thus, recorded transactions are usually incomplete. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.