Academic journal article Contemporary Economic Policy

Public Capital Formation and Labor Productivity Growth in Chile

Academic journal article Contemporary Economic Policy

Public Capital Formation and Labor Productivity Growth in Chile

Article excerpt


Following the lead of the endogenous growth literature, this article analyzes the impact on labor productivity growth of public and private investment spending in Chile. Using cointegration analysis, the results of the dynamic labor productivity function for the 1960-95 period show that (lagged) public and private investment spending, as well as the rate of growth in exports, has a positive and highly significant effect on the rate of labor productivity growth. The estimates also indicate that increases in government consumption spending have a negative effect on the rate of labor productivity growth, thus suggesting that the composition of government spending may also play an important role in determining the rate of labor productivity growth. The findings call into question the politically expedient policy in many Latin American countries of disproportionately reducing public capital expenditures to meet targeted reductions in the fiscal deficit as a proportion of GDP. (JEL O47, O54)


Chile was one of the first countries in Latin America and the Caribbean to abandon the strategy of economic growth and development led by import substitution industrialization (ISI) that had characterized Latin American economic development in the post-World War II period. Following the bloody military coup of 1973 that deposed the democratically elected government of Salvador G. Allende, the military authorities embraced an outward-oriented and market-led model of economic growth and development that, after many false starts and a high social and political cost, began in 1986 to generate high and sustained average annual growth rates in real GDP (see Table 1).

One of the outstanding features of the new economic model in Chile is that the state has redefined its economic and social role by channeling resources to projects that tend to complement, rather than compete, with the economic activities of the private sector, such as the building of roads, bridges, ports, airfields, and the promotion of education and health (see Edwards and Edwards, 1987; Meller, 1991; Bosworth, Dornbusch, and Laban, 1994; Scott, 1996). For example, beginning with the waning years of the dictatorship, and particularly with the return of civilian rule under the Patricio Aylwin (1990-93) and Eduardo Frei administrations (1994-98), the state's role in the investment process has increased from 21% in 1990 to 31% in 1995, while the overall investment coefficient rose from 18.8% to 25% (ECLAC, 1998).

In the social arena, the civilian administrations have also made a concerted effort to reduce the incidence of poverty and indigence in the country, as well as to promote and fund a variety of programs designed to raise the standard of living of the poor and working poor. In this connection, Weyland (1997) argues that the creation of new social programs and the expansion of existing ones were made possible by the increase in net tax revenues following parliamentary approval of an increase in personal income taxes for the country's upper middle classes during the first few months of 1990. [1] Some indication of the state's new-found commitment to alleviating absolute poverty can be gleaned from the following figures. During the last five years of the Pinochet regime the level of real social spending per capita fell by 2.5%, while it increased by over 8% under the Aylwin and Frei administrations. Also, as opposed to the Pinochet regime's severe underfunding and neglect of the public health system, which servic es disproportionally the poorer segments of Chilean society, the Aylwin government used part of the tax revenues from tax reform to raise "health expenditures by a striking 70 percent in real terms between 1990 and 1994" (Weyland, 1997, p. 44). Finally, the composition of social spending has been targeted toward the bottom 40% of the income distribution under the civilian administrations. …

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