Public infrastructure and private sector profitability and productivity in Mexico

Policy, Planning, and Research WORKING PAPERS Public Economks Country Economics Department The World Bank September 1988 WPS 100 Public Infrastructure and Private Sector Profitability and Productivity in Mexico Anwar Shah Microeconometric analysis of Mexican industry shows addi- tional investment in public infrastructure produces only a small increase in output. This suggests that the policy emphasis in Mexico should be on the better upkeep of existing infrastructure to ensure the continuity of public services rather than on new capital investment. The Policy. Plnning, and Research Comnpex distnibutes PPR WodcingPapers to disseninate the fndings of wodk in progress and to cnoournge the exchange of idcs amongr ank staff and all others inerested in development issues. These papers cary the names of the authes, refled only their views, and should be used and cited accordingly. The findings, intepeatims, and conclusions are the authors own. They should na be atibuted to the Wedd Bank. its Board of Directors, its managetnent, or any of its menberccuntries.  Polac,Pnning, and Ro"arch | Public Economics| This paper specifies a microeconometric model The long-run multiplier effect of public (a restri' ted equilibrium framework) to estimate infrastructure on output as measured by the the impact of investment in public infrastructure output elasticity of public infrastructure is on private industrial profitability. Empirical re- positive but small. Since public infrastructure is sults based on time series data for 34 industries also observed to have a smal degree of comple- characterize the Mexican industrial structure as mentarity with both capital and labor, better having involuntary unemployment, deficient upkeep of the existing infrastructure would help product demand, declining productivity growth, improve the functioning of labor and product increasing retums to scale, and short-nin excess markets in Mexico. capital capacity. Aggregate technological change over the period studied has been capital From the private sector's perspective, using and labor saving. however, the long-run productivity of private capital is much higher than the productivity of Both labor and capital are underused in the public capital. Therefore, new capital invest- short run. This disequilibrium has hig!i effi- ment in the public sector is nct recommended at ciency costs that may be undernining Mexico's this time and should be undertaken only to intemational compctitiveness. rectify any identified constraints imposed by the inadequacy of infrastructure in the private employment of private factors. This paper is a product of the Public Economics Division, Country Economics De- partment. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Ann Bhalla, room N1O-061,extension 60359. The PPR Working Paper Series disseminates the findings of work under way in the Bank's Policy, Planning, and Research Complex. An objective of the series is to get these fndings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank. Copyright