Page "Public capital" Paragraph 3

One of the most classic macroeconomic inquiries is the effect of public capital investment on economic growth.

While many analysts debate the magnitude, evidence has shown a statistically significant positive relationship between infrastructure investment and economic performance.

U. S. Federal Reserve economist David Alan Aschauer asserted an increase of the public capital stock by 1 % would result in an increase of the total factor productivity by 0. 4 %.

Aschauer argues that the golden age of the 1950s and 1960s were partly due to the post-World War II substantial investment in core infrastructure ( highways, mass transit, airports, water systems, electric / gas facilities ).

Conversely, the drop of U. S. productivity growth in the 1970s and 1980s was in response to the decrease of continual public capital investment and not the decline of technological innovation.

Likewise, the European Union nations have declined public capital investment through the same years, also witnessing declining productivity growth rates.

A similar situation emerges in developing nations.

Analyzing OECD and non-OECD countries ’ real-GDP growth rates from 1960-2000 with public capital as an explanatory variable ( not using public investment rates ), Arslanalp, Borhorst, Gupta, and Sze ( 2010 ) show that increases in the public capital stock does correlate with increases in growth.

However, this relationship depends on initial levels of public capital and income levels for the country.

Thus, OECD countries witness a stronger positive link in the short term while non-OECD countries experience a stronger positive link in the long term.

Hence, developing countries can benefit from non-concessional foreign borrowing to finance high-prospect public capital investments.