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    Bajo Rubio and Sosvilla Rivero - 1993

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    Does public capital affect private sector performance? An analysis of the Spanish case, 1964-88 Oscar Bajo-Rubio and Simén Sosvi The possible influence of public capital accumulation on private sector economic performance is examined using Spanish data for the 1964-88 period. To do this, a simple aggregate production function for private output, including government-owned capital as a separate factor, is estimated by cointegration techniques. The results tend to support the view that the stock of public capital plays an important role in affecting private sector productiv “Keyword Publi apt; Productivity; Coi The size of the government deficit is one of the main questions at issue in the current economic debate in Spain, As is well known, one of the conditions that were set out in the Maastricht Treaty for EC countries in order to be able to join the third stage of the Economic and Monetary Union (EMU), was that the public sector budget deficit (including central, regional and local administrations) should not exceed 3% of the gross domestic product (GDP) in 1997. Faced with this challenge, the Spanish government has recently produced a so-called Convergence Pro- gramme, with the aim of allowing the Spanish economy to fulfil those requirements needed for jo ing the EMU together with the strongest European economies ‘As far as the public sector budget deficit is con- cerned, the objective of this Convergence Programme is to reduce it from 4.4% of GDP at the end of 1991 to 1% in 1996, Since raising taxes is quite difficult for political reasons, the Spanish government envisages ‘The authors are with the Instituto de Estudios Fiscales, Plaza de Canalejas, 3, 28014 Madrid, Spain. Oscar Bajo-Rubio is also with UNED, and Simén Sosvilla-Rivero is with the Universidad Complutense de Madrid We acknowledge useful commen from participants atthe ASSET Meeting (Toulouse, November 1992), and the XVI Simposio de Aniliis Econdmico (Barcelona, December 1992). All remaining Final manuscript received § March 1993, (0264-9993/93/030179-07 © 1993 Butterworth-Heinemann Ltd cutting spending in order to fulfil the above-mentioned target. However, itis an open question which expendi- tures will be cut. In fact, the government has asserted in several statements that investment expenditure will not be reduced (given the widely felt need in Spanish society for improved public infrastructure); it will therefore be consumption expenditure which will be cut, But it is to be feared (as has happened on previous occasions), that in the face of the activities of all kinds of pressure groups fighting for their own shares of the public budget, the government will end up by cutting. its investment spending, which is subject to less immediate political pressure. On the other hand, a field of growing interest in the economic literature has recently arisen, dealing with the influence of government-provided infrastructure on private sector productivity. In a series of papers, Aschauer [2-5] has forcefully argued for a direct and sizable effect of public sector capital accumulation on private sector productivity and performance. Accord ing to this author, the decline in public capital formation, and in particular in what he calls ‘core’ infrastructure (consisting of streets and highways, airports, electrical and gas facilities, mass transit, water systems and sewers) is an important reason behind the productivity slowdown experienced by the US economy since the carly 1970s. ‘Similar results to Aschauer's, which followed earlier work by Ratner [23], have also been found when estimating production functions for the US states, using pooled time-series cross-state data, by Munnell 179 ee Does public capital affect private sector performance? O. Bajo-Rubio and 8. Saswilla-Rivero [20] and Garcia-Mili and McGuire [14]. In addition, Ford and Poret [13] have recently applied Aschauer's framework to 11 OECD countries with mixed results, the effect of infrastructure on total factor productivity being always significant in five cases (the USA, Germany, Canada, Belgium and Sweden), never significant in three cases (the UK, Norway and Australia), and sometimes significant in the other three (France, Japan and Finland), Further evidence has also been provided by Berndt and Hansson [6] for Sweden, Lynde and Richmond [18] for the USA and Otto and Voss [21] for Australia ‘As far as the Spanish case is concerned, we can quote in the first place a paper by Raymond-Bara [24], who finds @ negative relationship between the public spending-GDP ratio (where public spending included both consumption and investment expendi- tures) and the level of GDP using time-series data for the 1964-87 period. On the other hand, there are also some studies which make use of regional data: whereas Ventura [28] finds in general no significant relationship between public investment expenditure, on the one hand, and the regional value added, unemployment rate or private investment, on the other, Cutanda and Paricio [9] conclude that the Public capital stock has a positive impact on the explanation of regional income disparities. The objective of this paper is to provide some new evidence on the effects of public sector capital accumulation on private sector productivity, using Spanish data for the 1964-88 period, and making use (lor the first time in this field of literature) of cointegration analysis. At the same time, our empirical results will allow us to advance some arguments in the current debates on the reduction of the Spanish public budget deficit, which is considered a necessary condition for the Spanish economy to join the third stage of the EMU in 1997. In the next section we present the theoretical framework of the paper. The empirical results are then discussed, and the fourth section concludes. ‘The model It's a well-known fact that there are some goods and services which the private sector is likely to supply less of than society desires. This is particularly true when market failures are present, leading to resource allocations which are not Pareto efficient. These situations, as well as others yielding results which are deemed to be socially undesirable (eg an unequal distribution of income), provide a rationale for government intervention in a market economy (see Stiglitz [25] for a detailed discussion). 180 Since public services lead to external economies and, accordingly, lower production costs, we can state, following Arrow and Kurz [1], that production in the private sector would be directly affected by those services provided by public infrastructure, which are usually proxied by the stock of public capital. Therefore, we begin our analysis by postulating a simple aggregate production function for the private sector, in which government-owned capital is included as a separate factor of production: Y=AF(K,KG,N) wy where ¥ is the level of private output, A is an index of technological progress, K is the privately owned capital stock, KG is the government owned capital stock, and N is the labour input. For simplicity, the technology is assumed to be of the Cobb-Douglas form: Y=AK"KG?N® 2) so that, after taking logs, and denoting by a small letter the log of its corresponding capital letter, we obtain: yoataktagkg tan ° Following Aschauer [2], two possibilities can be considerc4. On the one hand, the function F(.) in (1) ‘may exhibit constant returns to scale over private inputs or, in other words, increasing returns to scale in all three inputs (ie 2, +4, =1, and a, +3+25>1 respectively), so (3) would become: W-K=atagkg tosh) a On the other hand, the function Fi.) may exhibit constant returns to scale in all three inputs, which would imply decreasing returns to scale over private inputs (ie a, +23 += and a, +4,

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