Anders Isaksson
Published: 2010
Total Pages: 0
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This paper sheds light on how important public capital is for countries trying to industrialize and achieve faster economic growth. To this end, a small empirical model of industrial development is formulated and applied to manufacturing level and growth data for 57 advanced and developing countries for the time period of 1970 to 2000. In estimating the impact of public capital on industry special care is taken to deal with country-specific effects, reverse causality and endogeneity bias. The findings are clear: public capital has important explanatory power for why some countries have managed to industrialize, while others have not. Stages of development influence how strongly public capital matters, but there is evidence of impact at all income levels. Moreover, it seems that the returns to public investment are, largely, diminishing as income increases. A second key conclusion is that growth of public capital not only explains long-term levels of industry, but also how rapidly industry grows. Interestingly, the largest impact occurs for the fastest growing countries, i.e., the Asian tiger economies, and the High-income ones. Based on rates of return on public capital calculations, little support is found for the notion that public infrastructure is overprovided in developing countries. To the contrary, the rate of return on public capital is positive at all stages of development, although higher for the countries least endowed with such capital and those growing at the fastest rate.