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Public Investment and Private Sector Performance – International Evidence

PFM, Vol. 1 No. 2, (2001)

This paper analyzes the effects of public investment on aggregate private
sector performance for a group of twelve OECD economies. The empirical results
are based on impulse response function analysis associated with country-specific
VAR/ECM models. Estimation results suggest that for most countries, public
investment crowds in private investment while it does not substantially affect
employment. More importantly, the effects of public investment on private output
are positive for all the countries. Germany, Japan, Sweden, UK, and US are the
countries with the highest long-term elasticities of output with respect to public
investment. Therefore, there seems to be a strong correlation across countries
between the elasticity of output with respect to public investment and the levels of
economic achievement. Finally, empirical results suggest that public investment
affects labor productivity growth positively for all countries. Accordingly, the
decline in public investment is a legitimate candidate to explain the slowdown of
labor productivity growth in these countries.

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