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The Tyranny of Concepts: CUDIE (Cumulated, Depreciated, Investment Effort) Is Not Capital

The Tyranny of Concepts: CUDIE (Cumulated, Depreciated, Investment Effort) Is Not Capital The cost of public investment is not the increment to the value ofpublic capital. Unlike with private investors, there is no plausiblebehavioral model in which every dollar that the public sectorspends as ``investment'' creates economically valuable ``capital.''While this simple analytic point is obvious, it has so far beenuniformly ignored in the empirical literature on economic growth,which uses—at best—cumulated, depreciated, investmenteffort (CUDIE) as a proxy for capital stocks. However, particularlyfor developing countries the difference between investment costand capital value is of first-order empirical importance: governmentinvestment is half of more of total investment, and calculationspresented here suggest that in many countries government investmentspending has created little useful capital. This has implicationsin three broad areas. First, none of the existing empirical estimatesof the impact of public spending has identified the productivityof public capital. Even where public capital has a potentiallylarge contribution to production, public-investment spendingmay have had a low impact. Second, it implies that all estimatesof total factor productivity in developing countries are deeplysuspect as there is no way to empirically distinguish betweenlow growth because of investments that create no factors andlow growth due to slow productivity growth. Third, multivariateregressions to date have not adequately controlled for capitalstock growth, which leads to erroneous interpretations of regressioncoefficients. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Growth Springer Journals

The Tyranny of Concepts: CUDIE (Cumulated, Depreciated, Investment Effort) Is Not Capital

Journal of Economic Growth , Volume 5 (4) – Oct 6, 2004

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References (45)

Publisher
Springer Journals
Copyright
Copyright © 2000 by Kluwer Academic Publishers
Subject
Economics; Economic Growth; Macroeconomics/Monetary Economics//Financial Economics; International Economics
ISSN
1381-4338
eISSN
1573-7020
DOI
10.1023/A:1026551519329
Publisher site
See Article on Publisher Site

Abstract

The cost of public investment is not the increment to the value ofpublic capital. Unlike with private investors, there is no plausiblebehavioral model in which every dollar that the public sectorspends as ``investment'' creates economically valuable ``capital.''While this simple analytic point is obvious, it has so far beenuniformly ignored in the empirical literature on economic growth,which uses—at best—cumulated, depreciated, investmenteffort (CUDIE) as a proxy for capital stocks. However, particularlyfor developing countries the difference between investment costand capital value is of first-order empirical importance: governmentinvestment is half of more of total investment, and calculationspresented here suggest that in many countries government investmentspending has created little useful capital. This has implicationsin three broad areas. First, none of the existing empirical estimatesof the impact of public spending has identified the productivityof public capital. Even where public capital has a potentiallylarge contribution to production, public-investment spendingmay have had a low impact. Second, it implies that all estimatesof total factor productivity in developing countries are deeplysuspect as there is no way to empirically distinguish betweenlow growth because of investments that create no factors andlow growth due to slow productivity growth. Third, multivariateregressions to date have not adequately controlled for capitalstock growth, which leads to erroneous interpretations of regressioncoefficients.

Journal

Journal of Economic GrowthSpringer Journals

Published: Oct 6, 2004

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