Infrastructure Spending as a Path to Development An Analysis of Latin America

Abstract

Endogenous growth theory outlines the effects of capital and labor on growth and productivity. This is reviewed in this paper with a focus on infrastructure as a key driver of capital endowment and promoter of productivity. In Latin American countries, this effect is mostly observed through the indirect impact on total factor productivity by the integration of markets and increasing returns to scale. The importance of Latin American economic history and the adherence to specific economic ideologies towards the end of the 20^th century is emphasized. This paper focuses on the contribution that infrastructure investment has on labor productivity using distributed lag models with time series data from 1994 to 2018. The results suggest that countries that are closer to their Solow steady state do not benefit significantly from increases in infrastructure investment as countries that are in earlier stages of economic development. Policymakers should consider the developmental context of their economy when deciding to prioritize public expenditure towards specific industries and projects.

Keywords: infrastructure investment, labor productivity, endogenous growth, distributed lag models