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

Lant Pritchett
1999 Policy Research Working Papers  
The cost of public investment is not the value of public capital. Unlike with private investors, there is no plausible behavioral model in which every dollar that the public sector spends as "investment" creates capital in an economic sense. While this simple analytic point is obvious, it has so far been uniformly ignored in the empirical literature on economic growth which uses, at best, cumulated, depreciated, investment effort (CUDIE) to estimate capital stocks. However, particularly for
more » ... articularly for developing countries the difference between investment cost and capital value is of first order empirical importance: government investment is half of more of total investment and perhaps as much as half or more of government investment spending has not created equivalent "capital." This implies that nearly everything empirical written in three broad areas is misguided. First, none of the estimates of the impact of public spending identify the productivity of public capital. Even where public capital would be potentially very productive regressions and evaluations may suggest public spending has low impact. Second, it implies that everything currently ever said about "total factor productivity" in developing countries is deeply suspect as there is no way to empirically distinguish between low output (or growth) because of investments that created no "factors" and low output (or growth) due to low (or slow) productivity growth. Third, multivariate regressions to date have not in fact "controlled" for capital stock growth and hence spurious interpretations emerge. JEL codes: O40, O47, H50.
doi:10.1596/1813-9450-2341 fatcat:vlwsbiy3lzbyvnmzwr3m4wkp4e