Government Production of Investment Goods and Aggregate Labor Productivity

Abstract

In this paper, I estimate the impact on aggregate labor productivity of having government, rather than private industry, produce investment goods. This policy was pursued to varying degrees by Egypt, India, Turkey, among others. The policy has a large impact because there is both a direct effect (on the production function in the investment sector) and a secondary effect (on the economywide capital stock per worker). I estimate that this policy alone accounted for about one-third of Egypt's aggregate labor productivity gap with the United States during the 1960s.

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