Public Debt, Public Investment and Economic Growth

Public Debt, Public Investment and
Economic Growth in Mexico

Group 10
Wulan Kurniasari 11180840000009
Siti Sira Shifa 11180840000039
Lasri Purnama Sari 11180840000045
Rachma Riska Mahani 11180840000095
Introduction
The problem of mexican economy: underdeveloped and the authorities have not found a way to
overcome this. The problems as diverse as poverty, informality, low productivity, insecurity, unemployment
and a chronic phase of economic stagnation. Of all indicated problems, the one that gives most concern
relates to the low rates of economic growth. Attempts have been made to fix this and various strategies
proposed, the most common being the increase in public spending, particularly concerning investment.
There are at least three sources to finance government spending:

1. printing money
2. taxes
3. public debt.
This work establishes that sub-national governments hire debt for the purpose of financing public investment
projects that complement private investment to translate into greater economic growth and jobs, which
ultimately result in greater well-being for the citizens.
Problem
From which contracted debt becomes sustainable and there is no risk for their
finances. The problem is the debt of the states or sub-national, which has grown
significantly from 2% of GDP in 1994 to 3.1% in 2013. So, The primary objective
of this article is to answer the following two research questions:
“Has the growing public debt of state governments promoted increased public
investment? If the answer is yes, then does any increase in public investment lead
to more growth in the Mexican states?”
Literature Review
Barro, R. On the determination of
Rodríguez, A.; Azamar, A. (2013)
public debt (1979)
This work establishes that According to orthodox

subnational governments principles, maintaining
hire debt for the purpose healthy public finances is a
of financing public necessary condition for
investment projects that growth, which implies
complement private maintaining an appropriate
investment to translate into public deficit and debt
greater economic growth. level.
Literature Review
Rodríguez, A.; Azamar, A. 2013 p. 349
Alternatively, the work relies on Minsky (1980) and its financial

instability hypothesis transferred to sub-national public finance,
according to which increases in investment in the current period
encourage expectations of higher profits in the future, which
improves the price of capital assets and increases the confidence
of companies and financial intermediaries, which is reflected in
lower perception of risk and greater indebtedness
Metodologi
2. Descriptions of data and econometric Method
Description of data is presented in the tables. The variabeles of interest are public debt,public invesment,and
production per person. The production per person increased by little more than 4000 pesos between 1993 and
2012,a modest increase in 20 years (42%),inequalities between states with more and less income reported
increased ,which can be seen when analyzing the positive change in the standart deviation. The main feature of the
behavior of output per person is its meager growth and geograohich concentration.
Metodologi
1. Origin and characteristic of data
Two caveats must be carried out with respect to this

We built a data base with information from series: the first is that in the case of the state of
1993 to 2012 for the 32 states that make up the Hidalgofor 1999, Campeche 2003, 2006 and 2019,and
mexican republic. influenced by several Tlaxcala 1996-2004 and 2008-2009,debt reported
variables: value was zero, so we proceeded to assign a value of
one peso, since for the econometric analysis
1. Population logarithms were used. The second warning is that the
2. Total production debt reported by the SHCP only includes registered
3. The output per person bank debt and equity instruments emissions, but does
4. Public invesment and current expenditure not include all of te short-term debt, since only states
5. Schooling are required to report the debt that compromises the
entries received from the federal government
6. Foreign direct investment
7. Public debt
significant in the estimation with absolute values and
logarithms.
2. The variable interaction between public investment and
Result public debt was statistically significant at 0.01, using
absolute values and logarithms. In the case of the
We present the results of estimate logarithms, the interaction variable was lagged three
Equation (7) in absolute values and periods. This confirms the two proposed hypotheses,
logarithmsResults of the estimation of according to which the debt which is channeled for public
Equation (7) with the GMM. investment collaborates to observe a greater economic
growth. However, the marginal contribution of increases
in public debt and public investment on growth are small,
since for every 1% increase in this interaction variable,
output per capita rises 0.0000508 per cent.
3. Education is a variable that persistently shows as
statistically significant and implies that the greater degree
of schooling of the population of a state, the greater the
chance of increased production per person.
4. Finally, foreign direct investment, if logarithms are used,
is statistically significant at 0.01 and has the expected
positive sign. In absolute terms, it is statistically
significant, but with a negative sign; it presents a negative
correlation with output per person, so it is not possible to
Discussion
In this article, using Dynamic Models with panel data and the GMM, there has been evidence to
confirm that between public investment and public debt of the Mexican states, there is a positive
correlation, which is in line with the findings of other researchers. Moreover, it has been shown that public
investment is a positive determinant of economic growth, with which it can be stated that the debt that has
been hiring does have a relatively favorable impact on state economies. However, there are some points
that need to be made.
In light of the results presented, it is recommended to increase public investment and monitor the
effectiveness of multiplier effects; it is not only quantity, but as in many other areas of the economy, it is a
matter of quality. It is also recommended that its funding comes from taxes and not exclusively from debt,
an issue long debated in Mexico, since states are highly dependent on resources received via the
federation: today, of every 100 pesos received by states, 97 pesos come from the federation and only three
pesos are collected internally. Tax reforms should aim at giving the states greater tax powers and
strengthen the legal framework to ensure that public finances are handled more transparently and citizens
may have total certainty over the government’s use of its resources.
The main conclusion of this work is that the public debt
may be an option to finance public investment, as long
as it is intended fully for this area and not diverted for
01 other purposes, which is always likely due to the
configuration of the incentives of the political class in
power.
The current legal framework should be reformed to

expressly state that debt contracted under any
Conclusion 02
circumstances must not be used in areas other than
investment in public works with productive, character,
introducing severe penalties for those who do not act in
this way
We can reflect on the true destination of public debt

that is contracted by the state governments. It is very
03 likely that it is channeling other than public investment
expenditures, particularly to cover the operating
expenditure of governments.
Thank You

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Public Debt, Public Investment and Economic Growth

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Public Debt, Public Investment and

Economic Growth in Mexico

There are at least three sources to finance government spending:

This work establishes that According to orthodox

Rodríguez, A.; Azamar, A. 2013 p. 349

Alternatively, the work relies on Minsky (1980) and its financial

Two caveats must be carried out with respect to this

The current legal framework should be reformed to

We can reflect on the true destination of public debt

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