9. Public Capital Effects and Regional Spillover in Spain

Public investment, and thus public capital accumulation, is a key determinant of the macroeconomic performance at a regional level. This chapter evaluates to what extent Spain as a whole and each of its regions individually respond to the economic stimulus provided by this investment. The economic impact of public capital has been the subject of growing attention in the literature since Aschauer (1989). In his seminal contribution, Aschauer showed the crucial role of public capital to understand the size and evolution of the total factor productivity (TFP). The TFP was defined by Solow (1956) as the part of the production which cannot be explained by the accrual of the production factors. Since then, it was also known as the Solow residual and was subsequently the object of attention in the macroeconomic literature. For example, Arrow (1962), Romer (1986, 1990), and Mankiw et al. (1992), among many others, searched for the main determining factors of the TFP and focussed on the role of technology and the human capital stock. It is in this context that Aschauer (1989, 2000) and Barro (1990) showed that public capital stock is essential to explain economic growth. In particular, an insufficiency in the provision of public capital can lead to substantial inefficiencies in the private sector and reduce the possibilities of economic progress.