The tyranny of concepts:: CUDIE (Cumulated, depreciated, investment effort) is not capital

The cost of public investment is not the increment to 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 economically valuable "capital.'' 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) as a proxy for capital stocks. However, particularly 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 calculations presented here suggest that in many countries government investment spending has created little useful capital. This has implications in three broad areas. First, none of the existing empirical estimates of the impact of public spending has identified the productivity of public capital. Even where public capital has a potentially large contribution to production, public-investment spending may have had a low impact. Second, it implies that all estimates of total factor productivity in developing countries are deeply suspect as there is no way to empirically distinguish between low growth because of investments that create no factors and low growth due to slow productivity growth. Third, multivariate regressions to date have not adequately controlled for capital stock growth, which leads to erroneous interpretations of regression coefficients.