- Richard Hemming, Gerd Schwartz, and Bernardin Akitoby
- Published Date:
- March 2007
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Traditionally, governments have built, maintained, and rehabilitated the physical infrastructure—such as roads, ports and airports, and telecommunications and electricity networks—without which most economic activity would be impossible. In fact, investment spending, particularly on infrastructure, used to be one of government’s main activities. Over the past three decades, however, public spending on infrastructure, as a share of GDP, has been on the decline worldwide. Both the causes and the consequences of this decline are far from clear.
Fiscal adjustment undertaken to stabilize the macroeconomy has sometimes been singled out as the main factor, but this overlooks the many other contributing factors. These include a decrease in public saving; the completion of major infrastructure networks; a pick-up in privatization activity in light of a growing preference for a smaller public sector; an increasingly diversified private sector that has expanded into infrastructure services; and a rise in current spending, including for civil service wages and social security. In addition, part of the decline may be purely statistical in nature: a broadening of financing options for infrastructure—for example, governments frequently contract out infrastructure services to the private sector—has allowed some infrastructure-related spending traditionally recorded as capital spending to be recorded as current spending.
Whether the decline in public investment in infrastructure has created bottlenecks for economic growth is an object of much debate. Infrastructure spending has been linked to higher economic growth in some cases, and individual infrastructure investments may generate fairly high social returns. However, it is far from certain that increasing spending on infrastructure would, in itself, be more growth-enhancing than, say, increasing spending on health care and education. Empirical studies have yielded widely different estimates of the impact of infrastructure investment on economic growth, and it is difficult to disentangle infrastructure-related effects from the impact of other factors, such as spending on human capital or the business environment. Nonetheless, the quality of physical infrastructure clearly affects a country’s productivity, competitiveness in export markets, and ability to attract foreign investment.
Does this mean that countries should increase public investment in infrastructure? If the answer is yes, how can they do so in a fiscally responsible manner? Are public-private partnerships (PPPs) a viable alternative?1
The IMF has devoted several studies to these questions. In March 2004, it published “Public Investment and Fiscal Policy,” and “Public-Private Partnerships.”2 To test the analytical frameworks developed in those two overviews, the IMF carried out eight additional studies in a diverse group of developing and emerging countries in Africa, Asia, Latin America, and the Middle East. The studies’ findings were summarized in two papers that were released in April 2005, “Public Investment and Fiscal Policy—Lessons from the Pilot Country Studies,” and “Public Investment and Fiscal Policy—Summaries of the Pilot Country Studies.”3 An additional study looks at the fiscal risks arising from government guarantees.4 This Economic Issue draws on these three studies as well as on a recent IMF Special Issues paper that covers similar ground.5