This paper examines the extent to which real per capita incomes have converged across developing countries during the last two decades, paying particular attention to the differential effect of private and public investment on growth. In addition, it investigates the role of human capital, trade orientation, and foreign direct Investment in determining growth. A theoretical framework is developed within which the separate roles of private and public investment in the convergence process can be examined, and empirical tests are conducted on a sample of 95 developing countries over the period 1970-90.
The results suggest that during the last two decades, there was no relationship between initial per capita GDP and its subsequent growth, thereby rejecting the convergence hypothesis. However, once aggregate investment rate and population growth are taken into account, there is evidence of convergence, although its speed differed markedly between the two decades. The effects of private and public sector investment on growth differed significantly, with private investment being consistently more productive than public investment, especially during the 1980s. The relative effects of public and private investment also exhibited pronounced regional variations. The stock of human capital, trade orientation, and foreign direct investment had positive but generally weak direct effects on per capita GDP growth.
From the standpoint of policy, the results suggest a clear need to improve the productivity of public sector investment by identifying more rigorously the types of investment that have positive net returns and are likely to be complementary to the private sector. At the same time, measures should be undertaken to stimulate private investment, which in turn would lead to a sustainable rate of growth. An increased emphasis on education, and the adoption or maintenance of outward-oriented policies, could also help raise private investment and spur long-term economic growth.