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Some Misconceptions about Public Investment Efficiency and Growth
Author:
Mr. Andrew Berg
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,
Mr. Edward F Buffie
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Ms. Catherine A Pattillo
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,
Mr. Rafael A Portillo
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Mr. Andrea F Presbitero
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https://orcid.org/0000-0003-4622-941X
, and
Luis-Felipe Zanna
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Series:
IMF Working Papers
Volume/Issue:
Volume 2015: Issue 272
Language:
English
Publication Date:
23 Dec 2015
DOI:
https://doi.org/10.5089/9781513589978.001
ISBN:
9781513589978
ISSN:
1018-5941
Pages:
37
Keywords:
WP; capital stock; production function; rate of return
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We reconsider the macroeconomic implications of public investment efficiency, defined as the ratio between the actual increment to public capital and the amount spent. We show that, in a simple and standard model, increases in public investment spending in inefficient countries do not have a lower impact on growth than in efficient countries, a result confirmed in a simple cross-country regression. This apparently counter-intuitive result, which contrasts with Pritchett (2000) and recent policy analyses, follows directly from the standard assumption that the marginal product of public capital declines with the capital/output ratio. The implication is that efficiency and scarcity of public capital are likely to be inversely related across countries. It follows that both efficiency and the rate of return need to be considered together in assessing the impact of increases in investment, and blanket recommendations against increased public investment spending in inefficient countries need to be reconsidered. Changes in efficiency, in contrast, have direct and potentially powerful impacts on growth: “investing in investing” through structural reforms that increase efficiency, for example, can have very high rates of return.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund