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On the Capacity to Absorb Public Investment: How Much is Too Much?
Author:
Daniel Gurara null

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Mr. Kangni R Kpodar
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Mr. Andrea F Presbitero
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https://orcid.org/0000-0003-4622-941X
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Dawit Tessema null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 048
Language:
English
Publication Date:
28 Feb 2020
DOI:
https://doi.org/10.5089/9781513529981.001
ISBN:
9781513529981
ISSN:
1018-5941
Pages:
37
Keywords:
WP; marginal cost; cost function; public investment; investment drive; investment program; investment acceleration; portfolio mix; investment inefficiency; Public investment spending; Public investment and public-private partnerships (PPP); Absorptive capacity; Capacity utilization; Infrastructure; Global; Unit costs; Investment efficiency
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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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While expanding public investment can help filling infrastructure bottlenecks, scaling up too much and too fast often leads to inefficient outcomes. This paper rationalizes this outcome looking at the association between cost inflation and public investment in a large sample of road construction projects in developing countries. Consistent with the presence of absorptive capacity constraints, our results show a non-linear U-shaped relationship between public investment and project costs. Unit costs increase once public investment is close to 10% of GDP. This threshold is lower (about 7% of GDP) in countries with low investment efficiency and, in general, the effect of investment scaling up on costs is especially strong during investment booms.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund