Some Misconceptions about Public Investment Efficiency and Growth
IMF Working Papers, December 23, 2015
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Bibliographic details
- Authors: Andrew Berg, Edward F Buffie, Catherine A Pattillo, Rafael A Portillo, Andrea F Presbitero, Luis-Felipe Zanna
- Published: December 23, 2015
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513589978.001
Summary
- Public investment efficiency is defined as the ratio between the actual increment to public capital and the amount spent.
- 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.
- This result is confirmed in a simple cross-country regression.
- The result contrasts with Pritchett (2000) and recent policy analyses and follows from the standard assumption that the marginal product of public capital declines with the capital/output ratio.
- Efficiency and scarcity of public capital are likely to be inversely related across countries.
- Both efficiency and the rate of return need to be considered together when assessing the impact of increases in investment.
- Changes in efficiency, such as “investing in investing” through structural reforms that increase efficiency, can have very high rates of return.
Key findings and evidence
- Increases in public investment spending in inefficient countries do not necessarily have a lower impact on growth than in efficient countries.
- The counter-intuitive result derives directly from the assumption that the marginal product of public capital declines with the capital/output ratio.
- Cross-country regression evidence presented in the paper confirms the theoretical result from the simple model.
- Efficiency and scarcity of public capital are likely to be inversely related across countries.
- Structural reforms that increase public investment efficiency can have direct and potentially powerful impacts on growth.
Implications for policy
- Blanket recommendations against increased public investment spending in inefficient countries need to be reconsidered.
- Policymakers should assess both efficiency and the rate of return together when evaluating increases in public investment.
- “Investing in investing” via structural reforms to raise efficiency can yield very high rates of return and directly boost growth.