Investing in Public Infrastructure: Roads or Schools?

IMF Working Papers, May 4, 2017

Source details

Canonical URL

Investing in Public Infrastructure: Roads or Schools?

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Manoj Atolia, Grace B Li, Ricardo Marto, Giovanni Melina
• Published: May 4, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475595932.001

Summary

• Governments in developing economies tend to invest more in roads than in schools.
• Distortionary taxation and debt aversion shape public investment composition because roads and schools yield growth benefits at different paces: costs are front-loaded for both, but the growth benefits of schools accrue with a delay.
• With a “big push,” even assuming a large "15 percent" return differential in favor of schools, the government would still limit the fraction of the investment scale-up going to schools to about a half.
• Political myopia is a crucial determinant of public investment composition; a “big push,” by accelerating growth outcomes, mitigates myopia but increases risks to fiscal and debt sustainability.
• Tied concessional financing and grants can potentially mitigate adverse effects of both debt aversion and political myopia.

Key findings and quantitative points

• Costs of both roads and schools are front-loaded.
• Growth benefits:
  • Schools: benefits accrue with a delay.
  • Roads: benefits materialize more quickly (implied contrast; source emphasizes pace difference).
• Return differential example:
  • A “big push” scenario with a "15 percent" return differential in favor of schools still results in the government allocating about a half of the investment scale-up to schools.
• Political economy:
  • Political myopia reduces the share of long‑lag investments (schools) in public investment portfolios.
  • Acceleration of growth outcomes under a “big push” reduces myopia but exacerbates fiscal and debt sustainability risks.

Determinants of investment composition

• Distortionary taxation: affects optimal financing and composition of public investment.
• Debt aversion: limits willingness to borrow to finance front‑loaded costs, biasing toward faster-return investments.
• Political myopia: short electoral horizons or short-term policy incentives favor investments with quicker payoffs.
• Financing modalities:
  • Tied concessional financing and grants: identified as mechanisms that can alleviate constraints from debt aversion and political myopia.

Policy implications and recommendations

• Consider targeted concessional financing or grants to support higher shares of delayed-return investments (schools) without worsening debt sustainability.
• Weigh the trade-off between accelerating growth through a “big push” and elevated fiscal and debt sustainability risks.
• Account for political myopia in designing public investment programs; policies that lengthen political horizons or insulate investment decisions may increase allocations to human capital investments with delayed returns.

Source: Investing in Public Infrastructure: Roads or Schools?, IMF Working Paper No. 2017/105

Content in this bundle

• Investing in Public Infrastructure: Roads or Schools?, WP/17/105, May 2017
  • Investing in Public Infrastructure: Roads or Schools?, WP/17/105, May 2017 (Markdown version)
  • Investing in Public Infrastructure: Roads or Schools?, WP/17/105, May 2017 (PDF)