On the Capacity to Absorb Public Investment: How Much is Too Much?
IMF Working Papers, February 28, 2020
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- On the Capacity to Absorb Public Investment: How Much is Too Much?
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Bibliographic details
- Authors: Daniel Gurara, Kangni R Kpodar, Andrea F Presbitero, Dawit Tessema
- Published: February 28, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513529981.001
Summary findings
- Expanding public investment can help fill infrastructure bottlenecks but scaling up too much and too fast often leads to inefficient outcomes.
- The paper analyzes the association between cost inflation and public investment using a large sample of road construction projects in developing countries.
- Results show a non-linear U-shaped relationship between public investment and project costs.
Key empirical results
- Unit costs increase once public investment is close to 10% of GDP.
- The threshold at which unit costs begin to increase is lower (about 7% of GDP) in countries with low investment efficiency.
- The effect of investment scaling up on costs is especially strong during investment booms.
Interpretation and mechanisms
- Findings are consistent with the presence of absorptive capacity constraints: rapid or large-scale scaling-up of public investment can overwhelm implementation capacity and drive up unit costs.
- Cost inflation in the sample of road construction projects serves as the measured outcome linking scaling-up to inefficiency.
Policy implications and recommendations
- Scale-up plans should consider absorptive capacity limits to avoid sharp increases in unit costs.
- In countries with low investment efficiency, more conservative public investment targets (around the identified lower threshold) may be warranted to prevent cost overruns.
- Attention to sequencing, implementation capacity, and mitigation of investment booms can reduce the likelihood of cost inflation when expanding public investment.
Research scope
- Evidence is based on a large sample of road construction projects in developing countries.
- The analysis focuses on the association between public investment levels and project unit costs to infer absorptive capacity constraints.
IMF Working Paper: "On the Capacity to Absorb Public Investment: How Much is Too Much?" (Working Paper No. 2020/048).
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