On the Capacity to Absorb Public Investment: How Much is Too Much?

Author/Editor:

Daniel Gurara ; Kangni R Kpodar ; Andrea F Presbitero ; Dawit Tessema

Publication Date:

February 28, 2020

Electronic Access:

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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.

Summary:

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.

Series:

Working Paper No. 20/48

Subject:

English

Publication Date:

February 28, 2020

ISBN/ISSN:

9781513529981/1018-5941

Stock No:

WPIEA2020048

Format:

Paper

Pages:

37

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