Roads or Schools: A Critical Tradeoff
IMF Blog, November 9, 2017
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Bibliographic details
- Authors: Manoj Atolia, Bin Grace Li, Ricardo Marto, Giovanni Melina
- Published: November 9, 2017
Overview
- Authors: Manoj Atolia, Bin Grace Li, Ricardo Marto, Giovanni Melina
- Date: November 9, 2017
- Empirical focus: cross-section of low-income countries during 2000-2008.
- Core question: How should governments allocate finite public resources between economic infrastructure ("roads") and social infrastructure ("schools") to maximize benefits?
Definitions
- Economic infrastructure ("roads"): investments such as roads, railways, ports, water, power, and telecommunications that help the economy function better.
- Social infrastructure ("schools"): capital spending, including schools, hospitals, and universities, that primarily delivers social services.
- For the analysis, capital spending is labeled as either "roads" or "schools."
Main findings
- Low-income countries tend to spend less on schools than on roads as a share of GDP.
- Long-run output effects for an average low-income country:
- A permanent increase of public investment in schools of 1 percent of GDP raises output by about 24 percent.
- An equal investment in roads boosts production by just 5 percent.
- Timing of gains:
- Investment in roads produces faster economic growth for the first 13 years.
- Investment in schools slows growth for nine years mainly because of the labor supply change.
- The growth payoff from schools overtakes that from roads after 24 years.
- Debt dynamics:
- The peak of the public debt increase associated with investment in schools is three times larger than that associated with investment in roads, due to higher upfront fiscal costs and delayed increases in output and government revenues.
Political economy
- Political myopia: Few political leaders plan over a multi-decade horizon; the 24-year horizon for schools to overtake roads favors investment in roads politically.
- The higher short-term fiscal and growth costs of schools increase leaders' reluctance to commit resources to social infrastructure.
Front-loading ("big push") scenario
- Strategy: Front-load investment in schools (a rapid "crash" effort).
- Effects:
- Accelerates the payoff: with a "big push," the gain in growth from schools overtakes that derived from roads in about 20 years, or about four years earlier than without front-loading.
- Short-term costs are higher: rapid scale-up of schools spending detracts from private consumption, labor supply, and output in the short and medium term.
- Short-term fiscal burden: requires a higher tax and debt burden in the short run.
- Debt reversion: within 20 years, public debt as a share of GDP reverts to its original level, or lower, owing to the faster rise in output.
- Fiscal handicap of schools relative to roads almost vanishes with a "big push."
Policy recommendations
- To overcome political myopia and short-term debt concerns, provide external support:
- Offer concessional financing and grants to give policymakers the incentive to emphasize investment in schools.
- Tie aid to social infrastructure to address planning horizon issues, while concessional terms mitigate concerns of debt intolerance.
Source: Roads or Schools: A Critical Tradeoff (IMF blog entry, November 9, 2017).
Content in this bundle
- 修路还是办学？一项重要的权衡; IMF 博客
- 道路か、学校か ― 両立困難な究極の選択, マノージ・アトーリア、ビン・グレース・リー、リカルド・マルト、ジョバンニ・メリナ
