## Investing in Public Infrastructure: Roads or Schools?

_IMF Working Papers, May 4, 2017_

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## 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

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### 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*

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_Source: https://www.imf.org/en/publications/wp/issues/2017/05/04/investing-in-public-infrastructure-roads-or-schools-44865_