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

_IMF Working Papers, February 28, 2020_

## Source details

**Canonical URL:** [On the Capacity to Absorb Public Investment: How Much is Too Much?](https://www.imf.org/en/publications/wp/issues/2020/02/28/on-the-capacity-to-absorb-public-investment-how-much-is-too-much-49039)

## Other formats

- [Markdown version](/en/publications/wp/issues/2020/02/28/on-the-capacity-to-absorb-public-investment-how-much-is-too-much-49039/index.md)
- [Structured JSON version](/en/publications/wp/issues/2020/02/28/on-the-capacity-to-absorb-public-investment-how-much-is-too-much-49039/index.json)
- [Bundle manifest](/en/publications/wp/issues/2020/02/28/on-the-capacity-to-absorb-public-investment-how-much-is-too-much-49039/bundle-manifest.json)

## 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).*

---

## Content in this bundle

- **Working Paper**
  - [Working Paper (Markdown version)](/-/media/files/publications/wp/2020/english/wpiea2020048-print-pdf.pdf.md){rel="alternate" type="text/markdown"}
  - [Working Paper (PDF)](/-/media/files/publications/wp/2020/english/wpiea2020048-print-pdf.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2020/02/28/on-the-capacity-to-absorb-public-investment-how-much-is-too-much-49039_