Some Misconceptions about Public Investment Efficiency and Growth

By Andrew Berg, Edward F Buffie, Catherine A Pattillo, Rafael A Portillo, Andrea F Presbitero, Luis-Felipe Zanna

December 23, 2015

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Andrew Berg, Edward F Buffie, Catherine A Pattillo, Rafael A Portillo, Andrea F Presbitero, and Luis-Felipe Zanna. Some Misconceptions about Public Investment Efficiency and Growth, (USA: International Monetary Fund, 2015) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We reconsider the macroeconomic implications of public investment efficiency, defined as the ratio between the actual increment to public capital and the amount spent. We show that, in a simple and standard model, increases in public investment spending in inefficient countries do not have a lower impact on growth than in efficient countries, a result confirmed in a simple cross-country regression. This apparently counter-intuitive result, which contrasts with Pritchett (2000) and recent policy analyses, follows directly from the standard assumption that the marginal product of public capital declines with the capital/output ratio. The implication is that efficiency and scarcity of public capital are likely to be inversely related across countries. It follows that both efficiency and the rate of return need to be considered together in assessing the impact of increases in investment, and blanket recommendations against increased public investment spending in inefficient countries need to be reconsidered. Changes in efficiency, in contrast, have direct and potentially powerful impacts on growth: “investing in investing” through structural reforms that increase efficiency, for example, can have very high rates of return.

Subject: Private investment, Production growth, Public investment spending, Stocks, Total factor productivity

Keywords: Capital stock, Production function, Rate of return, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/272
Stock No:

WPIEA2015272
ISBN:

9781513589978
ISSN:

1018-5941

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