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

By Daniel Gurara, Kangni R Kpodar, Andrea F Presbitero, Dawit Tessema

February 28, 2020

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Daniel Gurara, Kangni R Kpodar, Andrea F Presbitero, and Dawit Tessema. On the Capacity to Absorb Public Investment: How Much is Too Much?, (USA: International Monetary Fund, 2020) accessed November 21, 2024

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.

Subject: Absorptive capacity, Balance of payments, Capacity utilization, Expenditure, Infrastructure, National accounts, Production, Public investment and public-private partnerships (PPP), Public investment spending

Keywords: Absorptive capacity, Capacity utilization, Cost function, Global, Infrastructure, Investment acceleration, Investment drive, Investment efficiency, Investment inefficiency, Investment program, Marginal cost, Portfolio mix, Public investment, Public investment and public-private partnerships (PPP), Public investment spending, Unit costs, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/048
Stock No:

WPIEA2020048
ISBN:

9781513529981
ISSN:

1018-5941

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