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

Daniel Gurara, Kangni Kpodar, Andrea Presbitero and Dawit Tessema

No 2020/048, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; marginal cost; cost function; public investment; investment drive; investment program; investment acceleration; portfolio mix; investment inefficiency; Public investment spending; Public investment and public-private partnerships (PPP); Absorptive capacity; Capacity utilization; Infrastructure; Global; Unit costs; Investment efficiency (search for similar items in EconPapers)
Pages: 37
Date: 2020-02-28
New Economics Papers: this item is included in nep-ppm, nep-tre and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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