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Some Misconceptions about Public Investment Efficiency and Growth

Andrew Berg (), Edward F. Buffie (), Catherine Pattillo (), Rafael Portillo, Andrea Presbitero and Luis-Felipe Zanna ()
Additional contact information
Edward F. Buffie: Indiana University
Catherine Pattillo: International Monetary Fund (IMF)
Luis-Felipe Zanna: International Monetary Fund (IMF)

No 116, Mo.Fi.R. Working Papers from Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences

Abstract: 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.

Keywords: Efficiency; Growth; Low-Income Countries; Public investment (search for similar items in EconPapers)
JEL-codes: H54 O40 O43 (search for similar items in EconPapers)
Date: 2015-12
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Related works:
Journal Article: Some Misconceptions About Public Investment Efficiency and Growth (2019) Downloads
Working Paper: Some Misconceptions about Public Investment Efficiency and Growth (2015) Downloads
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