Public Investment in Developing Countries: A Blessing or a Curse?

42 Pages Posted: 25 Apr 2011

See all articles by Eduardo A. Cavallo

Eduardo A. Cavallo

Inter-American Development Bank (IDB) - Research Department

Christian Daude

Inter-American Development Bank (IADB)

Date Written: October 2008

Abstract

This paper analyzes the impact of public investment on private investment in 116 developing countries between 1980 and 2006. It finds a strong crowding-out effect that seems to be the norm rather than the exception, both across regions and over time. This effect is dampened (or even reversed) in countries with better institutions that are more open to international trade and financial flows. These results confirm that while public infrastructure may complement private capital, distortions associated with the public investment process might crowd out private investment in the course of building public capital stocks. These distortions are more prevalent in countries with weak institutions or closed economies.

Suggested Citation

Cavallo, Eduardo A. and Daude, Christian, Public Investment in Developing Countries: A Blessing or a Curse? (October 2008). IDB Working Paper No. 547, Available at SSRN: https://ssrn.com/abstract=1820935 or http://dx.doi.org/10.2139/ssrn.1820935

Eduardo A. Cavallo (Contact Author)

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

Christian Daude

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

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