Some Misconceptions About Public Investment Efficiency and Growth

Posted: 3 Feb 2016

See all articles by Edward F. Buffie

Edward F. Buffie

Indiana University Bloomington - Department of Economics

Catherine A. Pattillo

International Monetary Fund (IMF) - Research Division

Andrea Filippo Presbitero

Università Politecnica delle Marche - Department of Economics; Centre for Macroeconomics & Finance Research (CeMaFiR)

Rafael Portillo

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2015

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: Public investment, Growth, Efficiency, Low-Income Countries, capital, investment, production, Infrastructures, General, Institutions and Growth, All Countries,

JEL Classification: H54, O40, O43

Suggested Citation

Buffie, Edward F. and Pattillo, Catherine and Presbitero, Andrea Filippo and Portillo, Rafael, Some Misconceptions About Public Investment Efficiency and Growth (December 2015). IMF Working Paper No. 15/272. Available at SSRN: https://ssrn.com/abstract=2727221

Edward F. Buffie

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall 105
107 S. Indiana Avenue
Bloomington, IN 47405-7000
United States
812-855-4848 (Phone)

Catherine Pattillo

International Monetary Fund (IMF) - Research Division ( email )

700 19th Street NW
Washington, DC 20431
United States

Andrea Filippo Presbitero

Università Politecnica delle Marche - Department of Economics ( email )

Piazzale Martelli, 8
Ancona, AN 60121
Italy
+39 0712207074 (Phone)

HOME PAGE: http://sites.google.com/site/presbitero/

Centre for Macroeconomics & Finance Research (CeMaFiR) ( email )

Piazza Mirabello, 2
Milan, 20100
Italy

Rafael Portillo (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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