Some Misconceptions About Public Investment Efficiency and Growth

22 Pages Posted: 6 Mar 2019

See all articles by Andrew Berg

Andrew Berg

International Monetary Fund (IMF) - Developing Country Studies Division

Edward F. Buffie

Indiana University Bloomington - Department of Economics

Catherine A. Pattillo

International Monetary Fund (IMF) - Research Division

Rafael Portillo

International Monetary Fund (IMF)

Andrea Presbitero

International Monetary Fund (IMF)

Luis‐Felipe Zanna

International Monetary Fund

Multiple version iconThere are 2 versions of this paper

Date Written: April 2019

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 standard neoclassical and endogenous growth models, increases in public investment spending in inefficient countries do not generally have a lower impact on growth than in efficient countries. This apparently counterintuitive result, which contrasts with earlier papers and policy analyses, follows 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. Both efficiency and the rate of return thus 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 rethought.

Suggested Citation

Berg, Andrew and Buffie, Edward F. and Pattillo, Catherine and Portillo, Rafael and Presbitero, Andrea and Zanna, Luis‐Felipe, Some Misconceptions About Public Investment Efficiency and Growth (April 2019). Economica, Vol. 86, Issue 342, pp. 409-430, 2019. Available at SSRN: https://ssrn.com/abstract=3345652 or http://dx.doi.org/10.1111/ecca.12275

Andrew Berg

International Monetary Fund (IMF) - Developing Country Studies Division ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8843 (Phone)
202-589-8843 (Fax)

Edward F. Buffie (Contact Author)

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

Rafael Portillo

International Monetary Fund (IMF) ( email )

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

Andrea Presbitero

International Monetary Fund (IMF) ( email )

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

Luis‐Felipe Zanna

International Monetary Fund

Kuwait

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