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

38 Pages Posted: 20 Apr 2020

See all articles by Daniel Gurara

Daniel Gurara

International Monetary Fund (IMF)

Kangni Kpodar

International Monetary Fund (IMF)

Andrea Presbitero

International Monetary Fund (IMF)

Dawit Tessema

International Monetary Fund (IMF)

Date Written: February 2020

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: National income, Public investments, Absorptive capacity, Economic growth, Public investment programs, Public investment, Unit costs, Investment efficiency, infrastructure, WP, unit cost, quantiles, capacity constraint, public investment program

JEL Classification: H5, L70, R40, E01, L31, H54, C43, E52

Suggested Citation

Gurara, Daniel and Kpodar, Kangni and Presbitero, Andrea and Tessema, Dawit, On the Capacity to Absorb Public Investment: How Much is Too Much? (February 2020). IMF Working Paper No. 20/48, Available at SSRN: https://ssrn.com/abstract=3579668

Daniel Gurara (Contact Author)

International Monetary Fund (IMF) ( email )

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

Kangni Kpodar

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

Dawit Tessema

International Monetary Fund (IMF) ( email )

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

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