Description

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.

More publications in this series: Working Papers

More publications by: Andrew Berg ; Edward F. Buffie ; Catherine A. Pattillo ; Rafael Portillo ; Andrea Presbitero ; Luis-Felipe Zanna