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Public Investment as an Engine of Growth

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Public Investment as an Engine of Growth

IMF,

15 min read
10 take-aways
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What's inside?

Big increases in public investment may not accelerate long-term economic growth in low-income countries.

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Editorial Rating

7

Qualities

  • Innovative
  • Scientific
  • Eye Opening

Recommendation

Governments generally promote public investment in infrastructure development projects as a catalyst for sustainably faster economic growth. But Andrew M. Warner, an economist at the International Monetary Fund, says that economic slumps are more likely to follow public investment drives in low-income countries. Inadequate or corrupt implementation can undermine even the most promising civic undertaking. Diminishing returns on investment and irrational or nonexistent project screening and selection are just a few of the problems Warner highlights in a series of dated but illuminating case studies on past government investment programs in Mexico, Bolivia, South Korea, the Philippines and Taiwan. getAbstract suggests this well-researched report to economists, development specialists and analysts as an alternative point of view on state investment in capital projects. Those seeking a deeper understanding of public capital investments and their presumed role as economic growth catalysts will find much to ponder in this evaluation.

Summary

Public Investments and Economic Growth

The belief that public capital investment leads to higher rates of economic growth is a foundational feature of the “big push models” of infrastructure development that emerged in the 1940s, 1950s and 1960s. These models imply that a critical mass of concurrent civic investment projects will produce an “average social return” on investment that is significantly higher than the “average private return.”

Today, the International Monetary Fund (IMF) sees the lack of adequate infrastructure in developing countries as an impediment to those nations’ economic growth. Other international financial institutions, such as the African Development Bank, also consider infrastructure as a catalyst of economic growth. However, empirical research on public investment campaigns reveals that they have a minor, short-term association with faster economic growth but a negligible long-term impact on GDP. In fact, evidence from 21 countries based on data from the late 1960s to 2011, generally shows that economic downturns, not faster growth rates, have followed booms in public investment.

Why The Long-Term Impact of Public Investments Is Disappointing...

About the Author

Andrew M. Warner is an economist at the International Monetary Fund.

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