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

On the Capacity to Absorb Public Investment: How Much is Too Much?
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Volume/Issue: Volume 2020 Issue 048
Publication date: February 2020
ISBN: 9781513529981
$18.00
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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Exports and Imports , Public Finance , WP , marginal cost , cost function , public investment , investment drive , investment program , investment acceleration , portfolio mix , investment inefficiency , Public investment spending , Public investment and public-private partnerships (PPP) , Absorptive capacity , Capacity utilization , Infrastructure , Global , Unit costs , Investment efficiency

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Summary

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.

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