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.
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.
This paper investigates how macroeconomic uncertainty affects the fiscal multiplier of public investment. In theory, uncertainty can reduce the multiplier if the private sector becomes more cautious and does not respond to the fiscal stimulus. Conversely, it can increase the fiscal multiplier if public investment shocks improve private agents’ expectations about future economic outlook, and lead to larger private spending. Using the disagreement about GDP forecasts as a proxy for uncertainty, we find that unexpected increases in public investment have larger and longer-lasting effects on output, investment, and employment during periods of high uncertainty, with multipliers above 2, and the larger multipliers are not driven by economic slack. Public investment shocks are also found to boost private sector confidence during heightened uncertainty, driving-up expectations about future economic development which in turn magnify private sector response to the initial stimulus.
Investment in infrastructure can be a driving force of the economic recovery in the aftermath of the COVID-19 pandemic in the context of shrinking fiscal space. Public-private partnerships (PPP) bring a promise of efficiency when carefully designed and managed, to avoid creating unnecessary fiscal risks. But fiscal illusions prevent an understanding the sources of fiscal risks, which arise in all infrastructure projects, and that in PPPs present specific characteristics that need to be addressed. PPP contracts are also affected by implicit fiscal risks when they are poorly designed, particularly when a government signs a PPP contract for a project with no financial sustainability. This paper reviews the advantages and inconveniences of PPPs, discusses the fiscal illusions affecting them, identifies a diversity of fiscal risks, and presents the essentials of PPP fiscal risk management.
This paper investigates the emerging global landscape for public-private co-investments in infrastructure. The creation of the Asian Infrastructure Investment Bank and other so-called “infrastructure investment platforms” are an attempt to tap into the pool of both public and private long-term savings in order to channel the latter into much needed infrastructure projects. This paper puts these new initiatives into perspective by critically reviewing the literature and experience with public private partnerships in infrastructure. It concludes by identifying the main challenges policy makers and other actors will need to confront going forward and to turn infrastructure into an asset class of its own.
This paper introduces a new index that captures the institutional environment underpinning public investment management across four different stages: project appraisal, selection, implementation, and evaluation. Covering 71 countries, including 40 low-income countries, the index allows for benchmarking across regions and country groups and for nuanced policy-relevant analysis and identification of specific areas where reform efforts could be prioritized. Potential research venues are outlined.
A structural growth slowdown is under way across the world: at current trends, the global rate of potential growth is expected to fall to a three-decade low over the remainder of the 2020s. Nearly all the forces that have powered growth and prosperity since the early 1990s have weakened. In addition, a series of shocks has affected the global economy over the past three years. A persistent and broad-based decline in long-term growth prospects imperils the ability of emerging market and developing economies to combat poverty, tackle climate change, and meet other key development objectives. The challenges presented by this potential inability call for an ambitious policy response at the national and global levels. This book presents the first detailed analysis of the growth slowdown and a rich menu of policy options to deliver better growth outcomes. ------------------------------------------------------------------------------------------------------------- This book presents a sobering analysis of the secular growth slowdown based on the most comprehensive database of potential growth estimates available to date. With nearly all the forces that have driven growth and prosperity in recent decades now weakened, the book argues that a prolonged period of weakness is under way, with serious implications for emerging market and developing economies. The authors call for bold policy actions at both the national and global levels to lift growth prospects. The book is essential reading for policy makers, economists, and anyone concerned about the future of the global economy. Beatrice Weder di Mauro Professor of International Economics, Geneva Graduate Institute, and President of the Centre for Economic Policy Research (CEPR) Economic policy making is becoming increasingly complicated in the 2020s. In addition to tackling traditional trade-offs in aggregate demand management and improving efficiency on the supply side, policy makers need to address new priorities and challenges, from addressing climate change and its impacts to improving income distribution, all in the context of lower growth rates, waning productivity growth, and flattening of the globalization process that has brought unprecedented prosperity across the globe and lifted more than a billion people out of poverty. In Falling Long-Term Growth Prospects, the authors do a phenomenal job of assessing these trends at the global and regional levels, identifying and unpacking salient twenty-first-century policy challenges, and providing thoughtful and evidence-based policy prescriptions for leaders in advanced, emerging market, and developing economies. Importantly, the book underscores that these challenges tend to be global and, hence, global cooperation at all levels is necessary to achieve optimal results. Alas, we seem to be going in the opposite direction; this book offers a road map to put us back on the path to creating a more integrated, prosperous, and equitable global community. Michael G. Plummer Director, SAIS Europe and ENI Professor of International Economics, The Johns Hopkins University
The result of two years work by 19 experienced policymakers and two Nobel prize-winning economists, 'The Growth Report' is the most complete analysis to date of the ingredients which, if used in the right country-specific recipe, can deliver growth and help lift populations out of poverty.
This is an open access title available under the terms of a [CC BY 3.0 IGO] License. It is free to read, download and share on Elgaronline.com. Asia has shown the world what success in economic development looks like. From the amazing transformations of Japan, the Republic of Korea, and the other ‘tigers’ in the early 70s, to the more recent takeoffs of the People’s Republic of China (PRC), India, and the leading economies in Southeast Asia, the region has prospered at a startling pace. Technologies were adopted, productivity raised, and export markets conquered. Billions were lifted out of poverty. What was once a backwater is now a global engine of growth.
Setting macroeconomic policy is especially difficult in fragile states. Macroeconomic Policy in Fragile States addresses the many issues involved and considers ways to improve the effectiveness of macroeconomic management in the face of these constraints.
