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

This paper rationalizes this outcome looking at the association between cost inflation and public investment in road construction projects

From:: Foreign, Commonwealth & Development Office
Published: 28 February 2020

Document Type:: Working Paper
Theme:: Economic Growth
Authors:: Gurara, D, Kpodar, K, Presbitero, A.F., Tessema, D

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.

This work is part of the ‘Macroeconomics in Low-income countries’ programme

Citation

Daniel Gurara, Kangni Kpodar, Andrea F. Presbitero and Dawit Tessema (2020) On the Capacity to Absorb Public Investment: How Much is Too Much? IMF Working Paper No. 20/48