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Public investment in developing countries: A blessing or a curse?

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  • Cavallo, Eduardo
  • Daude, Christian

Abstract

This paper analyzes the relationship between public and private investment in developing countries. We set up a simple theoretical model where two countervailing forces coexist. On the one hand, public investment raises the marginal productivity of private capital and leads to potential crowding-in of private investment. On the other hand, weak institutions and restricted access to financing could diminish the positive effects of public investment projects and crowd-out private investment. The empirical results - which exploit both the time series and cross sectional variation in the data using a panel of 116 developing countries with annual observations between 1980 and 2006 - suggest that on average the crowing-out effect dominates. Moreover, we find that this crowing-out effect is dampened (or even reversed) in countries with better institutions - where the marginal productivity of public investment is conceivably higher - and that are more open to international trade and financial flows, such that financing constraints are less binding.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 39 (2011)
Issue (Month): 1 (March)
Pages: 65-81

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Handle: RePEc:eee:jcecon:v:39:y:2011:i:1:p:65-81

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Web page: http://www.elsevier.com/locate/inca/622864

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Keywords: Public investment Crowding out Institutions Openness;

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Citations

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Cited by:
  1. Augustin Kwasi Fosu & Yoseph Yilma Getachew & Thomas Ziesemer, 2012. "Optimal Public Investment, Growth, and Consumption: Evidence from African Countries," Working Papers 2012_03, Durham University Business School.
  2. Grigoli, Francesco & Mills, Zachary, 2011. "Do high and volatile levels of public investment suggest misconduct ? the role of institutional quality," Policy Research Working Paper Series 5735, The World Bank.
  3. Ricardo N. Bebczuk & Eduardo A. Cavallo, 2014. "Is Business Saving Really None of Our Business?," IDB Publications 85654, Inter-American Development Bank.
  4. Eden, Maya & Kraay, Aart, 2014. ""Crowding in"and the returns to government investment in low-income countries," Policy Research Working Paper Series 6781, The World Bank.
  5. Okey K. N. Mawussé, 2013. "Institutions and scientific research in Africa," Economics Bulletin, AccessEcon, vol. 33(2), pages 1487-1503.
  6. Ricardo Silva & Vitor Manuel Carvalho & Ana Paula Ribeiro, 2013. "How large are fiscal multipliers? A panel-data VAR approach for the Euro area," FEP Working Papers 500, Universidade do Porto, Faculdade de Economia do Porto.
  7. Farla, Kristine & de Crombrugghe, Denis & Verspagen, Bart, 2013. "Institutions, Foreign Direct Investment, and Domestic Investment: crowding out or crowding in?," MERIT Working Papers 054, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  8. Diogo Barbosa & Vitor M. Carvalho & Paulo J. Pereira, 2013. "The interaction between firms and Government in the context of investment decisions: a real options approach," FEP Working Papers 507, Universidade do Porto, Faculdade de Economia do Porto.

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