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Public Investment in Developing Countries: A Blessing or a Curse?

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Author Info
Eduardo A. Cavallo ()
Christian Daude

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Abstract

This paper analyzes the impact of public investment on private investment in panel of 116 developing countries between 1980 and 2006 using dynamic panel data techniques, finding a strong and robust crowding-out effect that seems to be the norm rather than the exception, both across regions and over time. It is also found that this effect is dampened (or even reversed) in countries with better institutions and that are more open to international trade and financial flows. These results are consistent with the hypothesis that, while public infrastructure may be complementary to private capital in the aggregate production function, there are distortions associated with the public investment process that might render a crowding out of private investment in the course of building public capital stocks. These distortions, in turn, are more prevalent in countries with worse institutions or that lack trade and financial openness.

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Paper provided by Inter-American Development Bank, Research Department in its series RES Working Papers with number 4597.

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Date of creation: Oct 2008
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Handle: RePEc:idb:wpaper:4597

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  6. Christian Daude & Ernesto Stein, 2007. "The Quality Of Institutions And Foreign Direct Investment," Economics and Politics, Blackwell Publishing, vol. 19(3), pages 317-344, November. [Downloadable!] (restricted)
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  19. Eduardo A. Cavallo & Patricio Valenzuela, 2007. "The Determinants of Corporate Risk in Emerging Markets: An Option-Adjusted Spread Analysis," RES Working Papers 4513, Inter-American Development Bank, Research Department. [Downloadable!]
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  20. Khan, Mohsin S & Kumar, Manmohan S, 1997. "Public and Private Investment and the Growth Process in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 69-88, February.
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  28. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, 06. [Downloadable!]
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  29. Jonathan Isham & Daniel Kaufmann, 1999. "The Forgotten Rationale For Policy Reform: The Productivity Of Investment Projects," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 149-184, February. [Downloadable!] (restricted)
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