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Mind your P's and Q's : the cost of public investment is not the value of public capital

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  • Pritchett, Lant

Abstract

The author presents theory and calculations to show that part of the explanation of slow growth in many poor countries is not that governments did not spend on investment, but that these investments did not create productive capital. For a variety of reasons governments take resources from current consumption to"invest"in the economic equivalent of pyramids, items that produce no future output. The most critical assumption necessary for cumulated investment flows to be even more reasonable proxies for capital stocks is that the cost of investments (the p's) is equal to the value of the capital stock evaluated as its increment to future profitability (the q's). This assumption can be justified only if investors act to equalize these. But there is ample reason not to believe that all governments act as profit maximizing investors - and ample reason to believe that some governments invest better than others. The implication is that a dollar's worth of public investment spending often does not create a dollar's worth of public capital. Calculations suggest that in a typical developing country less than 50 cents of capital were created for each public dollar invested. One of the difficulties of development may be that even when public capital is productive it may be difficult to create public sector capital.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1660.

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Date of creation: 31 Oct 1996
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Handle: RePEc:wbk:wbrwps:1660

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Keywords: International Terrorism&Counterterrorism; Economic Theory&Research; Capital Markets and Capital Flows; Banks&Banking Reform; Decentralization; International Terrorism&Counterterrorism; Banks&Banking Reform; Environmental Economics&Policies; Capital Flows; Economic Theory&Research;

References

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  1. Baffes, John & Shah, Anwar, 1993. "Productivity of public spending, sectoral allocation choices, and economic growth," Policy Research Working Paper Series 1178, The World Bank.
  2. Bosworth, B. & Collins, S.M. & Chen, Y.C., 1995. "Accounting for Differences in Economic Growth," Papers 115, Brookings Institution - Working Papers.
  3. Shah, Anwar, 1992. "Dynamics of Public Infrastructure, Industrial Productivity and Profitability," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 28-36, February.
  4. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  5. Eric A. Hanushek & Dongwook Kim, 1995. "Schooling, Labor Force Quality, and Economic Growth," NBER Working Papers 5399, National Bureau of Economic Research, Inc.
  6. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda 88-7, Federal Reserve Bank of Chicago.
  7. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
  8. Joel Slemrod, 1995. "Involvement, Prosperity, and Economic Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 373-431.
  9. Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers 885, C.E.P.R. Discussion Papers.
  10. Landau, Daniel, 1986. "Government and Economic Growth in the Less Developed Countries: An Empirical Study for 1960-1980," Economic Development and Cultural Change, University of Chicago Press, vol. 35(1), pages 35-75, October.
  11. Sudhir Anand & Martin Ravallion, 1993. "Human Development in Poor Countries: On the Role of Private Incomes and Public Services," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 133-150, Winter.
  12. Maxim Boycko & Andrei Shleifer & Robert W. Vishny, 1993. "Privatizing Russia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 139-192.
  13. Isham, Jonathan & Kaufmann, Daniel & Pritchett, Lant, 1995. "Governance and returns on investment : an empirical investigation," Policy Research Working Paper Series 1550, The World Bank.
  14. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  15. Isham, Jonathan & Narayan, Deepa & Pritchett, Lant, 1995. "Does Participation Improve Performance? Establishing Causality with Subjective Data," World Bank Economic Review, World Bank Group, vol. 9(2), pages 175-200, May.
  16. Douglas Holtz-Eakin, 1992. "Public-Sector Capital and the Productivity Puzzle," NBER Working Papers 4122, National Bureau of Economic Research, Inc.
  17. J. Bradford DeLong & Lawrence H. Summers, 1992. "Equipment Investment and Economic Growth: How Strong Is the Nexus?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 157-212.
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