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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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Author Info
Pritchett, Lant

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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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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;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
  5. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December. [Downloadable!] (restricted)
    Other versions:
  6. Isham, Jonathan & Narayan, Deepa & Pritchett, Lant, 1995. "Does Participation Improve Performance? Establishing Causality with Subjective Data," World Bank Economic Review, Oxford University Press, vol. 9(2), pages 175-200, May.
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  8. Baffes, John & Shah, Anwar, 1993. "Productivity of public spending, sectoral allocation choices, and economic growth," Policy Research Working Paper Series 1178, The World Bank. [Downloadable!]
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  9. Douglas Holtz-Eakin, 1992. "Public-Sector Capital and the Productivity Puzzle," NBER Working Papers 4122, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. 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(1992-2), pages 157-212. [Downloadable!]
  12. Isham, Jonathan & Kaufmann, Daniel & Pritchett, Lant, 1995. "Governance and returns on investment : an empirical investigation," Policy Research Working Paper Series 1550, The World Bank. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stephane Straub, 2008. "Infrastructure and Growth in Developing Countries: Recent Advances and Research Challenges," ESE Discussion Papers 179, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
    Other versions:
  2. Ismihan, Mustafa & Ozkan, F Gulcin, 2007. "Public investment: a remedy or a curse? Examining the Role of Public Investment for Macroeconomic Performance," CEPR Discussion Papers 6139, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Agenor, Pierre-Richard & Bayraktar, Nihal & Pinto Moreira, Emmanuel & El Aynaoui, Karim, 2005. "Achieving the Millennium Development Goals in Sub-Saharan Africa : a macroeconomic monitoring framework," Policy Research Working Paper Series 3750, The World Bank. [Downloadable!]
    Other versions:
  4. Diaz-Bautista, Alejandro, 2002. "The role of telecommunications infrastructure and human capital: Mexico´s economic growth and convergence," ERSA conference papers ersa02p102, European Regional Science Association. [Downloadable!]
  5. Arestoff, Florence & Hurlin, Christophe, 2006. "Estimates of government net capital stocks for 26 developing countries, 1970-2002," Policy Research Working Paper Series 3858, The World Bank. [Downloadable!]
  6. Canning, David, 1998. "A database of world infrastructure stocks, 1950-95," Policy Research Working Paper Series 1929, The World Bank. [Downloadable!]
  7. Ablo, Emmanuel & Reinikka, Ritva, 1998. "Do budgets really matter? - evidence from public spending on education and health in Uganda," Policy Research Working Paper Series 1926, The World Bank. [Downloadable!]
  8. Eduardo A. Cavallo & Christian Daude, 2008. "Public Investment in Developing Countries: A Blessing or a Curse?," RES Working Papers 4597, Inter-American Development Bank, Research Department. [Downloadable!]
  9. Pritchett, Lant, 2000. "Understanding Patterns of Economic Growth: Searching for Hills among Plateaus, Mountains, and Plains," World Bank Economic Review, Oxford University Press, vol. 14(2), pages 221-50, May. [Downloadable!]
  10. Omar Azfar & Tugrul Gurgur, 2008. "Does corruption affect health outcomes in the Philippines?," Economics of Governance, Springer, vol. 9(3), pages 197-244, July. [Downloadable!] (restricted)
  11. Teuea Toatu, 2002. "Unravelling the Pacific Paradox," International and Development Economics Working Papers idec02-2, International and Development Economics. [Downloadable!]
  12. Rajkumar, Andrew Sunil & Swaroop, Vinaya, 2002. "Public spending and outcomes : does governance matter?," Policy Research Working Paper Series 2840, The World Bank. [Downloadable!]
  13. Teuea Toatu, 2002. "Unravelling the Pacific paradox," Development Economics Working Papers 603, East Asian Bureau of Economic Research. [Downloadable!]
  14. Pablo Astorga & Ame R. Bergés & Valpy Fitzgerald, 2003. "Productivity Growth in Latin America during the Twentieth Century," Oxford University Economic and Social History Series _052, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
  15. Easterly, William, 1999. "When is fiscal adjustment an illusion?," Policy Research Working Paper Series 2109, The World Bank. [Downloadable!]
    Other versions:
  16. Warlters, Michael & Auriol, Emmanuelle, 2005. "The marginal cost of public funds in Africa," Policy Research Working Paper Series 3679, The World Bank. [Downloadable!]
  17. Easterly, William, 1997. "The ghost of financing gap : how the Harrod-Domar growth model still haunts development economics," Policy Research Working Paper Series 1807, The World Bank. [Downloadable!]
  18. Canning, David, 1999. "Infrastructure's contribution to aggregate output," Policy Research Working Paper Series 2246, The World Bank. [Downloadable!]
  19. Commander, Simon & Davoodi, Hamid R. & Lee, Une J., 1997. "The causes of government and the consequences for growth and well-being," Policy Research Working Paper Series 1785, The World Bank. [Downloadable!]
  20. Pritchett, Lant, 1998. "Patterns of economic growth : hills, plateaus, mountains, and plains," Policy Research Working Paper Series 1947, The World Bank. [Downloadable!]
  21. Agenor, Pierre-Richard & Bayraktar, Nihal & Pinto Moreira, Emmanuel, 2006. "Linking public investment programs and SPAHD macro models : methodology and application to aid requirements," Policy Research Working Paper Series 3944, The World Bank. [Downloadable!]
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