Some Misconceptions About Public Investment Efficiency and Growth

We reconsider the macroeconomic implications of public investment efficiency, defined as the ratio between the actual increment to public capital and the amount spent. We show that in standard neoclassical and endogenous growth models, increases in public investment spending in inefficient countries do not generally have a lower impact on growth than in efficient countries. This apparently counterintuitive result, which contrasts with earlier papers and policy analyses, follows from the standard assumption that the marginal product of public capital declines with the capital/output ratio. The implication is that efficiency and scarcity of public capital are likely to be inversely related across countries. Both efficiency and the rate of return thus need to be considered together in assessing the impact of increases in investment, and blanket recommendations against increased public investment spending in inefficient countries need to be rethought.