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On the capacity to absorb public investment: How much is too much?☆

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  • Gurara, Daniel
  • Kpodar, Kangni
  • Presbitero, Andrea F.
  • Tessema, Dawit

Abstract

While expanding public investment can contribute to fill infrastructure gaps, scaling up too much and too fast often leads to inefficient outcomes. This paper rationalizes this outcome looking at the association between cost inflation and public investment in a large sample of road construction projects in developing countries. Consistent with the presence of absorptive capacity constraints, our results show a non-linear U-shaped relationship between public investment and project costs. Unit costs increase once public investment is close to 10% of GDP. This threshold is lower (about 7% of GDP) in countries with low investment efficiency and, in general, the effect of investment scaling up on costs is especially strong during investment booms.

Suggested Citation

  • Gurara, Daniel & Kpodar, Kangni & Presbitero, Andrea F. & Tessema, Dawit, 2021. "On the capacity to absorb public investment: How much is too much?☆," World Development, Elsevier, vol. 145(C).
    • Handle: RePEc:eee:wdevel:v:145:y:2021:i:c:s0305750x21001376
    DOI: 10.1016/j.worlddev.2021.105525
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    References listed on IDEAS

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    Cited by:

    1. Sinem Kilic Celik & M. Ayhan Kose & Franziska Ohnsorge, 2023. "Potential Growth Prospects: Risks, Rewards and Policies," CAMA Working Papers 2023-19, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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    More about this item

    Keywords

    Public investment; Absorptive capacity; Unit costs; Investment efficiency; Road infrastructure;
    All these keywords.

    JEL classification:

    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • L7 - Industrial Organization - - Industry Studies: Primary Products and Construction
    • R4 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics

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