Government Investment and Economic Growth in the Developing World

There has been a sea change in the views of the economics profession as well as economic policy-makers over the past decade or so regarding the role of the government in the development process. Indeed, it is now becoming conventional wisdom that government can no longer be a dominant player in economic activities, but rather should restrict itself to providing an “enabling” environment within which the private sector can take the lead and flourish. More specifically, government intervention in the economy has to be designed carefully so as to support the private sector and not inhibit its development. The general acceptance of this paradigm is evident in the steadily declining importance of government activities in the economies of most of the developing world. But does this new paradigm mean that government investment has no role whatsoever in affecting growth in developing countries? Reality is that public investment still represents a large share of total investment in the majority of developing countries, and the question is what role it plays in relation to private investment in stimulating economic growth. The objective of this paper is to ascertain empirically for a large group of developing countries the relative importance of public and private investment in promoting and sustaining growth.