IDEAS home Printed from https://ideas.repec.org/p/bwp/bwppap/16412.html
   My bibliography  Save this paper

Optimal public investment, growth and consumption: evidence from African countries

Author

Listed:
  • Augustin Kwasi Fosu
  • Yoseph Yilma Getachew
  • Thomas Ziesemer

Abstract

How much does public capital matter for economic growth? How large should it be? This paper attempts to answer these questions, taking the case of Sub-Saharan African (SSA) countries. It develops and estimates a model that posits a non-linear relationship between public investment and growth, to determine the growth-maximising public investment GDP share. It empirically also accounts for the crowding-in and crowding-out effects between public and private investment, with equations estimated separately and simultaneously, using System GMM. The paper further runs a simulation and examines the public investment GDP share that maximises consumption. This is estimated to be between 8.4 percent and 11 percent. The results from estimating the growth model are in the middle of this range, which is larger than the observed value of 7.2 percent at the end of the sample period. These outcomes suggest that, on average, there has been public under-investment in Africa, contrary to previous findings.

Suggested Citation

  • Augustin Kwasi Fosu & Yoseph Yilma Getachew & Thomas Ziesemer, 2012. "Optimal public investment, growth and consumption: evidence from African countries," Global Development Institute Working Paper Series 16412, GDI, The University of Manchester.
  • Handle: RePEc:bwp:bwppap:16412
    as

    Download full text from publisher

    File URL: http://hummedia.manchester.ac.uk/institutes/gdi/publications/workingpapers/bwpi/bwpi-wp-16412.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-681, September.
    2. Ward Romp & Jakob De Haan, 2007. "Public Capital and Economic Growth: A Critical Survey," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 8(S1), pages 6-52, April.
    3. Calderon, Cesar, 2009. "Infrastructure and growth in Africa," Policy Research Working Paper Series 4914, The World Bank.
    4. Turnovsky, Stephen J, 2004. "The Transitional Dynamics of Fiscal Policy: Long-Run Capital Accumulation and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 883-910, October.
    5. Calderon, Cesar & Serven, Luis, 2008. "Infrastructure and economic development in Sub-Saharan Africa," Policy Research Working Paper Series 4712, The World Bank.
    6. Nigel James Miller & Christopher Tsoukis, 2001. "On the optimality of public capital for long-run economic growth: evidence from panel data," Applied Economics, Taylor & Francis Journals, vol. 33(9), pages 1117-1129.
    7. Vivien Foster & Cecilia Briceno-Garmendia, 2010. "Africa's Infrastructure : A Time for Transformation [Infrastructures africaines]," World Bank Publications, The World Bank, number 2692, Juni.
    8. Kamps, Christophe, 2005. "Is there a lack of public capital in the European Union?," EIB Papers 3/2005, European Investment Bank, Economics Department.
    9. David Alan Aschauer, 2000. "Do states optimize? Public capital and economic growth," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 34(3), pages 343-363.
    10. Fedderke, J.W. & Perkins, P. & Luiz, J.M., 2006. "Infrastructural investment in long-run economic growth: South Africa 1875-2001," World Development, Elsevier, vol. 34(6), pages 1037-1059, June.
    11. Cavallo, Eduardo & Daude, Christian, 2011. "Public investment in developing countries: A blessing or a curse?," Journal of Comparative Economics, Elsevier, vol. 39(1), pages 65-81, March.
    12. Kocherlakota, Narayana R & Yi, Kei-Mu, 1996. "A Simple Time Series Test of Endogenous vs. Exogenous Growth Models: An Application to the United States," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 126-134, February.
    13. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
    14. Bruno, Giovanni S.F., 2005. "Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models," Economics Letters, Elsevier, vol. 87(3), pages 361-366, June.
    15. Mark Dincecco & Mauricio Prado, 2012. "Warfare, fiscal capacity, and performance," Journal of Economic Growth, Springer, vol. 17(3), pages 171-203, September.
    16. Stephen J. Turnovsky, 2000. "Government Policy in a Stochastic Growth Model with Elastic Labor Supply," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(4), pages 389-433, October.
    17. Aschauer, David Alan, 2000. "Public Capital and Economic Growth: Issues of Quantity, Finance, and Efficiency," Economic Development and Cultural Change, University of Chicago Press, vol. 48(2), pages 391-406, January.
    18. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    19. Everaert, Gerdie & Heylen, Freddy, 2004. "Public capital and long-term labour market performance in Belgium," Journal of Policy Modeling, Elsevier, vol. 26(1), pages 95-112, January.
    20. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    21. Pierre-Richard Agénor, 2008. "Fiscal policy and endogenous growth with public infrastructure," Oxford Economic Papers, Oxford University Press, vol. 60(1), pages 57-87, January.
    22. David Canning & Peter Pedroni, 2008. "Infrastructure, Long‐Run Economic Growth And Causality Tests For Cointegrated Panels," Manchester School, University of Manchester, vol. 76(5), pages 504-527, September.
    23. Steve Bond & Asli Leblebicioglu & Fabio Schiantarelli, 2010. "Capital accumulation and growth: a new look at the empirical evidence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(7), pages 1073-1099, November/.
    24. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
    25. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
    26. David de la CROIX, 2014. "Economic Growth," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2014019, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    27. Devarajan, Shantayanan & Easterley, William R. & Pack, Howard, 2001. "Is investment in Africa too low or too high : macro and micro evidence," Policy Research Working Paper Series 2519, The World Bank.
    28. Demetriades, Panicos O & Mamuneas, Theofanis P, 2000. "Intertemporal Output and Employment Effects of Public Infrastructure Capital: Evidence from 12 OECD Economics," Economic Journal, Royal Economic Society, vol. 110(465), pages 687-712, July.
    29. Pantelis Kalaitzidakis & Vangelis Tzouvelekas, 2011. "Military Spending And The Growth‐Maximizing Allocation Of Public Capital: A Cross‐Country Empirical Analysis," Economic Inquiry, Western Economic Association International, vol. 49(4), pages 1029-1041, October.
    30. Fedderke, J.W. & Bogetic, Z., 2009. "Infrastructure and Growth in South Africa: Direct and Indirect Productivity Impacts of 19 Infrastructure Measures," World Development, Elsevier, vol. 37(9), pages 1522-1539, September.
    31. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    32. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521806428, April.
    33. Okui, Ryo, 2009. "The optimal choice of moments in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 151(1), pages 1-16, July.
    34. Maurice J. G. Bun & Frank Windmeijer, 2010. "The weak instrument problem of the system GMM estimator in dynamic panel data models," Econometrics Journal, Royal Economic Society, vol. 13(1), pages 95-126, February.
    35. R. Milbourne & G. Otto & G. Voss, 2003. "Public investment and economic growth," Applied Economics, Taylor & Francis Journals, vol. 35(5), pages 527-540.
    36. Ziesemer, Thomas, 1990. "Public Factors and Democracy in Poverty Analysis," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 268-280, January.
    37. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    38. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
    39. Melvin Ayogu, 0. "Infrastructure and Economic Development in Africa: A Review-super- †," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 16(suppl_1), pages -126.
    40. Alfonso Novales & Esther Fernández & Jesús Ruiz, 2014. "Economic Growth," Springer Texts in Business and Economics, Springer, edition 2, number 978-3-642-54950-2, September.
    41. Basu, Parantap & Gillman, Max & Pearlman, Joseph, 2012. "Inflation, human capital and Tobin's q," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 1057-1074.
    42. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-625, December.
    43. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    44. Michael Clemens & Samuel Bazzi, 2009. "Blunt Instruments: On Establishing the Causes of Economic Growth," Working Papers 171, Center for Global Development.
    45. Michael Bleaney & Norman Gemmell & Richard Kneller, 2001. "Testing the endogenous growth model: public expenditure, taxation, and growth over the long run," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 36-57, February.
    46. Joshua Greene, 1989. "The External Debt Problem of Sub-Saharan Africa," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 836-874, December.
    47. Canning, David, 1999. "Infrastructure's contribution to aggregate output," Policy Research Working Paper Series 2246, The World Bank.
    48. Luoto, Jani, 2011. "Aggregate infrastructure capital stock and long-run growth: Evidence from Finnish data," Journal of Development Economics, Elsevier, vol. 94(2), pages 181-191, March.
    49. Melvin Ayogu, 1999. "Before Prebendalism: A Positive Analysis of Core Infrastructure Investment in a Developing Fiscal Federalism," African Development Review, African Development Bank, vol. 11(2), pages 169-198.
    50. Stephen Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    51. Orazio P. Attanasio & Lucio Picci & Antonello E. Scorcu, 2000. "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 182-211, May.
    52. Basu, Parantap, 1987. "An Adjustment Cost Model of Asset Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 609-621, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kwon, Sanguk & Cho, Seong-Hoon & Roberts, Roland Keith & Kim, Taeyoung & Yu, T. Edward, 2015. "Effects of changes in electricity price on electricity demand and resulting effects on manufacturing output," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196850, Southern Agricultural Economics Association.
    2. Thomas H.W. ZIESEMER, 2012. "Worker remittances and government behaviour in the receiving countries," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 37-59, December.
    3. Presbitero, Andrea F., 2016. "Too much and too fast? Public investment scaling-up and absorptive capacity," Journal of Development Economics, Elsevier, vol. 120(C), pages 17-31.
    4. Eric Akobeng, 2017. "Gross Capital Formation, Institutions and Poverty in Sub-Saharan Africa," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 20(2), pages 136-164, April.
    5. Rafael Aguirre Unceta, 2018. "Niger : la Quête du Développement dans un Contexte Adverse," Working Papers hal-02046108, HAL.
    6. Thomas H.W. Ziesemer, 2020. "Can we have growth when population is stagnant? Testing linear growth rate formulas of non-scale endogenous growth models," Applied Economics, Taylor & Francis Journals, vol. 52(13), pages 1502-1516, March.
    7. Ziesemer, Thomas, 2019. "Can we have growth when population is stagnant? Testing linear growth rate formulas and their cross-unit cointegration of non-scale endogenous growth models," MERIT Working Papers 2019-021, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    8. Getachew, Yoseph Y. & Turnovsky, Stephen J., 2015. "Productive government spending and its consequences for the growth–inequality tradeoff," Research in Economics, Elsevier, vol. 69(4), pages 621-640.
    9. Daniel Gurara & Kangni R Kpodar & Andrea F Presbitero & Dawit Tessema, 2020. "On the Capacity to Absorb Public Investment: How Much is Too Much?," IMF Working Papers 20/48, International Monetary Fund.
    10. Ziesemer, Thomas, 2017. "Testing linear growth rate formulas of non-scale endogenous growth models," MERIT Working Papers 2017-036, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    11. Yoshino, Naoyuki & Abidhadjaev, Umid, 2017. "An impact evaluation of investment in infrastructure: The case of a railway connection in Uzbekistan," Journal of Asian Economics, Elsevier, vol. 49(C), pages 1-11.
    12. Oukhallou, Youssef, 2016. "Analyzing economic growth: what role for public investment?," MPRA Paper 69772, University Library of Munich, Germany.
    13. Djedje Hermann Yohou, 2015. "In Search of Fiscal Space in Africa: The Role of the Quality of Government Spending," Working Papers halshs-01222812, HAL.
    14. Issouf Samaké & Priscilla S Muthoora & Bruno Versailles, 2013. "Fiscal Sustainability, Public Investment, and Growth in Natural Resource-Rich, Low-Income Countries; The Case of Cameroon," IMF Working Papers 13/144, International Monetary Fund.
    15. Michael Mbate, 2013. "Domestic Debt, Private Sector Credit and Economic Growth in Sub-Saharan Africa," African Development Review, African Development Bank, vol. 25(4), pages 434-446.
    16. Fisayo Fagbemi, 2020. "Assessing the Role of Governance in West African Fiscal Performance," The American Economist, Sage Publications, vol. 65(1), pages 97-122, March.
    17. Nur Feriyanto, 2020. "Economic and Tourism Factors Affecting the Real Gross Regional Domestic Product: A Case Study," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 736-756.
    18. International Monetary Fund, 2012. "Cameroon; Staff Report for the 2012 Article IV Consultation," IMF Staff Country Reports 12/237, International Monetary Fund.
    19. Hallonsten, Jan Simon & Ziesemer, Thomas, 2016. "A semi-endogenous growth model for developing countries with public factors, imported capital goods, and limited export demand," MERIT Working Papers 2016-004, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    20. Rafael AGUIRRE UNCETA, 2018. "Niger : la Quête du Développement dans un Contexte Adverse," Working Papers P247, FERDI.
    21. Yehenew Endegnanew & Dawit Tessema, 2019. "Public Investment in Bolivia: Prospects and Implications," IMF Working Papers 19/151, International Monetary Fund.

    More about this item

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bwp:bwppap:16412. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rowena Harding). General contact details of provider: http://edirc.repec.org/data/wpmanuk.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.