IDEAS home Printed from https://ideas.repec.org/p/unm/unumer/2014057.html
   My bibliography  Save this paper

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

Author

Listed:
  • Kwasi Fosu, A.

    (Institute of Statistical, Social and Economic Research (ISSER), University of Ghana)

  • Getachew, Y.

    (Department of Economics, University of Pretoria)

  • Ziesemer, T.

    (UNU-MERIT)

Abstract

This paper develops a model positing a nonlinear relationship between public investment and growth. The model is then applied to a panel of African countries using nonlinear estimating procedures. The growth-maximizing level of public investment is estimated at about 10 percent of GDP based on System GMM estimation. The paper further runs simulations, obtaining the constant optimal public investment share that maximizes the sum of discounted consumption as between 81 percent and 96 percent of GDP. Compared with the observed end-of-panel mean value of no more than 726 percent, these estimates suggest that there has been significant public under-investment in Africa.

Suggested Citation

  • Kwasi Fosu, A. & Getachew, Y. & Ziesemer, T., 2014. "Optimal public investment, growth, and consumption: Fresh evidence from African countries," MERIT Working Papers 2014-057, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  • Handle: RePEc:unm:unumer:2014057
    as

    Download full text from publisher

    File URL: https://www.merit.unu.edu/publications/wppdf/2014/wp2014-057.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. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Devarajan, Shantayanan & Easterly, William R & Pack, Howard, 2003. "Low Investment Is Not the Constraint on African Development," Economic Development and Cultural Change, University of Chicago Press, vol. 51(3), pages 547-571, April.
    8. Boriana Yontcheva & Mrs. Nadia Masud, 2005. "Does Foreign Aid Reduce Poverty? Empirical Evidence from Nongovernmental and Bilateral Aid," IMF Working Papers 2005/100, International Monetary Fund.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. David de la CROIX, 2014. "Economic Growth," LIDAM Discussion Papers IRES 2014019, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    14. 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.
    15. 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.
    16. 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.
    17. 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.
    18. 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.
    19. 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.
    20. 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.
    21. 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.
    22. 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/.
    23. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, number 9780521001151.
    24. Ziesemer, Thomas, 1990. "Public Factors and Democracy in Poverty Analysis," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 268-280, January.
    25. Alfonso Novales & Esther Fernández & Jesús Ruiz, 2022. "Economic Growth," Springer Texts in Business and Economics, Springer, edition 3, number 978-3-662-63982-5, January.
    26. 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.
    27. Antonio Estache & Quentin Wodon, 2014. "Infrastructure and Poverty in Sub-Saharan Africa," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-137-34848-7, Januario-.
    28. 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.
    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. Canning, David, 1999. "Infrastructure's contribution to aggregate output," Policy Research Working Paper Series 2246, The World Bank.
    31. 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.
    32. 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.
    33. Vivien Foster & Cecilia Briceno-Garmendia, 2010. "Africa's Infrastructure : A Time for Transformation [Infrastructures africaines]," World Bank Publications - Books, The World Bank Group, number 2692.
    34. Kamps, Christophe, 2005. "Is there a lack of public capital in the European Union?," EIB Papers 3/2005, European Investment Bank, Economics Department.
    35. 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.
    36. Okui, Ryo, 2009. "The optimal choice of moments in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 151(1), pages 1-16, July.
    37. 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.
    38. David Alan Aschauer, "undated". "How Big Should the Public Capital Stock Be? The Relationship Between Public Capital and Economic Growth," Economics Public Policy Brief Archive ppb_43, Levy Economics Institute.
    39. 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.
    40. 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.
    41. Mark Dincecco & Mauricio Prado, 2012. "Warfare, fiscal capacity, and performance," Journal of Economic Growth, Springer, vol. 17(3), pages 171-203, September.
    42. 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.
    43. 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.
    44. 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.
    45. 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.
    46. Michael Clemens & Samuel Bazzi, 2009. "Blunt Instruments: On Establishing the Causes of Economic Growth," Working Papers 171, Center for Global Development.
    47. Stephen R. Bond, 2002. "Dynamic panel data models: a guide to micro data methods and practice," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 1(2), pages 141-162, August.
    48. Joshua Greene, 1989. "The External Debt Problem of Sub-Saharan Africa," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 836-874, December.
    49. 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.
    50. Humphreys, Charles & Underwood, John, 1989. "The external debt difficulties of low income Africa," Policy Research Working Paper Series 255, The World Bank.
    51. David Roodman, 2006. "How to Do xtabond2," North American Stata Users' Group Meetings 2006 8, Stata Users Group.
    52. 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.
    53. Calderon, Cesar, 2009. "Infrastructure and growth in Africa," Policy Research Working Paper Series 4914, The World Bank.
    54. 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.
    55. 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.
    56. 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.
    57. R. Milbourne & G. Otto & G. Voss, 2003. "Public investment and economic growth," Applied Economics, Taylor & Francis Journals, vol. 35(5), pages 527-540.
    58. 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.
    59. Shantayanan Devarajan & William Easterly & Howard Pack, 2001. "Is Investment in Africa Too High or Too Low? Macro‐ and Micro‐evidence," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 10(suppl_2), pages 81-108.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fosu, Augustin Kwasi & Getachew, Yoseph Yilma & Ziesemer, Thomas H.W., 2016. "Optimal Public Investment, Growth, And Consumption: Evidence From African Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 20(8), pages 1957-1986, December.
    2. Silvia Bertarelli, 2006. "Public capital and growth," Politica economica, Società editrice il Mulino, issue 3, pages 361-398.
    3. Calderon, Cesar & Serven, Luis, 2008. "Infrastructure and economic development in Sub-Saharan Africa," Policy Research Working Paper Series 4712, The World Bank.
    4. Benos, Nikos, 2009. "Fiscal policy and economic growth: empirical evidence from EU countries," MPRA Paper 19174, University Library of Munich, Germany.
    5. Getachew, Yoseph Yilma, 2010. "Public capital and distributional dynamics in a two-sector growth model," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 606-616, June.
    6. Getachew, Yoseph, 2008. "Public Capital, Income Distribution and Growth," MERIT Working Papers 2008-056, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    7. Roberto Dell'Anno & Adalgiso Amendola, 2015. "Social Exclusion and Economic Growth: An Empirical Investigation in European Economies," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 61(2), pages 274-301, June.
    8. Eleftherios Goulas & Athina Zervoyianni, 2012. "Growth, Deficits and Uncertainty in a Panel of 28 Countries," Working Paper series 52_12, Rimini Centre for Economic Analysis.
    9. Bakhat, Mohcine & Labandeira, Xavier & Labeaga, José M. & López-Otero, Xiral, 2017. "Elasticities of transport fuels at times of economic crisis: An empirical analysis for Spain," Energy Economics, Elsevier, vol. 68(S1), pages 66-80.
    10. Scott, K. Rebecca, 2015. "Demand and price uncertainty: Rational habits in international gasoline demand," Energy, Elsevier, vol. 79(C), pages 40-49.
    11. Piper, Alan T., 2014. "An Investigation into Happiness, Dynamics and Adaptation," MPRA Paper 57778, University Library of Munich, Germany.
    12. Zergawu, Yitagesu Zewdu & Walle, Yabibal M. & Giménez-Gómez, José-Manuel, 2020. "The joint impact of infrastructure and institutions on economic growth," Journal of Institutional Economics, Cambridge University Press, vol. 16(4), pages 481-502, August.
    13. Cavallo, Alberto F. & Cavallo, Eduardo A., 2010. "Are crises good for long-term growth? The role of political institutions," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 838-857, September.
    14. Thomas Ziesemer, 2016. "The Impact of Development Aid on Education and Health: Survey and New Evidence for Low‐income Countries from Dynamic Models," Journal of International Development, John Wiley & Sons, Ltd., vol. 28(8), pages 1358-1380, November.
    15. Ünal Töngür & Adem Yavuz Elveren, 2017. "The nexus of economic growth, military expenditures, and income inequality," Quality & Quantity: International Journal of Methodology, Springer, vol. 51(4), pages 1821-1842, July.
    16. Ünal Töngür & Adem Yavuz Elveren, 2015. "The Nexus of Economic Growth, Military Expenditures and Income Inequality," EY International Congress on Economics II (EYC2015), November 5-6, 2015, Ankara, Turkey 208, Ekonomik Yaklasim Association.
    17. Piper, Alan T., 2014. "The Benefits, Challenges and Insights of a Dynamic Panel assessment of Life Satisfaction," MPRA Paper 59556, University Library of Munich, Germany.
    18. Eva Barteková & Thomas H. W Ziesemer, 2019. "The impact of electricity prices on foreign direct investment: evidence from the European Union," Applied Economics, Taylor & Francis Journals, vol. 51(11), pages 1183-1198, March.
    19. Hartwig, Jochen, 2014. "Testing the Uzawa–Lucas model with OECD data," Research in Economics, Elsevier, vol. 68(2), pages 144-156.
    20. 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.

    More about this item

    Keywords

    Economic growth; Economic develeopment; Consumption; Public investment; Public expenditure; Africa; Panel data; GMM;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa
    • H41 - Public Economics - - Publicly Provided Goods - - - Public 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:unm:unumer:2014057. 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: . General contact details of provider: https://edirc.repec.org/data/meritnl.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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ad Notten (email available below). General contact details of provider: https://edirc.repec.org/data/meritnl.html .

    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.