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Revisiting Public Capital Needs : An Analysis of Growth-Maximizing Investment with Efficiency and Congestion Effects

Author

Listed:
  • Herrera Aguilera, Santiago
  • Hurlin, Christophe
  • Isaka, Hironobu

Abstract

This paper estimates growth-maximizing levels of public capital and investment across countries using a structural framework that accounts for three critical features: public investment efficiency, human capital levels, and congestion effects. A harmonized panel data set covering 166 countries over 1960–2024 was assembled to estimate public capital output elasticities for the entire sample and for countries clustered by income group. These estimates are used to calibrate an endogenous growth model yielding closed-form expressions for the optimal public investment-to-output ratio. The analysis finds a public capital output elasticity of around 0.20, which implies that countries invest slightly below their growth-maximizing levels. For the full sample and a homogeneous elasticity of public capital, the observed investment-to-output ratio averages 4.6 percent, significantly below the growth-maximizing level of 5.4 percent. The shortfall in aggregate investment becomes even more significant when using higher output elasticities of public capital. The aggregate results show considerable heterogeneity: public investment in advanced and emerging economies is, on average, 1.5 to 1.8 percent of gross domestic product below the growth- maximizing levels, while in low-income countries the gap is far wider at 3.2 percent of gross domestic product. Improving public expenditure efficiency can enable countries to increase investment without compromising fiscal sustainability. The analysis also finds that countries with large resource revenues, greater revenue and expenditure volatility, weaker fiscal governance, and lower institutional quality are more likely to have excessive levels of public investment. These results provide benchmarks for assessing public investment gaps and underscore the importance of expenditure efficiency, high-quality fiscal governance, and robust public institutions in achieving optimal levels of public investment.

Suggested Citation

  • Herrera Aguilera, Santiago & Hurlin, Christophe & Isaka, Hironobu, 2025. "Revisiting Public Capital Needs : An Analysis of Growth-Maximizing Investment with Efficiency and Congestion Effects," Policy Research Working Paper Series 11272, The World Bank.
    • Handle: RePEc:wbk:wbrwps:11272
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    References listed on IDEAS

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