Mind your P's and Q's : the cost of public investment is not the value of public capital
The author presents theory and calculations to show that part of the explanation of slow growth in many poor countries is not that governments did not spend on investment, but that these investments did not create productive capital. For a variety of reasons governments take resources from current consumption to"invest"in the economic equivalent of pyramids, items that produce no future output. The most critical assumption necessary for cumulated investment flows to be even more reasonable proxies for capital stocks is that the cost of investments (the p's) is equal to the value of the capital stock evaluated as its increment to future profitability (the q's). This assumption can be justified only if investors act to equalize these. But there is ample reason not to believe that all governments act as profit maximizing investors - and ample reason to believe that some governments invest better than others. The implication is that a dollar's worth of public investment spending often does not create a dollar's worth of public capital. Calculations suggest that in a typical developing country less than 50 cents of capital were created for each public dollar invested. One of the difficulties of development may be that even when public capital is productive it may be difficult to create public sector capital.
|Date of creation:||31 Oct 1996|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, vol. 16(2), pages 141-163, September.
- Sudhir Anand & Martin Ravallion, 1993. "Human Development in Poor Countries: On the Role of Private Incomes and Public Services," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 133-150, Winter.
- David Aschauer, 1988.
"Is public expenditure productive?,"
88-7, Federal Reserve Bank of Chicago.
- Landau, Daniel, 1986. "Government and Economic Growth in the Less Developed Countries: An Empirical Study for 1960-1980," Economic Development and Cultural Change, University of Chicago Press, vol. 35(1), pages 35-75, October.
- Easterly, William & Rebelo, Sérgio, 1994.
"Fiscal Policy and Economic Growth: An Empirical Investigation,"
CEPR Discussion Papers
885, C.E.P.R. Discussion Papers.
- Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
- William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
- J. Bradford DeLong & Lawrence H. Summers, 1992. "Equipment Investment and Economic Growth: How Strong Is the Nexus?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 157-212.
- Eric A. Hanushek & Dongwook Kim, 1995. "Schooling, Labor Force Quality, and Economic Growth," NBER Working Papers 5399, National Bureau of Economic Research, Inc.
- Isham, Jonathan & Narayan, Deepa & Pritchett, Lant, 1995. "Does Participation Improve Performance? Establishing Causality with Subjective Data," World Bank Economic Review, World Bank Group, vol. 9(2), pages 175-200, May.
- Robert J. Barro, 1989.
"Economic Growth in a Cross Section of Countries,"
NBER Working Papers
3120, National Bureau of Economic Research, Inc.
- B. Bosworth & S. M. Collins & Y. Chen, "undated".
"Accounting for Difference in Economic Growth,"
115, Brookings Institution International Economics.
- Shah, Anwar, 1992. "Dynamics of Public Infrastructure, Industrial Productivity and Profitability," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 28-36, February.
- Jeffrey D. Sachs & Andrew Warner, 1995.
"Economic Reform and the Process of Global Integration,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
- Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
- Douglas Holtz-Eakin, 1992. "Public-Sector Capital and the Productivity Puzzle," NBER Working Papers 4122, National Bureau of Economic Research, Inc.
- Joel Slemrod, 1995. "Involvement, Prosperity, and Economic Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 373-431.
- Baffes, John & Shah, Anwar, 1998.
"Productivity of Public Spending, Sectoral Allocation Choices, and Economic Growth,"
Economic Development and Cultural Change,
University of Chicago Press, vol. 46(2), pages 291-303, January.
- Baffes, John & Shah, Anwar, 1993. "Productivity of public spending, sectoral allocation choices, and economic growth," Policy Research Working Paper Series 1178, The World Bank.
- Maxim Boycko & Andrei Shleifer & Robert W. Vishny, 1993.
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 24(2), pages 139-192.
- Isham, Jonathan & Kaufmann, Daniel & Pritchett, Lant, 1995. "Governance and returns on investment : an empirical investigation," Policy Research Working Paper Series 1550, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1660. 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: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.