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Public Sector Investment Efficiency in Developing Countries

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Abstract

There are numerous examples where public investment has been grossly mismanaged and where corruption has overwhelmed the entire process (unfinished roads, highways leading to nowhere, incomplete or unusable bridges and power generation projects). This entry aims at reviewing the existing literature on the potential impact of such public investment inefficiencies on productivity and output, in theoretical models and empirical exercises. We conclude that despite recent progress in assessing and incorporating such inefficiencies in economic analysis, the composition of public capital and its interlinkages with other factors of production and with structural economic conditions should remain a key area of future research.

The views expressed in this project are the sole responsibility of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management.

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Notes

  1. 1.

    Imposing constant returns to scale across private inputs implies increasing returns to scale across all inputs if the factor share of public capital is positive. This could produce upward bias in the estimates if the true model is characterized by decreasing returns to scale across private inputs.

  2. 2.

    To construct PIMI data were compiled from a large number of sources including from World Bank Public Investment Management case studies, Public Expenditure and Financial Accountability assessment reports, the Budget Institutions database, World Bank Public Expenditure Reviews, World Bank Country Procurement Assessment Reviews, World Bank Country Financial Accountability Assessments and country websites.

  3. 3.

    Aggregate data on output, investment and raw labour are taken from PWT version 6.2, public investment shares to accumulate capital stocks are taken from WEO databases, and the average years of schooling come from the Barro and Lee (2013) database on educational attainment.

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Acknowledgments

Papageorgiou acknowledges financial support from the U.K.’s Department for International Development (DFID).

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Authors and Affiliations

  1. International Monetary Fund, Washington, DC, USA

    Alvar Kangur & Chris Papageorgiou

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  1. Alvar Kangur
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  2. Chris Papageorgiou
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Correspondence to Alvar Kangur .

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    Jonathan Temple

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© 2018 Macmillan Publishers Ltd.

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Kangur, A., Papageorgiou, C. (2018). Public Sector Investment Efficiency in Developing Countries. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_3064

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