Public Investment, Productivity, and Economic Growth in Developing Countries
Khan, Mohsin S., Kumar, Manmohan S., Journal of Public Budgeting, Accounting & Financial Management
The role of public sector investment in determining private sector productivity and long-run economic growth has been the subject of a number of recent studies (Aschauer, 1989a, 1989b; Ford and Poret, 1991; Munnell, 1990; Rubin, 1991). This interest has been marked in industrial countries, particularly in the United States, where the productivity slowdown after the first oil-price shock in 1973-74 has been regarded as due, in part, to inadequate public investment in infrastructure (Munnell, 1990). In the case of developing countries, the respective roles of public and private investment in the growth process have come under increasing scrutiny. The conventional wisdom is that in these countries public investment in infrastructure and in human capital formation is likely to increase the productivity of private capital and have a beneficial effect on growth. But, equally, public investment expenditures can crowd out private investment by using scarce resources and thus have an adverse effect on growth.
At the empirical level, a number of studies on developing countries have concluded that public investment has a smaller impact on growth than does private investment (Coutinho and Gallo, 1991; Khan and Kumar, 1993; Serven and Solimano, 1990). Others maintain that this effect may even be negative (Khan and Reinhart, 1990). However, these studies have not looked specifically at the effects of the components of investment on total factor productivity. Also, to examine the relative effects of public and private investment, a number of other important issues related to differences in the two components of investment across developing country regions or across countries in different income groups need to be considered.
From a policy perspective, if public investment does have a weaker impact on growth than private investment, it would highlight the need to rationalize public investment and the privatization of state-owned activities. From a theoretical perspective, if public and private investment have differential impacts on growth, there would be important implications for the determination of the steady-state growth path as well as for the convergence of real per capita incomes.(2)
The empirical analysis in this paper covers a sample of 95 developing countries for the period 1970-90. The large sample allows for tests of the hypothesis that there are marked differences in the effects of the two components of investment on growth and productivity for four developing country regions--Africa, Asia, Europe and the Middle East, and Latin America. Such an examination is of considerable interest in view of the marked differences in the performance of developing countries during the last two decades. Asian countries, for instance, have in general had a significantly superior performance compared to African or Latin American countries (see Kumar, 1992; Ossa, 1990). To the extent that the steady-state conditions underlying the differential growth performance-reflecting, for example, the rate of technological change and population growth--are likely to be more similar across developing countries, looking specifically at these countries can yield additional insights into the process of convergence.(2)
This article will first note the extent to which public and private investment may be complements or substitutes in developing countries, and describe the estimation equations used in the empirical analysis. Second, the effect of public and private investment on growth as well as on total factor productivity will be empirically analyzed. Third, it will examine the implications of the results, in particular of the differential impact of public and private investment, for the speed of convergence to a steady state. Lastly, some concluding remarks will be made.
THE ROLE OF PUBLIC INVESTMENT
As indicated in Table 1, public sector investment in developing countries during the 1970s and 1980s accounted for nearly half of total investment (which was around 20% of GDP). …