Investing in Public Infrastructure: Roads or Schools?

By Manoj Atolia, Grace B Li, Ricardo Marto, Giovanni Melina

May 4, 2017

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Manoj Atolia, Grace B Li, Ricardo Marto, and Giovanni Melina. Investing in Public Infrastructure: Roads or Schools?, (USA: International Monetary Fund, 2017) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Why do governments in developing economies invest in roads and not enough in schools? In the presence of distortionary taxation and debt aversion, the different pace at which roads and schools contribute to economic growth turns out to be central to this decision. Specifically, while costs are front-loaded for both types of investment, the growth benefits of schools accrue with a delay. To put things in perspective, with a “big push,” even assuming a large (15 percent) return differential in favor of schools, the government would still limit the fraction of the investment scale-up going to schools to about a half. Besides debt aversion, political myopia also turns out to be a crucial determinant of public investment composition. A “big push,” by accelerating growth outcomes, mitigates myopia—but at the expense of greater risks to fiscal and debt sustainability. Tied concessional financing and grants can potentially mitigate the adverse effects of both debt aversion and political myopia.

Subject: Education, Expenditure, Human capital, Infrastructure, Labor, National accounts, Public investment and public-private partnerships (PPP), Public investment spending

Keywords: Debt aversion, Debt sustainability, Global, Human capital, Infrastructure, Infrastructure investment, Investment composition, Investment expenditure, Investment increase, Investment scale up, Low-income developing countries, Political myopia, Public investment, Public investment and public-private partnerships (PPP), Public investment spending, Real interest rate, School investment, Time horizon, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/105
Stock No:

WPIEA2017105
ISBN:

9781475595932
ISSN:

1018-5941

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