Public Investment as an Engine of Growth

This Working Paper should not be reported as representing the views of the IMF or DFID. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF, IMF policy, or DFID. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper looks at the empirical record whether big infrastructure and public capital drives have succeeded in accelerating economic growth in low-income countries. It looks at big long-lasting drives in public capital spending, as these were arguably clear and exogenous policy decisions. On average the evidence shows only a weak positive association between investment spending and growth and only in the same year, as lagged impacts are not significant. Furthermore, there is little evidence of long term positive impacts. Some individual countries may be exceptions to this general result, as for example Ethiopia in recent years, as high public investment has coincided with high GDP growth, but it is probably too early to draw definitive conclusions. The fact that the positive association is largely instantaneous argues for the importance of either reverse causality, as capital spending tends to be cut in slumps and increased in booms, or Keynesian demand effects, as spendin