Public investment (in infrastructure and services) is capable of crowding in private efforts and boosting inclusive growth. However, public investment also attracts political interest-often the kind that lowers efficiency. Inadequately designed, underfunded, long-delayed, or poorly implemented public projects have a negligible impact on real economic activity. This is a challenge for many developing countries, especially countries in Sub-Saharan Africa. Some countries lack the absorptive capacity to execute their limited investment budget; others fail to have a portfolio of "shovel-ready" projects to stimulate the economy (Rajaram et al. 2014).
In this context, the productivity of public capital is a hot issue of debate.39 So far, the literature has argued that infrastructure contributes positively to real economic activity, but there is no consensus on the magnitude of this effect (Agénor 2011). Recent literature, by contrast, focuses on the quality of the spending. It suggests that economic production is the outcome of an effective stock of infrastructure at work-or what is called economic public capital.40
A recent study evaluates the long-run growth effects of surges in public investment (Warner 2014), and finds that the impact is limited due to poor institutions governing the lifecycle of infrastructure projects. In this context, enhancing the institutions and procedures associated with project appraisal, selection, and monitoring plays a key role in raising the quality of infrastructure spending. More efficient public investment can foster growth through several channels (IMF 2015): (a) reducing transaction costs for the private sector; (b) increasing the marginal productivity of private physical and human capital; (c) generating fiscal space through the provision of low-cost, better infrastructure services; and (d) releasing resources for growth-enhancing recurrent expenditure.
Closing efficiency gaps in public investment could significantly raise the public investment multiplier. For instance, a one-off increase in public investment of 1 percent of GDP will boost output by about 0.3 percent among countries in the lowest quartile of public investment efficiency. An analogous increase in public investment will raise output by 0.6 percent among countries in the highest quartile (IMF 2015). In other words, closing the efficiency gap between the top and bottom quartiles could double the impact of public investment on growth.
This section looks first at the quality of institutions governing public investment management systems (PIMs) as well as the transparency of procedures associated with the procurement cycles of public and PPP projects. Next, the section looks at the correlation of the soundness of public investment management and economic performance. Countries with sound PIMs tend to have greater growth and efficiency, higher private investment, and lower public investment. Finally, the section considers the relationship between PIMs and governance. Again, countries with sound PIMs tend to display strong levels of governance-that is, improved control of corruption, rule of law, and regulatory quality.
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39 See Sturm, Kuper, and De Hann (1998) and Romp and De Hann (2007) for extensive surveys of the literature.
40 Efficiency can be constrained by political issues (Drazen 2000; Grossman and Helpman 2001; Persson and Tabellini 2000).