Measuring the Impact of Debt-Financed Public Investment

While debt-financed productive public investment raises a country s debt ratios in the short run, it can also generate higher growth, revenues, and exports, leading over time to lower debt ratios. This paper develops a framework to assess whether c...

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Bibliographic Details
Main Authors:	Cavalcanti, Carlos B., Marrero, Gustavo A., Le, Tuan Minh
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	ACCESS TO FINANCING ACCOUNTING ADMINISTRATIVE CAPACITY AFFILIATED ORGANIZATIONS ARBITRAGE AVERAGE DEBT BALANCE SHEET BANK LENDING BANK LOAN BANK POLICY BANKS BENCHMARK BID BONDS BUDGET CONSTRAINT BUDGET SURPLUS BUDGETING CAPACITY BUILDING CAPITAL ACCUMULATION CAPITAL ASSETS CAPITAL BUDGETING CAPITAL FORMATION CAPITAL INVESTMENT CAPITAL INVESTMENTS CAPITAL MARKET CAPITAL OUTLAY CENTRALIZATION COMPETITIVE BIDDING CONSTANT RETURNS TO SCALE CORRUPTION CREDITORS CREDITS CREDITWORTHINESS DEBT DEBT BURDEN DEBT COMPOSITION DEBT FINANCING DEBT ISSUES DEBT LEVELS DEBT RATIOS DEBT RELIEF DEBT SERVICE DEBTS DEFAULT RISK DEFICITS DEPRECIATION DERIVATIVES DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT BANK DEVELOPMENT CORPORATION DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DISBURSEMENT DISCOUNT RATE DISCOUNTED VALUE DIVERSIFICATION DOMESTIC DEBT DYNAMIC ANALYSIS EARNINGS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC EFFICIENCY ECONOMIC GROWTH ECONOMIC POLICY ECONOMIC RESEARCH ECONOMIC THEORY ECONOMIES OF SCALE ELASTICITY ELASTICITY OF SUBSTITUTION ELECTRICITY EQUALITY EQUILIBRIUM EUROBOND EXCLUSION EXOGENOUS VARIABLES EXPENDITURE EXPORTS EXPROPRIATION EXTERNAL COMMERCIAL BORROWING EXTERNAL DEBT EXTERNAL FINANCING EXTERNALITIES FINANCIAL ASSETS FINANCIAL CRISIS FINANCIAL FLOWS FINANCIAL MANAGEMENT FINANCIAL MARKETS FINANCIAL VIABILITY FISCAL DEFICIT FISCAL MANAGEMENT FISCAL PERFORMANCE FISCAL POLICY FISCAL SURPLUS FIXED ASSETS FIXED CAPITAL FIXED INVESTMENT FUNCTIONAL FORMS GDP GOVERNMENT BUDGET GOVERNMENT DEBT GOVERNMENT EXPENDITURE GOVERNMENT INDEBTEDNESS GOVERNMENT POLICY GOVERNMENT SPENDING GROSS DOMESTIC PRODUCT GROSS FIXED CAPITAL FORMATION GROWTH OPPORTUNITIES GROWTH POTENTIAL GROWTH RATE HEALTH SPENDING HIGH RISK BORROWERS HOUSEHOLD INCOME HOUSEHOLD WELFARE HOUSEHOLDS HUMAN CAPITAL INCOME TAX INCOME TAX RATE INCOME TAXES INCREASING RETURNS INEFFICIENCY INFORMATION ASYMMETRIES INFRASTRUCTURE INVESTMENT INFRASTRUCTURE INVESTMENTS INITIAL DEBT INTEREST PAYMENTS INTEREST RATE INTEREST RATES INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL MARKETS INVENTORIES INVESTING INVESTMENT DECISIONS INVESTMENT FINANCING INVESTMENT MANAGEMENT INVESTMENT PLANS INVESTMENT POLICIES INVESTMENT POLICY INVESTMENT PROJECTS INVESTMENT SPENDING INVESTMENT ASSET ISSUANCE JOB CREATION LABOR MARKET LENDING LIMITS LESS DEVELOPED COUNTRIES LIQUIDITY LOAN LOAN AGREEMENT LOAN AGREEMENTS LOW INTEREST RATES MACROECONOMICS MARGINAL PRODUCTIVITY MARKET INTEREST RATES MONETARY FUND MULTIPLIERS NATURAL RESOURCES NORMAL GOOD OPERATING COSTS OUTSIDE ASSISTANCE OUTSTANDING PUBLIC DEBT PHYSICAL CAPITAL POLITICAL ECONOMY POSITIVE EXTERNALITY PRIVATE CAPITAL PRIVATE CAPITAL STOCK PRIVATE INVESTMENT PRIVATE INVESTMENTS PRIVATE SAVINGS PRIVATE SECTOR PRODUCTION FUNCTION PRODUCTIVE CAPITAL PROVISION OF INFRASTRUCTURE PUBLIC PUBLIC ASSETS PUBLIC EXPENDITURE PUBLIC EXPENDITURES PUBLIC FINANCE PUBLIC FINANCES PUBLIC INFRASTRUCTURE PUBLIC INVESTMENT PUBLIC INVESTMENT IN INFRASTRUCTURE PUBLIC INVESTMENT PROGRAM PUBLIC INVESTMENTS PUBLIC POLICY PUBLIC SECTOR PUBLIC SECTOR WAGES PUBLIC SPENDING RATE OF RETURN RATES OF RETURN RATES OF RETURNS REAL GDP RECURRENT EXPENDITURES REMITTANCES RETURNS ROADS SAVINGS SHAREHOLDERS SOVEREIGN BOND STATIC ANALYSIS STOCKS TARIFF REVENUES TAX TAX EXEMPT TAX RATE TAX RATES TAXATION TOTAL FACTOR PRODUCTIVITY TRADING UTILITIES UTILITY FUNCTION VALUATION VALUE ADDED WEALTH
Online Access:	http://documents.worldbank.org/curated/en/2014/02/18895457/measuring-impact-debt-financed-public-investment http://hdl.handle.net/10986/17309

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Summary:	While debt-financed productive public investment raises a country s debt ratios in the short run, it can also generate higher growth, revenues, and exports, leading over time to lower debt ratios. This paper develops a framework to assess whether countries meet the conditions for realizing the net benefits over the costs of public investment debt financing. While it is possible to achieve debt sustainability with an appropriate mix of concessional and non-concessional financing, this is a necessary but not sufficient condition. It is also important to ensure the operational viability of public investment projects by having in place adequate project management: (i) project screening and appraisal, (ii) a clear connection between capital and recurrent expenditures once the projects are launched, and (iii) safeguards for appropriate project implementation and facilities operations. To illustrate the strength of these results, the paper carries out three measurement exercises: (a) a simulation of the degree to which the ratio of optimal public investment responds to changes in key parameters related to project management in a general equilibrium model; (b) application of the public investment management (PIMa) index to benchmark a country's public investment management capacity; and (c) presentation of the results of the Investment, Savings, and Macroeconomic Vulnerabilities tool aimed at tracking country choices in public finance and the impact of public projects on private investments.

Measuring the Impact of Debt-Financed Public Investment

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