Assessing the Effect of Public Capital on Growth : An Extension of the World Bank Long-Term Growth Model
To analyze the effect of an increase in the quantity or quality of public investment on growth, this paper extends the World Bank’s Long-Term Growth Model (LTGM), by separating the total capital stock into public and private portions, with the form...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/701811539089110745/Assessing-the-Effect-of-Public-Capital-on-Growth-An-Extension-of-the-World-Bank-Long-Term-Growth-Model http://hdl.handle.net/10986/30569 |
| Summary: | To analyze the effect of an increase in
the quantity or quality of public investment on growth, this
paper extends the World Bank’s Long-Term Growth Model
(LTGM), by separating the total capital stock into public
and private portions, with the former adjusted for its
quality. The paper presents the Long-Term Growth Model
Public Capital Extension (LTGM-PC) and accompanying freely
downloadable Excel-based tool. It also constructs a new
Infrastructure Efficiency Index (IEI), by combining quality
indicators for power, roads, and water as a cardinal measure
of the quality of public capital in each country. In the
model, public investment generates a larger boost to growth
if existing stocks of public capital are low, or if public
capital is particularly important in the production
function. Through the lens of the model and utilizing
newly-collated cross-country data, the paper presents three
stylized facts and some related policy implications. First,
the measured public capital stock is roughly constant as a
share of gross domestic product (GDP) across income groups,
which implies that the returns to new public investment, and
its effect on growth, are roughly constant across
development levels. Second, developing countries are
relatively short of private capital, which means that
private investment provides the largest boost to growth in
low-income countries. Third, low-income countries have the
lowest quality of public capital and the lowest efficient
public capital stock as a share of gross domestic product.
Although this does not affect the returns to public
investment, it means that improving the efficiency of public
investment has a sizable effect on growth in low-income
countries. Quantitatively, a permanent 1ppt GDP increase in
public investment boosts growth by around 0.1-0.2ppts over
the following few years (depending on the parameters), with
the effect declining over time. |
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