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Investing in Public Infrastructure Roads or Schools?

By: Atolia, Manoj.
Contributor(s): Li, Bin Grace | Marto, Ricardo | Melina, Giovanni | IMF.
Material type: materialTypeLabelBookSeries: IMF Working Paper SeriesWP/17/105. Publisher: Washington International Monetary Fund 2017Description: 44p.Subject(s): Education | Public investment | Debt sustainability | Human capital | Political myopia | Debt aversion | Low income developing countries | Developing countries | IMFSummary: 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.
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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.

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