Ebook Determinants of public capital spending in less-developed countries
There is a large literature on the determinants of private investment in less developed countries. Two explanations for this interest can be put forward. First, recent empirical studies for developing countries have found positive, significant and robust effects of increases in investment ratio on economic growth.
In fact, Levine and Renelt (1992), Sala-i-Martin (1997) and Sturm and De Haan (2000) found that the ratio to GDP of total investment is among a few variables that are robustly correlated with growth for a diverse group of countries. This raises the question as of why the investment ratios across countries differ so much. Secondly, the debt crisis in the early 1980s have triggered the interest in the ‘debt overhang’ hypothesis. In general those studies have found support for the adverse effects of the debts service and debt overhang on private investment.
In principal similar arguments can be made for public investment. However, on the determinants of publicly funded investment in less-developed countries hardly any research has been conducted. This lack of analysis is especially surprising, as in a great majority of countries throughout the world productive government services have declined as percentage of GDP since the 1970s. At the same time productivity growth plummeted worldwide. In his seminal work, Aschauer (1989) has hypothesized that this decrease in productive government services is crucial in explaining the general productivity growth decline. This hypothesis has received great attention in the literature ever since. Many economists nowadays believe that there is an important role for infrastructure investment in economic growth.
The implications for policymakers seem to be clear: public investment should go up to give a boost to the economy. Indeed, in many countries politicians of various political origins and international institutes like the World Bank and IMF support such policies. This raises the question, however, as of why public capital spending has declined in so many countries.
Using panel data for 123 non-OECD countries for the period 1970–1998 we test various hypotheses that may explain the development of government capital spending. We classify the hypotheses in three classes: structural, economic and politico-instititutional. The remainder of this paper is organized as follows. Section 2 describes the development of government capital spending in most developing countries over the period 1970–1998. The third section reviews previous studies on determinants of public capital investment, formulates the hypotheses and describes our variables. The fourth section presents our estimation results and the final section summarizes the paper.
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