Optimal Public Investment, Growth, and Consumption: Evidence From African Countries

Fosu, Augustin Kwasi; Getachew, Yoseph; Ziesemer, Thomas

doi:10.1017/s1365100515000206

Cited by 14 publications

(17 citation statements)

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“…In the present context it is plausible that the public investment may be devoted to improving the reliability of the existing infrastructure, resulting in a decline in the idiosyncratic productivity shocks. Fosu et al (2015). This suggests mild underinvestment in public capital and is consistent with the findings of Eden and Kraay (2014).…”

Section: Increase In Rate Of Public Investmentsupporting

confidence: 85%

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Productive government spending and its consequences for the growth–inequality tradeoff

Getachew

Turnovsky

2015

Research in Economics

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This paper investigates the effects of productive government spending on the relationship between growth and inequality in an economy subject to idiosyncratic production shocks and heterogeneous endowments. Assuming lognormal distributions, we derive tractable closed form solutions describing the equilibrium dynamics. We show how the effect of government investment on the equilibrium dynamics of both inequality and growth depends crucially upon the elasticity of substitution between public and private capital in production. This has important consequences for the growth-and welfaremaximizing rates of government investment. Finally, we supplement our theoretical analysis with numerical simulations, calibrated to approximate the productive characteristics of a real world economy. With the empirical evidence strongly supporting the complementarity between public and private capital, our simulations suggest that conclusions based on the commonly employed Cobb-Douglas production function may be seriously misleading.Key words: Government investment; Idiosyncratic shocks; Growth; Inequality JEL Classification: D31, O41 Revised versionJune 2015*The paper has benefited from comments received on earlier versions from seminar participants at the University of Durham and the University of Pretoria. We also thank Santanu Chatterjee for useful suggestions. Research for this paper was carried out while Getachew was visiting the University of Washington in the Fall of 2013. Turnovsky"s research was supported in part by the Van Voorhis endowment at the University of Washington.**Corresponding author: sturn@u.washington.edu 1 IntroductionThe role of public investment in infrastructure as a source of economic growth continues to be widely debated in both developing and advanced economies, with different economies adopting different policy options. Several emerging-market countries including India, China, and Brazil have undertaken extensive public investment, to which their high growth rates of recent years may at least in part be attributed. In contrast, several European countries have reduced public spending, as they have pursued austerity measures intended to deal with concerns related to their rising debt levels.Contemporaneously with these diverse policies toward public investment, we have witnessed increasing income inequality, both in emerging markets and in most OECD countries. This raises the important question that we address in this paper, namely the relationship between public investment directed toward growth enhancement and its consequences for income inequality.Interest in the relationship between public investment, output, and growth has a long history, dating back to Arrow and Kurz (1970), who examined it in the context of a neoclassical economy.Beginning with Barro (1990), an extensive literature has evolved addressing the issue in an endogenous growth framework, with a general consensus that government spending on infrastructure can yield significant productivity gains and thus enhance growth. See e.g. F...

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Section: Increase In Rate Of Public Investmentsupporting

confidence: 85%

“…Fosu et al (2015), using data for Sub Saharan African countries, estimate e around 0.10. Finally, using a sample of data from developing countries Dessus and Herrer (2000) find e to range between 0.11. and 0.13.…”

Section: Calibrating the Elasticity Of Substitutionmentioning

confidence: 99%

Productive government spending and its consequences for the growth–inequality tradeoff

Getachew

Turnovsky

2015

Research in Economics

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“…An example is the study on South Africa by Fedderke et al (2006). Additional supportive empirical evidence on the role of public investments in the growth process in Africa can be found in Fosu et al (2012). These findings confirm the strategic role of public investment in the growth process.…”

Section: Empirical Reviewsupporting

confidence: 62%

“…The countries that have with the highest debt to GDP ratios in Africa over the 2000-2012 period include Eritrea, Angola, Ethiopia, Libya, Mozambique, Guinea-Bissau, and Rwanda. According to Fosu et al (2012) the decline in public investment in Africa should be an issue of concern. This is because growth in African countries has been hampered by public "underinvestment", since the actual public investment continues to remain below the optimal level required to attain high growth.…”

Section: Introductionmentioning

confidence: 99%

The Relationship Between Public Investment To GDP Ratio And External Debt Stocks In Kenya

Mweni¹

2016

IJMEI

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Debt is a two-edged sword. External borrowing for productive investment is associated with macroeconomics stability, increased domestic savings, improved welfare and enhanced debt repayment ability; while over accumulation of debt is associated with increased repayment and debt-service costs, depressed domestic investment, crowding out of private investment and increased vulnerability to debt crisis. The paper sought to establish the relationship between public investment to GDP ratio and external debt in Kenya over the period of 1972-2012. The study used time-series data for public investment, GDP, and external debt from IMF International Financial Statistics database. All data was evaluated, cross-checked, compared and critically analyzed. To ensure that the data does not violate the assumptions of classical linear regression model (CLRM) and test for stationarity, the study tested for unit tests using Augmented Dickey-Fuller (ADF). To test for the verifiability of the estimated long run model, additional diagnostic tests, notably: heteroskedasticity, autoregressive conditional heteroskedasticity (ARCH), autocorrelation and normality, were carried out before regression was used to determine the relationship between external debt and inflation. The gauge the relationship between the external debt and growth in Kenya, a simple open macroeconomic debt growth model will be applied. Regression analysis of Ordinary Least Squares (OLS) will be used to determine the relationship between public investment to GDP ratio and external debt over the 1972 and 2012 period in Kenya. The correlation findings indicated a Spearman's correlation coefficient of -0.5618 with a P value of 0.0001, implying a negative and significant correlation. The regression results show an R square of 0.0067 indicating that 0.7 percent of variations in external debt are explained by variations in total investment/GDP ratio, F statistic of 0.26 and a p value of 0.1828. The study recommends sustaining lower inflation rates through tight fiscal and monetary policies, financing of budget deficit from noninflationary sources, implementation of price stabilization program by subsiding basic food items, and effectively managing external debt.

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“…As a second purpose of this paper, we add to the literature using dynamic simultaneous equation models in the analysis of public investment in developing countries. It contains the early contributions of Canning and Fay (1993), and the more recent ones by Ferreira, Hamilton, and Araújo (2006), Canning and Pedroni (2008), Sahoo, Dash, and Nataraj (2010), Agénor and Neanidis (2015) and Fosu, Getachew, and Ziesemer (2016). Dynamic approaches are able to distinguish short and long-run effects of public investment and other variables (Glomm & Ravikumar, 1997) and take dynamic feedback from and to other variables into account (De Frutos & Pereira, 1993).…”

Section: Introductionmentioning

confidence: 99%

A semi-endogenous growth model with public factors, imported capital goods, and limited export demand for developing countries

Hallonsten

Ziesemer

2019

Journal of Applied Economics

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We build a semi-endogenous growth model for developing countries with non-rivalrous public factors, imported capital goods, and an export demand function. The model exhibits the three-way interaction between public and private investment and trade shown recently in the empirical literature. A parameter for government-investment inefficiency has transitional growth effects distorting between public investment and private capital, consumption, and exports, the latter biasing the terms of trade. Our analysis of a vector error-correction model (VECM) for Trinidad &Tobago shows that additional expenditure for public investment increases output less than taxes decrease per capita consumption and therefore is sub-optimal there. Both temporary and permanent shocks on public investment have level effects supporting semi-endogenous growth modeling and demonstrate that the VECM effects are in line with the logic of the theoretical model; terms of trade are endogenous.

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Optimal Public Investment, Growth, and Consumption: Evidence From African Countries

Cited by 14 publications

References 59 publications

Productive government spending and its consequences for the growth–inequality tradeoff

Productive government spending and its consequences for the growth–inequality tradeoff

The Relationship Between Public Investment To GDP Ratio And External Debt Stocks In Kenya

A semi-endogenous growth model with public factors, imported capital goods, and limited export demand for developing countries

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