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INVESTING IN PUBLIC INFRASTRUCTURE: ROADS OR SCHOOLS?

Published online by Cambridge University Press:  16 December 2019

Manoj Atolia ,
Bin Grace Li ,
Ricardo Marto  and
Giovanni Melina
Manoj Atolia*
Affiliation:
Florida State University
Bin Grace Li
Affiliation:
International Monetary Fund
Ricardo Marto
Affiliation:
University of Pennsylvania
Giovanni Melina
Affiliation:
International Monetary Fund and CESifo
*
Address correspondence to: Manoj Atolia, Florida State University. e-mail: matolia@fsu.edu.
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Abstract

Why do governments in developing economies favor roads rather than schools in public investment scale-ups? We study this question using a dynamic general equilibrium model and argue that the different pace at which roads and schools contribute to economic growth, public debt intolerance, and political myopia are central to this decision. In a thought experiment with a large return differential in favor of schools, a benevolent government would intuitively devote the majority of an investment scale-up to them. However, the fraction of schools chosen by the government falls with increasing levels of debt intolerance and political myopia. In particular, political myopia is a meaningful explanation for the observed result to the extent that an extremely myopic government would not invest in schools at all.

Keywords

Public InvestmentHuman CapitalDebt SustainabilityPolitical MyopiaDebt IntoleranceDeveloping Countries
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 7 , October 2021 , pp. 1892 - 1921
Copyright
© Cambridge University Press 2019

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Footnotes

We thank the editor, the anonymous referee, Andy Berg, Ed Buffie, Prakash Loungani, Chris Papageorgiou, Felipe Zanna as well as the participants at the CSAE Conference on Economic Development in Africa held in Oxford, UK in March 2017, at the SAET Conference on Current Economic Trends held in Faro, Portugal in June 2017, and at the Research Department Seminar at the IMF for useful comments and suggestions. We also thank Jun Ge for research assistance. All remaining errors are ours. We acknowledge also the financial support from UK’s Department for International Development (DFID) under the project Macroeconomic Research in Low-Income Countries. The views expressed here are those of the authors and do not necessarily represent those of the IMF or DFID, or IMF Policy.

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