Public Investment and GDP Growth in Developing and Advanced Countries: A Panel Data Analysis

Abstract

Abstract. This research paper examines the differences between developing and advanced countries in terms of public investment’s impact on economic growth. In this regard, we investigate whether or not the macroeconomic impact of government investment spending is tributary to the degree of private-public capital substitutability and the level of the capital-to-GDP ratio. In this perspective, we use a panel data model for two groups of countries that include respectively five advanced economies and five developing ones. Our study provides empirical evidence that public investment expenditures have a larger influence on GDP’s evolution in developing countries. Our results also suggest that public investment spending is relatively counterproductive in advanced economies, most likely because of high levels of crowding out; the latter are driven by public-private capital substitutability and the advanced position of these countries in terms of transitional dynamics. The analysis in this paper also sheds the light on efficiency, as a concept that is significantly linked to the level of corruption. Keywords. GDP growth, Public investment, Crowding out, Panel data. JEL. C33, H54, O47.