Abstract
This survey focuses on the impact of public investment as an instrument of economic policy. The study presents and analyzes features and results of the empirical works on this theme taking into account both theory and estimations issues. In general, the studies surveyed support the idea that public investment, if projects are properly selected, raises output and welfare through both demand and supply effects and thus should be the instrument of choice of economic policy for governments and public agencies. Moreover, a considerable amount of empirical studies show that public investments have higher positive growth effects than public consumption both in the short and in the long run. In spite of a great diversity in the theoretical approaches and the empirical results, the studies surveyed tend to converge in many indications that can be useful to policy makers. Among these, in addition to several pointers on the reasons why public investments may be made more effective, is that a major challenge is to provide a new generation of global public goods for sustainable development.
Highlights
As the world emerged from the global financial crisis, the recovery in many advanced economies remained tepid and there were worries that a slow down or even a recession might be imminent, in spite of the seemingly robust, but perhaps unsustainable growth in the US economy
Most of these effects are quantitatively unknown, but they may be empirically measurable if monitoring the efficiency of public capital through cost benefit and impact analysis becomes itself part of public investment policies
Recent econometric studies have been focusing on fiscal multipliers associated with consolidation
Summary
As the world emerged from the global financial crisis, the recovery in many advanced economies remained tepid and there were worries that a slow down or even a recession might be imminent, in spite of the seemingly robust, but perhaps unsustainable growth in the US economy. The following features of public capital appear especially relevant: 1) the network character of infrastructure services which implies network externalities; 2) economies of scale related to infrastructure in terms of lower fixed costs, attracting companies and factors of production and, thereby, raising production (Haughwout, 2002; Egger & Falkinger 2003); 3) public infrastructure and especially new “smart” facilities as important instruments of competitive location policy because of high spillover effects depending on the size of the country or region concerned and its openness1; 4) according to the so called new economic geography (e.g., Krugman, 1991; Holtz-Eakin & Lovely, 1996; Venables, 1996; Fujita et al, 1999)—which considers transport costs a central determinant of the location and scale of economic activity and of the pattern of trade—infrastructure and in particular transport infrastructure has a profound impact on the size of the market, because it enables producers to cluster and exploit joint economies of scale; v) the relation with private capital i.e. the extent to which private and public capital are substitutes or complements Most of these effects are quantitatively unknown, but they may be empirically measurable if monitoring the efficiency of public capital through cost benefit and impact analysis becomes itself part of public investment policies (de Haan et al, 2008). We elaborate on the practical implications that can be useful to policy makers
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