Public investment trade-offs: The long and short of it

2 years ago

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  • UK
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Public investment becomes the default option when the economic commentariat suggests a solution to combat a phase charaterized by a slowdown in investment. India is no exception to this phenomenon and there are periodic calls to enhance public investment to deal with India’s current spell of weak private investment.
Public investment, however, involves a tough trade-off. Should more money be spent on expanding a country’s stock of physical infrastructure such as roads, or should the quality of human capital be enhanced through larger outlays in education?
Four economists, Manoj Atolia, Bin Grace Li, Ricardo Marto and Giovanni Melina, recently examined this question. Their research address a couple of important questions.
# Why is public spending on social infrastructure not higher in developing countries?
# What determines the composition of public infrastructure investment?
Their conclusions are that increasing spending on physical infrastructure has a quicker impact on economic performance; enhancing the quality of social infrastructure through spending on education improves workers’ productivity in the long-run; and social infrastructure investment needs larger current spending on maintenance.
In short, the trade-off which faces policy makers is to choose between putting money where the immediate returns are higher or one where the long-run benefits are more meaningful.
For a politician who has to face voters at relatively short intervals, there is strong incentive to choose an option which promises immediate returns.

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