"Crowding in" and the Returns to Government Investment in Low-Income Countries

This paper estimates the effect of government investment on private investment in a sample of 39 low-income countries. Fluctuations in a predetermined component of disbursements on loans from official creditors to developing country governments are used as an instrument for fluctuations in public investment. The analysis finds evidence of "crowding in": an extra dollar of government investment raises private investment by roughly two dollars, and output by 1.5 dollars. To understand the implications for the return to public investment, a CES production function with public and private capital as inputs is calibrated. For most countries in the sample, the returns to government investment exceed the world interest rate. However, for some countries that already have high government investment rates, the return to further investment is below the world interest rate.

Bibliographic Details

Main Authors:	Eden, Maya, Kraay, Aart
Language:	English en_US
Published:	World Bank, Washington, DC 2014-02
Subjects:	AFFILIATED ORGANIZATIONS, BANK LENDING, BANK POLICY, BORROWING, BORROWING COUNTRY, CAPITAL ACCUMULATION, CAPITAL SHARE, CAPITAL STOCK, CAPITAL STOCKS, CLOSED ECONOMY, CONSUMPTION EXPENDITURES, COST OF CAPITAL, COST OF FUNDS, COUNTRY FIXED EFFECTS, CREDITOR, CREDITORS, DEBTOR, DEBTOR REPORTING SYSTEM, DERIVATIVE, DERIVATIVES, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DEVELOPING ECONOMIES, DIMINISHING RETURNS, DIRECT FINANCING, DISBURSEMENT, DISBURSEMENTS, ECONOMIC GROWTH, ECONOMICS, EQUALITY, EXCESS RETURN, EXCESS RETURNS, EXCLUSION, FACTORS OF PRODUCTION, FINANCING COSTS, FISCAL POLICY, GLOBAL MARKETS, GOVERNMENT DEBT, GOVERNMENT INVESTMENT, GOVERNMENT INVESTMENTS, GOVERNMENT SPENDING, INCOME, INDIVIDUAL LOANS, INFRASTRUCTURE DEVELOPMENT, INFRASTRUCTURE INVESTMENT, INSTRUMENT, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL DEVELOPMENT, INVESTING, INVESTMENT DECISIONS, INVESTMENT EXPENDITURES, INVESTMENT PROJECTS, INVESTMENT RATES, LOAN, LOAN APPROVAL, LOCAL CURRENCY, LOW-INCOME COUNTRIES, MULTIPLIER EFFECT, NPL, OIL PRICES, OPEN ECONOMY, OUTPUT, POLICY RESPONSE, POLITICAL ECONOMY, PRIVATE CAPITAL, PRIVATE CAPITAL STOCK, PRIVATE CAPITAL STOCKS, PRIVATE INVESTMENT, PRIVATE INVESTORS, PUBLIC INVESTMENT, RATE OF RETURN, RATES OF RETURN, REPAYMENT, RETURN, RETURNS, WORLD DEVELOPMENT INDICATORS,
Online Access:	http://documents.worldbank.org/curated/en/2014/02/19005742/crowding-returns-government-investment-low-income-countries https://hdl.handle.net/10986/17337
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