Must-read: Dani Rodrik: “The Return of Public Investment”
The Return of Public Investment: “If one looks at the countries that, despite strengthening global economic headwinds, are still growing very rapidly…:
…one will find public investment is doing a lot of the work. In Africa, Ethiopia is the most astounding success story of the last decade…. The country is resource-poor and did not benefit from commodity booms, unlike many of its continental peers. Nor did economic liberalization and structural reforms of the type typically recommended by the World Bank and other donors play much of a role. Rapid growth was the result, instead, of a massive increase in public investment…. The Ethiopian government went on a spending spree, building roads, railways, power plants, and an agricultural extension system that significantly enhanced productivity in rural areas, where most of the poor reside. Expenditures were financed partly by foreign aid and partly by heterodox policies (such as financial repression) that channeled private saving to the government. In India, rapid growth is also underpinned by a substantial increase in investment, which now stands at around one-third of GDP…. These days, it is public infrastructure investment that helps maintain India’s growth momentum…. Bolivia is one of the rare mineral exporters that has managed to avoid others’ fate in the current commodity-price downturn…. Much of that has to do with public investment, which President Evo Morales regards as the engine of the Bolivian economy….
Today it may be the advanced economies of North America and Western Europe that stand to gain the most from ramping up domestic public investment. In the aftermath of the great recession, there are many ways in which these economies could put additional public spending to good use…. Such arguments are typically countered in policy debates by objections related to fiscal balance and macroeconomic stability. But… public investment serves to accumulate assets, rather than consume them. So long as the return on those assets exceeds the cost of funds, public investment in fact strengthens the government’s balance sheet…. Ethiopia, India, or Bolivia… are examples that other countries, including developed ones, should watch closely as they search for viable growth strategies in an increasingly hostile global economic environment.