Bottlenecks in Ramping Up Public Investment

Oct 2011 | 66

Authors: Rick Van der Ploeg

A windfall in a developing economy with capital scarcity and investment adjustment costs facing a temporary windfall should be used to give more consumption to poorer present generations and to speed up development by ramping up public investment and paying off debt taking due account of the increasing inefficiency as investment gets ramped up. The optimal strategy requires negative genuine saving; the permanent income requires zero genuine saving. The optimal real consumption increments are smaller once one allows for absorption constraints resulting from Dutch disease and sluggish adjustment of ‘home-grown’ public capital.

JEL Codes: E60, F34, F35, F43, H21, H63, O11, Q33

Keywords: optimal management of windfalls, economic development, capital scarcity, public capital, PIMI, investment adjustment costs, absorption constraints, genuine saving, Dutch disease

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