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Impact of Public Investment on Economic Growth

@ChiaraFomia

In this article, I’d like to explore how economic growth and the “welfare state”[1] are affected by public investment. The effect of public investment on economic growth is very country-specific, indicating that each nation has different public investment scenarios.

Public investment can be defined as investment by the state in particular assets, and it has historically occurred from the need to provide certain goods, infrastructure, or services that are deemed to be of vital national interest. [2]

In high-income countries, some discussion in recent years has been centered on raising public spending to provide a near-term boost to the job market – this is based on studies showing that investment in infrastructure is among the most effective measure to help a struggling economy[3]. There is also a large amount of data showing that public spending is a major long-run engine of productivity growth — and therefore growth in the average standard of living. This lesson has been overlooked in recent decades since, in a break from historical patterns, the acceleration of productivity in the late 1990s was primarily driven by private-sector information and communication investments.

It is time, though, to learn from the past. A recent study conducted over the last decade has confirmed the major effect that public spending has on productivity growth. According to this view, the importance of public investment in determining long term economic growth stems from the fact that not only does it generate positive externalities within the economy through the organization of education, health, basic scientific research, and physical infrastructure, but also may encourage private investment – thereby enhancing economic growth. 

On the other hand, public spending can be a challenge for low-income countries. Developed nations, such as the United States, are measuring the impact of industrial development on economic growth. Developing countries, such as the ones on the African continent, are trying to solve public investment challenges as they typically spend their limited resources not on infrastructure, but rather on purchasing raw materials.

The key issue I’d like to point out is the need to recognize difficulties that currently inhibit economic growth, and to emphasize that shifting our mentality on public spending can have a positive impact GDP as a result. All this, while recognizing that public investment solutions will vary from country to country. 


[1] Welfare state refers to a type of governing in which the national government plays a key role in the protection and promotion of the economic and social well-being of its citizens 

[2] Lee, S.(n.d.). Public investment. In ENCYCLOPÆDIA BRITANNICA. Retrieved from https://www.britannica.com/topic/public-investment. (Accessed 2020-4-21) 

[3] See Zandi (2011), CEA (2010), CBO (2012), Woodford (2011), and Hall (2009) for representative research pointing to the extraordinary efficiency of infrastructure spending as a macroeconomic stabilization policy 

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