The Return of Public Investment
Using public investment to drive economic growth – often derisively called “capital fundamentalism” – has long been out of favor among development experts. But if one looks at the countries that, despite strengthening global economic headwinds, are still growing rapidly, one will find that public investment is doing much of the work.
CAMBRIDGE – The idea that public investment in infrastructure – roads, dams, power plants, and so forth – is an indispensable driver of economic growth has always held powerful sway over the minds of policymakers in poor countries. It also lay behind early development assistance programs following World War II, when the World Bank and bilateral donors funneled resources to newly independent countries to finance large-scale projects. And it motivates the new China-led Asian Infrastructure Investment Bank (AIIB), which aims to fill the region’s supposed $8 trillion infrastructure gap.
But this kind of public-investment-driven growth model – often derisively called “capital fundamentalism” – has long been out of fashion among development experts. Since the 1970s, economists have been advising policymakers to de-emphasize the public sector, physical capital, and infrastructure, and to prioritize private markets, human capital (skills and training), and reforms in governance and institutions. From all appearances, development strategies have been transformed wholesale as a result.
It may be time to reconsider that change. 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.