Politics and Public Investment

Abstract

Virtually all countries need additional infrastructure such as roads, bridges, airports, telecommunications networks, power plants, and public transportation. With interest rates low—and, as a result, cheap financing for government spending—many analysts and policy advisors advocate increasing public investment in infrastructure to promote growth, which would both lower the debt-to-GDP ratio and expand an economy’s long-term productive capacity (IMF, 2014). However, even if shovel-ready projects have been identified and decision-making processes for public investment are working efficiently, investment still may not happen. Why? Political considerations get in the way. When elections loom, policymakers choose to provide immediate benefits to the electorate through lower taxes or increased income transfers—at the expense of public investment, which takes time to come to fruition. Other factors can also play a role in discouraging needed investment. For example, the political orientation of parties that form a government may favor a lower level of public investment. When there are no political or institutional constraints, public investment should be determined mainly by development needs—to meet the requirements of a growing population and to reduce infrastructure bottlenecks. Occasionally, public investment can be triggered by demand management considerations— for example, when an economy has spare capacity and policymakers believe investment would increase aggregate demand and raise employment in the short term. In reality, however, political considerations often strongly influence public investment decisions.