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Public Investment, Public Finance, and Growth: The Impact of Distortionary Taxation, Recurrent Costs, and Incomplete Appropriability

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  • Mr. Christopher S Adam
  • Mr. David Bevan

Abstract

Effective public investment requires governments to address the "recurrent cost problem" to ensure operations and maintenance (O&M) expenditures are sufficient to sustain the flow of productive public capital services to private factors of production. Building on the model of Buffie et al (2012), this paper explores the macroeconomic implications of this recurrent cost problem and its resolution in a context that recognizes that taxation is distortionary. The model is also used to examine stylized fiscal reforms including the replacement of a distortionary output tax with a uniform consumption tax and budgetary reforms that restore O&M expenditures to their efficient levels. These experiments are stylized but clearly demonstrate the material consequences of the tax and public expenditure structures for growth and debt sustainability in low-income countries.

Suggested Citation

  • Mr. Christopher S Adam & Mr. David Bevan, 2014. "Public Investment, Public Finance, and Growth: The Impact of Distortionary Taxation, Recurrent Costs, and Incomplete Appropriability," IMF Working Papers 2014/073, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2014/073
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Adam, Christopher & Bevan, David, 2020. "Tropical cyclones and post-disaster reconstruction of public infrastructure in developing countries," Economic Modelling, Elsevier, vol. 93(C), pages 82-99.
    2. Mark Henstridge, 2018. "Understanding the boom: A framing paper," WIDER Working Paper Series 178, World Institute for Development Economic Research (UNU-WIDER).
    3. Zharku Lutfi, 2018. "(Un)Productive Use of Public Debt in Kosovo," Ekonomika (Economics), Sciendo, vol. 97(2), pages 18-37, December.
    4. Patrick Plane, 2021. "What Factors Drive transport and Logistics Costs in Africa ?," Working Papers hal-03198081, HAL.
    5. Andrew Berg & Edward F. Buffie & Catherine Pattillo & Rafael Portillo & Andrea F. Presbitero & Luis‐Felipe Zanna, 2019. "Some Misconceptions About Public Investment Efficiency and Growth," Economica, London School of Economics and Political Science, vol. 86(342), pages 409-430, April.
    6. Christine Richmond & Irene Yackovlev & Shu-Chun S. Yang, 2015. "Investing Volatile Resource Revenues in Capital-Scarce Economies," Pacific Economic Review, Wiley Blackwell, vol. 20(1), pages 193-221, February.
    7. Adam, Christopher & Bevan, David & Gollin, Douglas, 2018. "Rural–Urban Linkages, Public Investment and Transport Costs: The Case of Tanzania," World Development, Elsevier, vol. 109(C), pages 497-510.
    8. Mfouapon Alassa & Kamdem Cyrille Bergaly & Mohammadou Nourou, 2022. "Agricultural Foreign Aid Allocation in Sub-Saharan Africa: The importance of Democracy and Quality of Governance," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(3), pages 84-100, March.
    9. Stefan Mittnik & Willi Semmler & Alexander Haider, 2020. "Climate Disaster Risks—Empirics and a Multi-Phase Dynamic Model," Econometrics, MDPI, vol. 8(3), pages 1-27, August.
    10. Suescun, Rodrigo, 2020. "A tool for fiscal policy planning in a medium-term fiscal framework: The FMM-MTFF model," Economic Modelling, Elsevier, vol. 88(C), pages 431-446.
    11. Melina, Giovanni & Yang, Shu-Chun S. & Zanna, Luis-Felipe, 2016. "Debt sustainability, public investment, and natural resources in developing countries: The DIGNAR model," Economic Modelling, Elsevier, vol. 52(PB), pages 630-649.
    12. Levine,Paul Leslie & Melina,Giovanni & Onder,Harun & Levine,Paul Leslie & Melina,Giovanni & Onder,Harun, 2016. "Non-renewable resources, fiscal rules, and human capital," Policy Research Working Paper Series 7695, The World Bank.
    13. Mark Henstridge, 2018. "Understanding the boom: A framing paper," WIDER Working Paper Series wp-2018-178, World Institute for Development Economic Research (UNU-WIDER).
    14. Marto, Ricardo & Papageorgiou, Chris & Klyuev, Vladimir, 2018. "Building resilience to natural disasters: An application to small developing states," Journal of Development Economics, Elsevier, vol. 135(C), pages 574-586.
    15. Grace Li, 2018. "Investing in Public Infrastructure: Roads or Schools?," 2018 Meeting Papers 338, Society for Economic Dynamics.
    16. Abdulkadir Abdulrashid Rafindadi & Kondo Augustine Kondo, 2018. "Public Finance and Rural Development in Nigeria: Empirical Evidence from the Structural Equation Modeling," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 8(11), pages 1313-1339, November.

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    Keywords

    WP; tax rate; tax burden; crowding in;
    All these keywords.

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