Bottlenecks in ramping up public investment

Working paper

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.

Authors: Van der Ploeg, R

• Publication status: Published
• Publisher: University of Oxford
• Series: OxCarre Papers
• Publication date: 2011-10-13
• Paper number: 66
• Keywords: investment adjustment costs; optimal management of windfalls; economic development; genuine saving; Dutch disease; PIMI; public capital; absorption constraints; capital scarcity