Session 3: State Capabilities & Public Investment

This presentation addresses the macroeconomic challenges faced by many African States to improve public investment decisions and realize its full economic return on these investments. To understand the challenges that underpin public investment, Prof. Adam and Bevan discussed the International Monetary Fund (IMF) approach to improve public investment decisions through the Debt Sustainability Analysis (DSA).

The DSA model has two standard areas of focus which include: traded and non-traded goods and optimizing (saving) household and rational household. This model does not take into account monetary component as well as econometric context (it is not a forecasting model). But, this model examines the movement in the exchange rate and crowding out of private capital by public investment. The limitation of this model is that it assumes that taxation instrument is a uniform consumption tax; thus there is no margin choice that is affected by consumption tax. It operates as a lump-sum tax and pays little attention to the recurrent cost implications of public investment.

Prof. Adam and Bevan current paper extends the difficulty of managing high recurrent cost when distortionary tax and return to public investment may not be fully appropriable. Also, the government may not optimize public investment due to poor project choice, corruption, and other implementation constraints (e.g. lack of human capacity). The key question is: how recurrent cost can be managed if there is a distortionary tax? The answer to this question will help the government to manage and implement sound public investments that has short and long term inclusive and pro poor growth.