econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 19 November 2017

Roads Or Schools: A Critical Tradeoff

from the International Monetary Fund

-- this post authored by Manoj Atolia, Bin Grace Li, Ricardo Marto, and Giovanni Melina

Roads or schools? It’s a question akin to the “guns or butter" choice that governments around the world confronted in the 20th century: How to spend a nation’s finite resources to produce the maximum benefit for its people.

In our recent IMF Working Paper, we find that low-income countries tend to spend less on schools than on roads as a share of GDP - even though investment in education may be a more pressing need in their societies.

We divide capital spending on infrastructure into two categories: economic infrastructure describes investments, such as roads, railways, ports, water, power, and telecommunications, that help the economy function better. Social infrastructure comprises capital spending, including schools, hospitals, and universities, that primarily delivers social services. We looked at data for a cross-section of low-income countries during 2000-2008 and labeled these categories roads and schools.

Shortchanging schools

Why do countries make these choices? Investment in roads can deliver a short-term increase in output, new economic opportunities, and lower poverty - even though, in the long run, capital spending on schools results in a much larger increase in output.

The tradeoff is rather stark and clear. For an average low-income country, in the long run, a permanent increase of public investment in schools of 1 percent of GDP raises output by about 24 percent, whereas an equal investment in roads boosts production by just 5 percent.

For political leaders, the critical factor may be which choice produces the quickest results, and that tips the scales in favor of roads. An investment in roads, instead of schools, produces faster economic growth for the first 13 years. By contrast, an investment in schools slows growth for nine years mainly because of the labor supply change.

Political myopia

Eventually, the payoff in growth from an investment in schools overtakes the gain from similar spending for roads. But that takes 24 years, and few leaders have such a long planning horizon. We call this condition “political myopia."

In the meantime, the peak of the public debt increase associated with investment in schools is three times larger than that associated with investment in roads. The reason lies in upfront fiscal costs and the greater delay with which schools increase output and government revenues, which poses greater risks to debt sustainability.

This only adds to leaders’ reluctance to commit resources to schools.

Front-loading the investment, a strategy we call the “big push," accelerates the payoff. With such a “crash" effort, the gain in growth from schools overtakes that derived from roads in about 20 years, or about four years earlier.

Short-term costs

Of course, the short-term costs of the “big push" are higher. A rapid scale-up of schools spending detracts from private consumption, labor supply, and output in the short and medium term. And the “big push" requires a higher tax and debt burden in the short run. But within 20 years, public debt as a share of GDP reverts to its original level, or lower, owing to the faster rise in output. The handicap of schools vis-à-vis roads from a fiscal perspective almost vanishes with a “big push."

Even so, that may not be enough to overcome political myopia. Addressing the short-term concerns may require the help of multilateral agencies. Specifically, our paper recommends offering concessional financing and grants to give policymakers the incentive to emphasize investment in schools.

While tying aid to social infrastructure would address the issue of myopia, concessional terms would mitigate concerns of debt intolerance.

Source

https://blogs.imf.org/2017/11/09/roads-or-schools-a-critical-tradeoff/

Disclaimer

The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Contributors








search_box
Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.







Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved