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Is Bangladesh Getting Public Investment Right?

Zahid Hussain's picture

Economic growth in Bangladesh began to decline since FY06 at roughly the same time that its public investment rate started falling. The decline in growth also appears to coincide with slowdown in growth of infrastructure capital in the hard infrastructure sectors; particularly energy, transport and communication. It is therefore tempting to think that the two may be correlated.

Indeed, economic theory suggests that the availability of economic and social infrastructures makes it conducive for the private sector to invest; higher public capital increases productivity and reduces production costs; and by increasing demand public investment gives rise to profit and sales expectations which in turn induce private investments. These are known as the crowding-in effects of public investment.

Crowding in, however, cannot be taken for granted. Public investment can also crowd out private investment if it is made in activities that compete with the private sector. In addition, the growth impact of increased public investment depends on how it is financed. If it is financed through higher public debt, which implies higher future taxation levels, private investments may get crowded out.