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The investment-growth paradox in developing economies: A structural analysis of Indian public investment
Abstract
High rates of growth of investment (and savings) and low rates of growth of output constitute a paradox of development for many developing nations. Popular resolutions of this paradox are couched in terms of the Incremental Capital - Output ratio (ICOR). High ICORs, especially for the public sector, are taken to be indicative of inefficiency and responsible for the deceleration of output growth. The policy recommendations which follow include a dismantling of the public sector and increased privatization of the economy. This dissertation critically examines the conceptual and empirical basis of these indictments of the public sector. The case of Indian public investment over the period 1960 to 1987 is analyzed, using a disaggregated framework that emphasizes the structure of investment. Neo-classical and non neo-classical development literature on the relationship between public investment and growth is first reviewed, and criticized for adopting an aggregative framework of analysis. A growth model is then developed that establishes the importance of a disaggregated study of investment (public and private) to an examination of the growth process in an economy. It is demonstrated that even if the rate of investment is constant,variations in the growth rate of output can come about through changes in the structure of investment, due to variations among sub-sectoral ICORs and/or the complementarities among sub-sectors, including complementarities between the public sector and the private sector. A study of the structure of Indian investment is undertaken in a disaggregated empirical framework. The results indicate complementarities between public investment in infrastructure and private sector output across most industrial categories. The findings thus suggest that public investment can play an important role in economic development. The current debates on privatization can be enriched by a recognition of the structural nature of investment and the output-enhancing effect of public investment in infrastructure.
Subject Area
Economics
Recommended Citation
Rishi, Meenakshi, "The investment-growth paradox in developing economies: A structural analysis of Indian public investment" (1993). Doctoral Dissertations Available from Proquest. AAI9316714.
https://scholarworks.umass.edu/dissertations/AAI9316714