The Unassuming Economist

Roads or schools? It’s a question akin to the “guns or butter” choice that governments around the world confronted in the 20^th century: How to spend a nation’s finite resources to produce the maximum benefit for its people. A new IMF working paper finds that low-income countries tend to spend less on schools than on roads as a share of GDP.

“In the presence of distortionary taxation and debt aversion, the different pace at which roads and schools contribute to economic growth turns out to be central to this decision. Specifically, while costs are front-loaded for both types of investment, the growth benefits of schools accrue with a delay. To put things in perspective, with a ‘big push’, even assuming a large (15 percent) return differential in favor of schools, the government would still limit the fraction of the investment scale-up going to schools to about a half. Besides debt aversion, political myopia also turns out to be a crucial determinant of public investment composition. A ‘big push’, by accelerating growth outcomes, mitigates myopia—but at the expense of greater risks to fiscal and debt sustainability. Tied concessional financing and grants can potentially mitigate the adverse effects of both debt aversion and political myopia”