Public Investment Efficiency and Sectoral Economic Growth in Pakistan

PSSP Working Paper number 022 “Public Investment Efficiency and Sectoral Economic Growth in Pakistan” compares the effects of sectoral and aggregate public investments on sectoral private investment, output, and employment for eight sectors of the economy. The authors estimate the elasticities of private investment with respect to aggregate and sectoral public investments to find crowding-out or crowding-in phenomena in Pakistan as well as the changes in labor absorption or replacement due to additional capital and the effects on output. This is accomplished using vector autoregressive (VAR) models for each sector, which allows measuring the dynamic feedback effects among the variables. Forty-eight elasticity coefficients from sectoral and aggregate public investments are reported for the three variables. The authors conclude that fourteen out of sixteen cases confirm a crowding-in of private investment in the Pakistan economy. This overwhelming majority of cases supports the argument that public investment has a positive effect on private investment. It suggests that if the government of Pakistan wants to have a significant role from the private sector to increase inclusive growth, public investment should increase. A marginal productivity analysis (the effects per rupee of public investment) is conducted as well. The comparison for private investment shows that, for six out of eight sectors, the marginal productivity of sectoral investment is more than that of aggregate public investment. It stands to reason that public investment made directly in a sector will have a more profound impact per rupee than aggregate public investment has on the same sector.