Rethinking Public Investment for Pro-Poor Growth (Development Dialogue)

Investment is one of the keys to economic growth and increasing per capita income. Theoretical and empirical research, and country experiences (China, India, and Ethiopia, for instance) suggest that growth is a precondition for poverty reduction. Consequently, investment is also crucial for poverty reduction. Both public and private investment are crucial for economic growth and complement each other, but public investment matters more for the poor and backward areas or regions. The private sector invests for the pro_x001f_t motive and channels the investment to where the expected returns are the highest. And while the public investment’s raison d’ être is also to generate social returns and stimulate economic activity, it must also, in principle, consider welfare and equity issues. Available evidence suggests that public investment crowds in private investment, so public investment in poor or backward areas could potentially attract private investment in those areas. In sum, public investment has both growth-enhancing and pro-poor functions.