Public Investment

Public investment is investment by the state, whether through central or local government, or state-owned industries or corporations, in particular assets. Public investment has arisen historically from state ownership, control and delivery of goods, and infrastructure or services, whose provision has been deemed to be of vital national interest. Public investment has tended to rise as a consequence of the process of industrialization and the demands created for a new infrastructure of goods and services from the accompanying largescale movement of population from rural areas into densely populated urban communities. During the past decade, the process of privatization of industries, and the accompanying liberalization and deregulation of markets, has witnessed the growth of public investment in goods and services provided by the private and not-for-profit sectors, principally through the development of various public-private partnerships.

Public investment tends to be measured quantitatively, on an annual basis, as a percentage of total national income in a given period. It tends to be divided between capital investment in physical or tangible investment in fixed infrastructure, for example, transport, telecommunications and buildings; human or intangible investment in education, skills, and knowledge; and current investment in the consumption of goods and services, for example, welfare benefits and pensions. Public investment has tended to constitute a relatively small percentage of overall public spending, but frequently a major component of total national capital investment.

Public investment has been justified both on the grounds of economic theory and political ideology. In economics, public investment has been justified because of the existence of certain public goods and natural monopolies that, if held under private ownership, would result in an inefficient allocation of resources because of potential overcharging and underinvestment. Public goods refer to those goods and services that the market would find difficult or impossible to invest in or provide profitably because of the existence of externalities, that is, costs and [Page 769]benefits that could not be captured exclusively by the goods provider. Primary examples of public goods are the maintenance of law and order, the security and defense of a particular territory, and the provision of clean air and a sustainable environment. Natural monopolies are those goods and services for which the cost of provision is so vast that only one supplier can economically invest in the necessary infrastructure of supply and where the costs of market entry are prohibitive for rival suppliers. Primary examples of natural monopolies are the supply of electricity, clean water, and sewage.

In politics, public investment has been justified because of the desire to achieve a variety of political objectives, notably the guarantee of national security, the protection of property rights, and the maintenance of the rule of law, rising educational and health standards, national economic development and full employment, a cleaner environment, collective ownership of the means of production, and greater equality in the distribution of income and wealth.

The growth of public investment was driven during the nineteenth century by the demands of industrialization and the need to provide a physical and human infrastructure to accommodate the rapid movement of population from rural areas into cities. Friedrich List identified the critical importance of public investment for any industrializing economy wishing to develop its national productive powers sufficiently to be able to catch up to its more advanced competitors. Public investment was seen not only as a vital source of investment in factors of production, but also as a prime mover of the independence, power, national unity, and sense of common purpose of the nation concerned.

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