Political Economy of Public Capital Formation in Japan

JEL codes: 
Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.4, No.1, December 2008

This paper investigates public investment policy (mainly from the 1980s onwards) with a political-economic approach. The points of this paper are as follows. First, at the macro level, it is possible that the short-term fluctuation of public investment has been controlled by the government partys political incentive to win an election rather than in order to dampen economic fluctuations. Second, as for regional allocation, up to 1993 when the Liberal Democratic Party of Japan (LDP) stepped down from government, the LDP had had a great influence on public investment allocation; however, following such a government alternation the influence of local special interest groups may have become stronger. Focusing on the local side, empirical analysis of the public investment function considering political-economic factors clarifies that local
public investment policy has been deeply affected by the construction industry as a local interest group (which is heavily dependent on public investment in general), and that levels of public investment have not been determined in the way the median voter theorem implies.