## Chapter 2: Public Investment for the Recovery

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### Context and priorities
- Immediate government focus during the COVID-19 crisis: address the health emergency and provide lifelines for vulnerable households and businesses.
- Additional needs: prepare economies for safe and successful reopening, design policies to create jobs and boost economic activity, and facilitate transformation to more resilient, inclusive, and greener economies.
- Priority public investment areas highlighted:
  - well-resourced and better-prepared healthcare systems,
  - expanding digital infrastructure to support social distancing and to narrow the digital gap that exacerbates disparities in access to information, education, and work opportunities,
  - addressing climate change and environmental protection.
- Pre-crisis trend: public-investment-to-GDP ratios were already declining and the growth in infrastructure had not kept up with needs.

### Feasibility and sequencing of public investment
- In advanced and some emerging market economies, where interest rates are near their effective lower bound, scaling up of quality public investment can:
  - have a powerful impact on employment and activity,
  - crowd in private investment,
  - absorb excess private savings without causing a rise in borrowing costs.
- For many low-income countries and several emerging market economies—particularly those borrowing in foreign currency—investment is highly constrained by financing conditions despite massive needs to attain the Sustainable Development Goals.
- Recommended sequencing to deliver public investment, even with social distancing:
  - invest right now in maintenance;
  - review and restart promising projects that were delayed in preparation or implementation;
  - speed up projects in the pipeline to bring them to fruition within the next two years;
  - start planning immediately for new projects aligned with postcrisis priorities.

### Investment management, governance, and financing constraints
- Strengthened public investment management practices and governance are essential because delays, cost overruns, and disappointing projects are common and could be more frequent when investment is scaled up.
- Empirical observation: the cost of an individual project can increase by 10 percent when public investment in the country is high.
- For countries with easy access to finance, borrowing to finance public investments of good quality is an effective strategy because the global decline in interest rates has set a lower bar for investment projects to be beneficial.
- For countries with financing constraints, the bar is higher to pass because governments with limited resources face competing spending priorities.
- For constrained countries, policymakers should safeguard public investment to the extent compatible with saving lives and livelihoods, and enhance its efficiency.
- The crisis increases the need for a global response to avoid slipping further behind on the Sustainable Development Goals.

### Empirical findings on macroeconomic and labor impacts
- Empirical estimates based on a cross-country data set and a sample of 400,000 firms show that public investment can have a powerful impact on GDP growth and employment during periods of high uncertainty.
- For advanced and emerging market economies, the fiscal multiplier:
  - peaks at over 2 in two years.
- Employment effects of increasing public investment by 1 percent of GDP in these economies:
  - would create 7 million jobs directly,
  - and between 20 million and 33 million jobs overall when considering the indirect macroeconomic effects.
- Crowding in private investment is particularly strong in industries critical for the resolution of the health crisis (communications and transport) or for the recovery (construction and manufacturing), but must be accompanied by complementary policies to address high leverage and liquidity constraints faced by private firms.

### Sectoral priorities and climate adaptation financing
- New investments recommended to lay the foundation for a more resilient and inclusive economy:
  - healthcare,
  - social housing,
  - digitalization,
  - environmental protection.
- Returns on climate adaptation investments:
  - rates of return on investments in adaptation to climate change are often greater than 100 percent.
- Official aid for adaptation:
  - current allocation: $10 billion,
  - required allocation: would have to more than double the $10 billion allocated currently to around $25 billion to finance the public investments required for adaptation to climate change in low-income countries.

*International Monetary Fund | October 2020 — Chapter 2: Public Investment for the Recovery (Executive Summary)*

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2020/october/english/ch2execsum.pdf_