Infrastructure in CESEE Benchmarking Macroeconomic Impact and Policy Issues

IMF News, September 28, 2020

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Remarks delivered by IMF Managing Director, Kristalina Georgieva, at the virtual Summit of the Three Seas Initiative (hosted by Estonia).
Crisis framing:
- COVID-19 described as "the biggest shock of the post-war era".
- Projected cumulative loss to the global economy of more than $12 trillion in 2020 and 2021—roughly equivalent to the annual output of the euro area.
- Outlook has improved since June but uncertainty remains; several countries face second waves and emerging markets and developing economies (other than China) face a precarious outlook.
Policy imperative: successful navigation of the crisis requires coordinated action across public health, fiscal, monetary, and macroprudential policies, with well-targeted infrastructure investment a fiscal priority.

Long-run performance:
- Since the mid-1990s, annual real per capita income growth in CESEE averaged about 3 percent.
- This rate is "almost two and a half times" the per capita growth rate in the EU15.
- Region’s GDP per capita (PPP-adjusted) nearly doubled and now stands at about 55 percent of the EU15 level.
- For the 11 CESEE countries that are EU members (and Three Seas Initiative members), per capita income reaches close to 70 percent of the EU15 level.
Drivers of optimism:
- Geographic location, skilled population, strong policy frameworks, and positive spillovers from continued support from European Institutions.

Assessment of gaps relative to EU15:
- Electricity generating capacity is around some 50 percent less than in the EU15.
- Fewer internet subscriptions per 100 people than in the EU15.
- Physical connectivity gaps (adjusted for arable land area): roads are some 60 percent below EU15 level; railways are some 40 percent below EU15 level.
Cost estimates to close half the gaps by 2030:
- Could cost countries in the CESEE region between 3 percent and 8 percent of GDP annually.
- For CESEE countries that are EU members, estimated cost around 2-3 percent of GDP annually (reflecting smaller infrastructure quantity gaps).

Infrastructure investment risks and governance challenges:
- Long delays, cost overruns, increased fiscal risks, and opportunities for corruption.
- Cross-border projects add complexity.
- Weaker governance and low transparency in parts of CESEE magnify these challenges, deterring private investors and complicating capital mobilization.
IMF support:
- IMF published the book Well Spent earlier this month to assist countries in building strong infrastructure governance and ending waste in public investment.

Estimated output effects per 1 percent of GDP spent on infrastructure:
- Short run: output can increase by ½ to ¾ percent.
- Long run: output can increase by 2 to 2½ percent.
- Benefits may be larger for regional cross-border projects that strengthen connectivity.
Triple win from scaling up infrastructure in CESEE:
- Short-term: powerful stimulus, job creation, and absorption of underutilized resources.
- Long-term: enhanced productive capacity and faster convergence via improved digital and physical connectivity.
- Structural transformation: well-designed investments support digitalization and greening of economies.

Invest in "the economy of tomorrow, not the economy of the past" by prioritizing digitalization and green transitions.
Seize opportunities presented by the tech sector expansion and more ambitious climate targets:
- Note: European Commission proposed emission reduction goals of 55 percent by 2030 compared to 1990 levels.
Strengthen infrastructure governance and transparency to:
- Reduce delays and cost overruns.
- Lower fiscal risks.
- Improve private investor confidence and mobilize capital.
Emphasize regional projects to amplify connectivity benefits across borders.

Introductory remarks by IMF Managing Director, Kristalina Georgieva — September 28, 2020