Public Investment for the Recovery

IMF Blog, October 5, 2020

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Publication: "Public Investment for the Recovery" by Vitor Gaspar, Paolo Mauro, Catherine Pattillo, Raphael Espinoza; October 5, 2020.
Context: Governments responding to COVID-19 must address the health emergency and provide lifelines while preparing economies for the post-COVID-19 transition, including helping people get back to work.
Core proposition: Increasing public investment in advanced and emerging market economies could help revive economic activity, create jobs directly in the short term and indirectly over a longer period, and strengthen confidence in the recovery.

Increasing public investment by 1 percent of GDP could:
- boost GDP by 2.7 percent,
- raise private investment by 10 percent,
- increase employment by 1.2 percent,
- provided investments are of high quality and existing public and private debt burdens do not weaken the private sector response.

Pre-pandemic context:
- Global investment had been weak for over a decade.
- Significant infrastructure needs: transportation, clean water, sanitation, and more—especially in emerging and developing economies.
Immediate pandemic priorities:
- Investment is urgently required in health care, schools, safe buildings, safe transportation, and digital infrastructure.
Financial environment:
- Low interest rates globally make borrowing at low cost feasible.
- Savings are plentiful, private sector investment is depressed, and many people are unemployed and available to take jobs created through public investment.
Job creation potential (per million dollars spent):
- Traditional infrastructure: between 2 and 8 jobs.
- Research and development, green electricity, and efficient buildings: between 5 and 14 jobs.
Timing and implementation:
- Investment projects can take time to implement; to create jobs immediately, countries should:
- ramp up infrastructure maintenance, where safe,
- review and restart promising projects delayed by the crisis,
- speed up projects in the pipeline to bring them to fruition within the next two years,
- plan new projects aligned with postcrisis priorities.

Constraints:
- Some countries face tight financing conditions making borrowing to invest difficult.
Approaches:
- Gradual scaling-up of public investment financed by borrowing could pay off if rollover risks and interest rates do not increase too much and projects are chosen wisely.
- Countries may need to reallocate spending or raise additional revenue for priority investments.
Support for low-income countries:
- Poorer countries, especially in the context of the Sustainable Development Goals 2030, will need grant support from the international community.
- Official aid noted: $10 billion allocated in 2018 falls short of the $25 billion of investment required annually in low-income economies, according to IMF staff estimates.
Climate adaptation:
- Investing in adaptation to climate change is critical for countries susceptible to floods and droughts.

Risks when scaling up quickly:
- The cost of an individual project can increase by as much as 10 to 15 percent when undertaken in a period of particularly high investment.
- Cost increases and project delays tend to be higher and longer if projects are approved and undertaken when public investment is significantly scaled up.
- Fast increases in public investment carry the risk of facilitating corruption.
Governance and efficiency:
- Improving governance of project selection and management is crucial.
- There is scope to improve the efficiency of infrastructure by one third on average, as discussed in the IMF book "Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment."

Rationale:
- Public investment can boost private investors’ confidence in the recovery and induce additional private investment by signaling government commitment to sustainable growth.
Direct channels:
- Investments in digital communications, electrification, or transportation infrastructure allow new businesses to emerge.
- Investments in healthcare and other social services are associated with sizable increases in private investment at the one-year horizon.
Caveats:
- Fiscal multipliers may be muted if some jobs cannot be performed safely during the pandemic or if firms exit the crisis with less financial capacity to invest.
Overall conclusion:
- Public investment is a powerful element of stimulus packages to limit the economic fallout from the pandemic and to lay the foundation for a more resilient economy by investing in job-rich, highly productive, and greener activities.

Source: Public Investment for the Recovery — Vitor Gaspar, Paolo Mauro, Catherine Pattillo, Raphael Espinoza; October 5, 2020.