## Public Investment for the Recovery

_IMF Blog, October 5, 2020_

## Source details

**Canonical URL:** [Public Investment for the Recovery](https://www.imf.org/en/blogs/articles/2020/10/05/blog-public-investment-for-the-recovery)

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- [Markdown version](/en/blogs/articles/2020/10/05/blog-public-investment-for-the-recovery/index.md)
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## Bibliographic details
- Authors: Vitor Gaspar, Paolo Mauro, Catherine Pattillo, Raphael Espinoza
- Published: October 5, 2020

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### Overview
- 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.

### Potential macroeconomic impacts (quantified)
- 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.

### The case for scaling up investment
- 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.

### Striking the right balance (financing considerations)
- 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.

### Maintaining the quality of investment projects
- 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."

### Catalyzing private 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.*

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## References

- [Fiscal Monitor](http://www.imf.org/fiscalmonitor)
- [Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment](https://blogs.imf.org/2020/09/03/how-strong-infrastructure-governance-can-end-waste-in-public-investment/)

_Source: https://www.imf.org/en/blogs/articles/2020/10/05/blog-public-investment-for-the-recovery_