Collect More, Spend Better: Public Investment in Asian Frontier Markets

IMF Working Papers, January 24, 2017

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Collect More, Spend Better: Public Investment in Asian Frontier Markets

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Bibliographic details

• Authors: Manuk Ghazanchyan, Ricardo Marto, Jiri Jonas, Kaitlyn Douglass
• Published: January 24, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475570892.001

Overview

• Authors: Manuk Ghazanchyan, Ricardo Marto, Jiri Jonas, Kaitlyn Douglass
• Publication date: January 24, 2017
• Core question: How do alternative public investment scaling-up scenarios, and improvements in capital spending efficiency and tax revenue collection, affect growth and debt sustainability in three fast-growing Southeast Asian economies: Cambodia, Sri Lanka, and Vietnam?
• Main conclusion: A gradual public investment profile is more favorable than front-loading capital spending under the assumption that governments gradually learn to invest more efficiently, accelerating public capital accumulation and growth. Improving revenue collection efficiency over time can substantially ease fiscal adjustment and lower debt-to-GDP ratios while helping address infrastructure gaps.

Methodology

• Model: A dynamic small open economy model calibrated for Cambodia, Sri Lanka, and Vietnam.
• Scenarios analyzed:
  • Alternative public investment scaling-up profiles (gradual vs. front-loaded).
  • Improvements in capital spending efficiency (investment efficiency parameter; learning over time).
  • Improvements in tax revenue collection efficiency over time.
• Financing options: Pros and cons of alternative financing sources considered and the financing mix that generates the best macroeconomic outcome is identified.

Key Findings

• Gradual public investment scaling-up:
  • More favorable than front-loading when governments can gradually learn to invest more efficiently.
  • Accelerates public capital accumulation and GDP growth under the learning assumption.
• Revenue collection efficiency:
  • Improving efficiency of revenue collection over time may ease the burden of fiscal adjustment.
  • Can achieve higher GDP growth with substantially lower debt-to-GDP ratios.
• Trade-offs and complementarities:
  • The best macroeconomic outcomes depend on the mix of financing options and concurrent improvements in spending and revenue efficiency.
  • Addressing large infrastructure gaps while maintaining debt sustainability is feasible if investment efficiency and revenue collection improve.

Policy Recommendations

• Prefer gradual scaling-up of public investment when capacity to deploy high-quality investment rises over time and learning improves investment efficiency.
• Prioritize measures that improve the efficiency of capital spending (investment project selection, execution, and management) to raise the return on public investment.
• Strengthen revenue administration to improve tax collection efficiency over time, which can reduce the need for sharp fiscal consolidation and lower debt-to-GDP ratios.
• Design financing mixes that balance concessional and market financing while accounting for the pace of efficiency gains in spending and revenue.

Content in this bundle

• Collect More, Spend Better: Public Investment in Asian Frontier Markets
  • Collect More, Spend Better: Public Investment in Asian Frontier Markets (Markdown version)
  • Collect More, Spend Better: Public Investment in Asian Frontier Markets (PDF)