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Public investment at the heart of the recovery

Vitor Gaspar, Paolo Mauro, Catherine Pattillo and Raphael Espinoza

October 5, 2020

Countries around the world are taking exceptional action today in response to the COVID-19 pandemic. While giving priority to the end of the health crisis and the activation of safety nets intended for households and companies, the public authorities must already prepare the transition of the economies towards “the world after” , in particular to support workers in their return to work.

In this regard, public investment is called to play a central role. The new edition of Public finance monitor shows that an increase in public investment in advanced and emerging countries would help revive activity after the halt inflicted by the crisis, both the most severe and the most brutal in contemporary economic history. Such an initiative would indeed create millions of direct jobs in the short term and pave the way for the indirect creation of millions more jobs in the longer term. An increase in public investment equal to 1% of GDP would strengthen confidence in restarting activity and boost GDP by 2.7%, private investment by 10% and employment by 1.2%, provided that the projects selected relate to high quality investments and that the pre-existing levels of public and private debt do not weaken the private sector’s response to this stimulus.

In this edition of the Monitor of Public Finances, we examine why it is necessary to increase public investment, what could be the impact of public investment for growth and jobs, and how governments can ensure investment promotes recovery.

The Case for More Investment

Even before the pandemic, global investment was more than a decade of low levels, despite road and bridge collapses in some advanced countries, and while most emerging and developing countries were in need. in considerable infrastructure, particularly in transport, safe water supply and sanitation. It is now necessary to invest urgently in various essential areas to stem the pandemic, such as health care, schools, respect for hygiene measures in buildings and transport or the development of digital infrastructure. .

The low level of interest rates around the world also suggests that the time is right to invest:. Savings are plentiful, the private sector remains on the lookout, and many unemployed workers are now able to take on the new jobs created by public investment. However, the deep uncertainties surrounding the course of the pandemic and the economic outlook are translating into a decline in private investment. The time has therefore come for many countries to commit to high-quality public investments in priority projects. They can do this by borrowing at low cost.

Public investment can be a major driver of recovery. It is thus possible to create between 2 and 3 direct jobs for each million dollars invested in traditional infrastructure projects, and between 5 and 14 direct jobs for each million dollars invested in research and development, green electricity and energy efficient buildings.

However, an investment project does not happen overnight. For investment to create jobs today – when they are needed most – countries need to step up maintenance of infrastructure in a safe way. They must also review and relaunch certain promising projects put on hold due to the crisis, accelerate the deployment of projects already scheduled to complete them within two years, and plan new projects taking into account the priorities defined for post-crisis.

Finding the right balance

However, some countries will find it difficult to finance their investment projects through debt because the financing conditions are unfavorable. Even so, a gradual increase in public investment financed by the debt can be considered, provided that the risks of debt refinancing and interest rates remain at moderate levels, and that projects are chosen. with discernment. Some countries could also reallocate budgetary expenditures or increase their revenues to drive their priority investments.

Poorer countries, for their part, will have to be supported by the international community through donations, particularly in the context of the 2030 sustainable development goals. Investments are needed for adaptation to climate change, particularly in exposed countries. at the risk of drought and flooding. Public aid is available, but the $ 10 billion envelope established in 2018 does not meet the investment needs of low-income countries, estimated at $ 25 billion per year by IMF staff.

Maintaining the quality of investment projects is essential. For example, a project can see its cost increase by 10 to 15% just because it is implemented in a period when the investment is very high. According to our analysis, the most significant additional costs and delays are observed among projects approved and launched during periods of significant increases in public investment. Rapid growth in public investment also risks facilitating corruption. Finally, it is essential to improve governance in the choice and management of infrastructure projects, because it is possible to improve the efficiency of infrastructure by a third on average (as noted in a recently published book by the IMF: Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment).

Be the catalyst for private investment

We also examine how, in the face of an unprecedented crisis, public investment can accelerate growth enough to create additional jobs in the private sector. We determine whether the effect of an increase in public spending on GDP (the “fiscal multiplier”) can be neutralized either by the context of a pandemic which does not allow certain jobs to be held in complete safety, or because the companies’ financial capacity to invest will be reduced at the end of the crisis.

However, against a background of high uncertainty, public investment can strengthen the confidence of private investors in the recovery and encourage them to invest in turn, not least because it signals the government’s desire to ensure sustainable growth. Public investment projects can also stimulate private investment more directly. For example, investments in digital networks, electrification or transport infrastructure allow new businesses to grow. Likewise, our results show that investments in health care and other social services are accompanied by significant increases in private investment within 12 months.

In summary, public investment is an effective tool in stimulus programs designed to limit the effects of the pandemic on the economy. Even as they continue their efforts to save lives and preserve livelihoods, countries can lay the foundations for a more resilient economy by investing in high job-creating, highly productive and more eco-friendly activities. environment.


Vitor Gaspar, a Portuguese national, is Director of the IMF’s Fiscal Affairs Department. Before joining the IMF, he held various high-level positions at the Bank of Portugal, most recently as Special Advisor. From 2011 to 2013, he was Minister of Finance of Portugal, with the rank of Minister of State. He headed the Office of European Policy Advisers of the European Commission from 2007 to 2010 and was Director General of Studies at the European Central Bank from 1998 to 2004. Vitor Gaspar holds a doctorate and a postdoctoral degree in economics of the New University of Lisbon. He also studied at the Portuguese Catholic University.

Paolo Mauro is Deputy Director of the IMF’s Fiscal Affairs Department. He previously held various management positions in the Africa Department, the Fiscal Affairs Department and the IMF Research Department. From 2014 to 2016, he was a senior research fellow at the Peterson Institute for International Economics and a visiting professor at the Carey Business School at Johns Hopkins University. His articles have appeared in journals such as the Quarterly Journal of Economics, Journal of Monetary Economics, and Journal of Public Economics; they have been widely cited in academic work and by renowned media organizations. He is the co-author of three books, namely World on the Move: Consumption Patterns in a More Equal Global Economy; Emerging Markets and Financial Globalization and Chipping Away at Public Debt.

Catherine Pattillo is Deputy Director of the Public Finance Department and Head of the Public Finance Policy and Oversight Division, responsible for the Public Finance Monitor. Its work focuses on macrobudgetary issues. After holding a post at Oxford University, she worked in the IMF and African and Caribbean Studies Department, as well as in the Strategy, Policy and Evaluation Department, where she devoted her work to low-income countries and emerging issues, such as gender, inequalities and climate change. She has published numerous studies in these fields.

Raphael Espinoza is Deputy Division Chief in the IMF’s Fiscal Affairs Department. He was previously Assistant Professor of Economics at University College London where he was also Director of the Center for Studies of Emerging Economies. At the IMF, he worked in the studies department, as well as on the United Kingdom, Spain, the Dominican Republic and various countries in the Middle East. He also worked at the European Central Bank on the subprime loan crisis in the United States and has published numerous studies on fiscal policy, monetary policy and financial stability.

EDITOR’S NOTE: This article is a translation. Apologies should the grammar and / or sentence structure not be perfect.

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