Closing Efficiency Gaps Means Big Gains for Public Investment

SUMMARY

On average, about 30 percent of the potential value of public investment is lost to inefficiencies in the investment process, and closing this efficiency gap could substantially increase the economic dividends from public investment.

 
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  • “Efficiency gaps” in public investment spending are large and hinder growth
  • Better public investment management can significantly reduce efficiency gaps
  • New assessment tools can identify gaps and pinpoint reform priorities
  • Despite widespread evidence of wasteful public investment spending, including for “white elephant” projects that are characterized by large cost overruns, time delays, and inadequate maintenance, cross-country analysis of public investment efficiency remains scarce.

    A new IMF study examines the relationship between public investment, infrastructure quality, and economic growth on the basis of the broadest data set yet assembled. It confirms significant waste (“efficiency gaps”) in public investment spending, and shows that strengthening public investment management institutions could close up to two-thirds of the efficiency gaps.

    “Public investment can serve as an important catalyst for economic growth, for example by supporting or enabling the delivery of key public services, and connecting citizens and firms to economic opportunities,” said Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department. “But the economic and social impact of public investment critically depends on its efficiency.”

    The study finds that increasing public investment efficiency could double the impact of that investment on growth. More specifically, a 1 percent of GDP increase in public investment, would increase output by just 0.3 percentage points of GDP in countries in the bottom efficiency quartile, but by 0.6 percent for countries in the top efficiency quartile.

    Narrowing (but persistent) disparities

    Following three decades of steady decline, public investment as a share of GDP has begun to recover in emerging markets (EMs) and low-income developing countries (LIDCs), but remains at historic lows in advanced economies (AEs) (Chart 1).

    Indicators of infrastructure quality and access suggest that the recent ramping up of public investment in LIDCs and EMs has helped to reduce perceived disparities in infrastructure across countries (Chart 1). Convergence has been especially pronounced in social infrastructure, however, large disparities persist for economic infrastructure.

    Persistent cross-country disparities in infrastructure quality coupled with the potentially positive effect of infrastructure spending on economic growth make it particularly important to use limited investment funds as efficiently as possible.

    Mind the efficiency...

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