EIB Papers Volume 13. n°1/2008 - European Investment Bank

Further productivity
gains, including for
public investment, may
be more critical for
economic growth than
higher investment levels.
118 Volume13 N°1 2008 EIB PAPERS
Further productivity gains, including for public investment, would be required to help support
macroeconomic stability and foster economic growth. For example, for the Czech Republic,
Hungary, and Slovakia, and assuming no further productivity gains, halving the income gap vis-à-vis
the old member states over 10 to 20 years would require a dramatic increase in investment by 12 to
15 percent of GDP from the current level (Table 1). In contrast, assuming no increase in investment
rates, the productivity growth needed to close the income gap is largely in line with the average
level in the NMS. This suggests that, even at current levels of total investment, increases in efficiency
to the level of leading peers could already go a long way toward achieving higher growth (Figure 4).
For example, in 2000–2005, total investment in Slovakia was higher than in Latvia by 6 percent of
GDP, but per-capita GDP growth rate was only half. Therefore, while increasing investment levels
remains important, boosting the efficiency of investment, particularly public investment, may be
even more critical. Policy options to improve efficiency gains may include, for example, reallocations
between new investments and maintenance and optimized choices between investment alternatives
for more cost-effective usage.
At the same time, fostering growth will require addressing the institutional and policy constraints
that are seen as key barriers to business activity. As shown in Table 2, recent World Bank Investment
Climate Surveys (ICS) suggest that, among 18 indicators, private firms consistently rank tax rates,
economic and regulatory policy uncertainty, and macroeconomic instability as top constraints
for businesses in the NMS. In contrast, none of the infrastructure indicators (e.g., access to land,
electricity, telecommunications, and transport) are among the top 12 constraints in any NMS.
Therefore, private investment decisions are more closely related to the strength of government
institutions and policies than to the availability of infrastructure, and public investment alone would
not foster private investment if other pressing concerns are not addressed. 4
Figure 3. Macroeconomic vulnerability indicators in NMS and East Asia
Current account deficit
(In percent of GDP)
Estonia
Latvia
Hungary
Lithuania
Thailand (’96)
Slovakia
Philippines (’96)
Malaysia (’96)
Korea (’96)
Czech Republic
Indonesia (’96)
Slovenia
Poland
0 5 10 15
Source: IMF (2006a)
Note: Data are for 2005, unless noted otherwise.
External debt
(In percent of GDP)
Latvia
Estonia
Hungary
Slovenia
Slovakia
Thailand (’96)
Philippines (’96)
Indonesia (’96)
Poland
Lithuania
Malaysia (’96)
Czech Republic
Korea (’96)
0 50 100 150
Reserve cover of short-term debt
(In percent)
Slovakia
Slovenia
Czech Republic
Malaysia (’96)
0 50 100 150 200
4 This is not to say that public investment does not contribute to growth. In theory, public investment contributes to growth
both as an input and by enhancing productivity. Yet, the empirical evidence is mixed. Surveys by Sturm et al. (1998) and
de Haan et al. (2008) conclude that public capital stimulates economic growth, but the quantitative impact is lower than
previously believed. Also, public investment has decreasing returns and, beyond certain thresholds, may crowd out private
investment.
Latvia
Indonesia (’96)
Estonia
Philippines (’96)
Thailand (’96)
Lithuania
Hungary
Poland