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

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Fiscal adjustment and reforms need not depress public investment. 144 Volume13 N°1 2008 EIB PAPERS 6. Concluding remarks Many NMS need to continue to implement fiscal adjustment to support growth and macroeconomic stability. An analysis of the determinants of economic growth in the NMS suggests that achieving income convergence with other EU members rests more with maintaining productivity growth, attracting foreign savings, and improving investment efficiency than with increasing spending (including for infrastructure). Also, as macroeconomic vulnerability indicators remain high, and in some countries are approaching critical values, strong fiscal positions are needed to avoid a further deterioration in the macroeconomic framework and support medium-term economic growth. Yet, fiscal adjustment does not necessarily have to constrain public investment. Several NMS have successfully increased public investment with the support of higher revenue efforts and cuts in other expenditures, while at the same time consolidating their fiscal positions. In general, further fiscal adjustment can lead to stronger private-sector-led growth, including through private investment and foreign capital inflows. The EU experience shows that countries with strong fiscal positions and modest debt have generally been able to stimulate higher private investment to more than offset cuts in public investment. Finally, success in achieving the convergence objective requires higher efficiency in investment, which can be facilitated by properly designed fiscal adjustment. In most NMS, institutional reforms will be needed to enhance the efficiency of investment. Addressing infrastructure bottlenecks usually requires both more investment and more efficient investment. In all NMS, further institutional reforms play a critical role in improving efficiency and encouraging private sector investment. Policy options will need to be country-specific with due consideration to the overall macroeconomic and fiscal framework, infrastructure bottlenecks, business constraints, and the efficiency of investment. New financing options can ease fiscal constraints but present both new opportunities and challenges. One such option, various EU funds, make additional resources available for investment but their net fiscal impact may be negative in the short run unless countries can reallocate spending away from domestically-funded programmes. Appropriate project selection procedures are crucial to ensure the efficient use of funds. Additional resources also pose challenges for absorptive capacities in many NMS. Another option, PPPs, provide a promising route for channelling more resources into infrastructure investment but require an urgent strengthening of the institutional framework to handle PPPs, and limiting incentives to move investment off budget. Benefits can only be expected to materialize to the extent that the risks and complexities inherent in this investment route are adequately managed.
Annex: EU funding available for new member states 17 Pre-accession aid Aimed to facilitate adjustment to full membership. The disbursements on remaining pre-accession funds continue also after accession. There were three pre-accession instruments: • Poland and Hungary: Assistance for Restructuring of the Economy (PHARE); • Instrument for Structural Policies for pre-Accession (ISPA); • Special Accession Programme for Agriculture and Rural Development (SAPARD). Structural funds Aimed at the following objectives: (1) economic catch-up in less developed regions (GDP per capita less than 75 percent of EU average, (2) economic and social cohesion in areas facing structural difficulties (e.g., rural, fisheries); (3) training and promotion of employment (in less developed regions included in (1)). These three objectives account for 94 percent of structural allocations for the NMS. There are four structural funds to finance the above objectives: • European Regional Development Fund (ERDF): financing objectives (1) and (2) • European Social Fund (ESF): financing objectives (1), (2), and (3) • European Agricultural Guidance and Guarantee Fund (EAGGF) – guidance section: financing objective (1) in agriculture; • Financial Instrument for Fisheries Guidance (FIFG): financing objective (1) in the fisheries sector. Other structural funds, so called Community Initiatives, include: Interreg III (cross-border cooperation), Urban II (innovative strategies in urban areas), Equal (combating labour market discrimination), and Leader + (rural development initiatives). Cohesion Fund Available to countries with GDP per capita below 90 percent of the EU average. This finances large infrastructure projects in environment and transportation. Common Agricultural Policy (CAP) The CAP policy has several components: • Market measures: Purchase of unprocessed food at intervention price and subsidies to non-EU exports; • Direct payments: Payments to farmers based on farm area and type of production; • Rural development (EAGGF guarantee section): So-called CAP pillar II to provide support to farms in less favorable areas (LFA), forestation of land, structural pensions (paid to those who transfer farms to young farmers), food-processing, or training of farmers. Internal policies Funds to finance existing EU policy priorities, NMS mainly receive funds for: • Nuclear safety: Decommissioning of power plants; • Schengen: Strengthening control on the EU border and complying with the Schengen Treaty. 17 This Annex draws on Rosenberg and Sierhej (2007). EIB PAPERS Volume13 N°1 2008 145
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Preface This year the European Inve
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