Public Investment, Growth, and Debt Sustainability: Putting Together the Pieces

Fiscal space: Asias fiscal safety net has shrunk

“…This result is consistent with a study on the unit costs of infrastructure projects, which shows that they increase when public investment is close to 10 percent of GDP (Gurara et al 2020). This body of evidence suggests that scaling up public investment too much and too fast can lead to absorptive capacity constraints and cost inflation, undermining the returns from public investment (Buffie et al 2012;Berg et al 2013;Presbitero 2016). Thus, while an investment push could stimulate the economy, help the recovery from the pandemic crisis, and make progress toward the SDGs, any plan has to be carefully designed and implemented.…”

“…Hence, country authorities should carefully design investment plans that, in the short term, prioritize maintenance and the termination of existing projects or the implementation of those already in the pipeline. In the medium term, existing evidence shows that a front-loaded public investment surge can induce debt sustainability risks (Buffie et al 2012). Again, the timing and size of these plans will depend on the degree of fiscal space, with some countries prioritizing the reduction of debt vulnerabilities.…”

The Ararat Fiscal Strategy Model: A Structural Framework for Fiscal Policy Analysis in Armenia

“…The labor income shares in traded and nontraded production are set at 0.55 and 0.45, respectively, reflecting the actual shares for the 2015-2019 period. They fall within the estimates for low-income countries by Buffie et al (2012). 𝛼 𝛼 .…”

“…Public capital is a public good and increases 2 For a description of STAMP, see Remo et al (2022). The model builds on more-than-a-decade efforts in academia and policymaking institutions to develop DSGE models for research and policy analysis and shares features of these models, including those in Christiano et al (2005), Buffie et al (2012), Erceg et al (2005), Gali and Monacelli (2005), Kumhof et al (2010), Melina et al (2016), Shen et al (2018), Wouters (2003, 2007), Woodford (2003). For a recent critical discussion on DSGE models, see Christiano et al (2018).…”

“…1 𝛿 𝐺 𝜖 𝐼 𝑡 𝑔,𝑖 , for 𝑖 𝑑, ℎ . Note that public investment may be subject to inefficiencies and, therefore, may add less than one-to-one real value to public capital, as in Buffie et al (2012). This inefficiency is captured by the parameter 𝜖 , which can be shocked, to capture the insights of Berg et al (2018)-what matters for growth is not the level of efficiency but changes in efficiency.…”