The International Monetary Fund has called on advanced and emerging market economies to intensify public investment and hasten recovery from the COVID-19 pandemic.
Boosting public investment could help revive economic activity from the deepest economic collapse in contemporary history, the IMF said in its latest Fiscal Monitor.
While maintaining the focus on addressing the health emergency and providing lifelines for households and businesses, countries should also prepare economies for the transition to the post-COVID-19 world.
According to the IMF, based on cross country data from a sample of 400,000 companies, public investment can have a strong impact on GDP growth and employment during uncertain times like the current crisis.
Paulo Mauro, deputy director of the IMF Fiscal Affairs Department, said they see public investment as being a very effective way of generating activity and jobs at this time.
By increasing public investment by 1 percent of the GDP, governments can generate 7 million jobs directly, and between 20 million and 33 million jobs overall when considering the indirect macroeconomic effects.
The IMF report also showed increasing public investment by 1 percent of GDP could strengthen confidence in the recovery and boost GDP by 2.7 percent, private investment by 10 percent, and employment by 1.2 percent if investments are of high quality and if existing public and private debt burdens do not weaken the response of the private sector to the stimulus.
Scaling up on public investment
In advanced and emerging economies scaling up with quality public investments can have a powerful impact on employment and activity, the crowd in private investment, and absorb excess private savings without causing a rise in borrowing costs.
Governments must also take four steps to deliver quality public investment. These are:
- Invest right now in maintenance.
- Review and restart promising projects that were delayed in preparation or implementation.
- Speed-up projects in the pipeline to bring them to fruition within the next two years.
- Start planning immediately for new projects aligned with post-crisis priorities.
The IMF Fiscal Monitor also highlighted that public investment can play a central role in the recovery, with the potential to generate, directly, between 2 and 8 jobs for every million dollars spent on traditional infrastructure, and between 5 and 14 jobs for every million spent on research and development, green electricity, and efficient buildings.
The Washington-based organization of over 180 countries also suggested that governments should boost infrastructure maintenance and also start reviewing and restarting promising projects that were delayed because of the crisis.
Crowding in private investment is particularly strong in industries critical for the resolution of the health crisis (communications and transport) or for the recovery (construction and manufacturing), but it would have to be accompanied by complementary policies to address high leverage and liquidity constraints faced by private firms.
The IMF also stressed that new investments in healthcare, social housing, digitalization, and environmental protection would lay the foundation for a more resilient and inclusive economy post-pandemic.
“Because rates of return on investments in adaptation to climate change are often greater than 100 percent, official aid for adaptation is an effective use of public money,” the report said.
The IMF also added that official aid for climate change adaptation would have to more than double the $10 billion allocated currently to around $25 billion to finance the public investments required for adaptation to climate change in low-income countries.
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