Unlocking Public Investment's Potential: Driving GrowthAchieving SDGs in EMDEs

Unlocking the Potential of Public Investment to Drive Economic Growth

Progress toward achieving the Sustnable Development Goals SDGs demands urgent and substantial scaling up of investments across emerging market and developing economies EMDEs. While varying studies estimate the funding required to bridge these investment gaps, they generally amount to trillions of dollars annually. As noted by UNCTAD, EMDEs face a staggering $4 trillion yearly investment deficit to meet their SDG targets.

Low-income countries LICs bear particularly onerous investment needs due to vast infrastructure deficits in sectors critical for sustnable development. For instance, as little as one-third of the population in LICs had access to electricity and basic sanitation over the past decade Figure 1. These nations are also grappling with heightened challenges in building resilience agnst climate change and transitioning towards a greener future; an annual investment requirement averaging up to 8 of GDP through 2030 is estimated for this purpose, substantially surpassing other EMDEs' needs.

The prolonged, broad-based slide in domestic investment across EMDEs since the last decade further compounds these challenges. Average annual growth rates have halved from a robust 10 pre-2010 to sluggish 5 during the subsequent decade Figure 2. Public investment presents an indispensable policy lever for igniting growth, however, its impact is contingent upon favorable structural conditions.

New empirical findings suggest that public investment's benefits are contingent on both government sping efficiency and fiscal space avlability - budget resources enabling countries without jeopardizing stability. For instance, scaling up public investment by one unit could boost economic output by approximately $4 units for an efficient sper in a scenario with ample fiscal space Figure 3.

In LICs, where public infrastructure efficiency typically lags behind advanced economies, this disparity is stark Figure 4.A. Amidst rising debt levels surpassing 60 of GDP over recent years, their fiscal space has notably diminished Figure 4.B. To harness the benefits of public investment and maximize its positive effects across EMDEs, including LICs, a comprehensive policy strategy is essential. While country-specific interventions vary, three overarching priorities are universally relevant:

1. Expansion of Fiscal Space: Increasing room for government sping through prudent fiscal policies that reduce debt levels while ensuring macroeconomic stability.

2. Enhancement of Public Investment Efficiency: Strengthening project selection processes and implementation capabilities to ensure each dollar spent yields the maximum benefits.

3. Increased Global Support: Coordinated financial assistance and are crucial for LICs facing deep structural challenges, vast infrastructure gaps, limited fiscal resources, and capacity constrnts. These countries require robust foundations for sustnable economic growth and development through these interventions.

The June 2024 Global Economic Prospects report elaborates on these policies in detl Chapter 3, providing a comprehensive roadmap for EMDEs to unlock the full potential of public investment.

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This article is reproduced from: https://blogs.worldbank.org/en/developmenttalk/unlocking-the-power-of-public-investment-to-foster-economic-grow

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