IDB – Spend on public projects

The Inter-American Development Bank (IDB) is urging regional governments to ramp up public investment as part of its response to the COVID-19 pandemic and in preparation for a recovery.

This advice formed part of the recently published IDB Quarterly Bulletin that examined Policy Options for Economic Recovery from the Pandemic in the Caribbean.

Monitoring the situation in the Bahamas, Barbados, Jamaica, Guyana, Trinidad and Tobago and Suriname, the IDB singled out Barbados in the bulletin for its management of the pandemic, so far.

“Except for Barbados, the Caribbean region experienced a new surge of COVID-19 cases toward the end of the summer. Several factors contributed to this unfortunate situation: a rise in imported cases as borders opened, an increase in community transmission as domestic social distancing measures were eased, and elections with in-person voting in three countries — Suriname, Trinidad and Tobago, and Jamaica.

“Governments are adjusting their health and sanitary precautions and social and economic policy responses to the evolving situation. In addition to these current events, “pre-existing” conditions in terms of poverty and inequality — along  with  the  pre-crisis institutional  situations  in  the  countries — have  an  effect  on  how governments can, and should, respond to the current crisis,” the IDB report noted.

The multilateral institution which is involved in development funding to the region, said particular attention needed to be placed on investment in public infrastructure.

“Against this backdrop of recent shocks to public investment across countries in the region, the pandemic has created further challenges. When comparing public investment levels (relative to GDP) across Latin American and Caribbean countries over the past five years, one sees a wide range of outcomes. Guyana ranked sixth out of 25 countries across the region for which comparable data were available, but other countries like Barbados, the Bahamas, and Jamaica ranked in the bottom half of the distribution.”

According to the bank, the COVID-19 crisis forced many countries to re-prioritize budgetary spending and of the 11 countries expected to see public investment levels contract between 2019 and 2020, the two largest compressions will take place in Guyana and Suriname.

Importantly, the IDB said increased spending on public investment will serve the economies well after COVID-19.

“Given their initial conditions, Caribbean countries stand to benefit tremendously from well-designed and appropriately prioritized investment. By increasing an economy’s productive capacity—for example, better roads or airports to facilitate the transport of goods and services to market, improved water and power infrastructure enables industry to operate at lower costs.

“Public investment increases the marginal product of capital and labour. Over time, that in turn drives higher levels of private investment, incomes, and consumption. Importantly, both economic theory and empirical evidence suggest that countries with relatively less public capital, or where the stock of capital is in need of improvement, stand to benefit most.”

At the same time, the IDB warned that projects should be monitored carefully.

“It will be important to ensure that related outlays are appropriate in terms of the prioritization of critical needs and that projects are undertaken in a cost-effective and efficient manner. Similarly, making sure that government financing for such projects is undertaken in a way that minimizes risks to the public balance sheet will be important to ensure that the benefits of public investment outweigh the costs.”