Speech

Infrastructure in CESEE Benchmarking Macroeconomic Impact and Policy Issues

September 28, 2020

Good morning everyone. It is an honor and pleasure to join President Kaljulaid and the Atlantic Council today. 

In three weeks, Estonia will host the fifth annual Summit of the Three Seas Initiative and – like so many events this year – this will be a virtual Summit. 

Sadly, we will not have the chance to explore the cobbled streets of Tallinn’s old town, visit the Alexander Nevski Cathedral or walk through the beautiful gardens of the Kadriorg Palace.

That is the reality of a world that has been reshaped by COVID-19 – the biggest shock of the post-war era – that we project will result in a cumulative loss to the global economy of more than $12 trillion in 2020 and 2021 – roughly equivalent to the annual output of the euro area. 

Looking ahead, the picture is now less bleak than we had anticipated in our June outlook. In China and many advanced economies, second quarter performance was a little better, and we have seen global trade slowly recovering.

But we are not out of the woods yet. The pandemic is still with us and a number of countries are being hit by a second wave.  There is a great deal of uncertainty about the pathway to recovery. The outlook for emerging markets and developing economies, other than China, remains precarious.

For countries in Central, Eastern, and Southeastern Europe, CESEE, the pandemic will erase almost three years of economic progress – and this is a heavy blow for a region that had made remarkable economic progress prior to the crisis.

Recent economic progress in CESEE

This is progress that I have witnessed myself. Like some of you here today I remember the turbulence that followed the collapse of the planned economies after the fall of the Berlin wall. 

Yet, since the mid-1990s, annual real per capita income growth in the CESEE region has averaged about 3 percent, almost two and a half times the per capita growth rate in the EU15—the more advanced European countries. 

In this period, the region’s GDP per capita—adjusted for differences in purchasing power—nearly doubled, and now stands at about 55 percent of that of the EU15. 

For the 11 countries in the CESEE region that are EU members — also those that are members of the Three Seas Initiative—the story is even better with per capita income reaching close to 70 percent of that of the EU15. 

So, looking forward, I am optimistic about prospects in this region and further convergence thanks to its geographical location, its skilled population, strong policy frameworks and positive spillovers from continued support from European Institutions. 

This depends – however – on the successful navigation of the crisis and laying the foundations for a strong recovery based oncareful policies across a range of areas – public health, fiscal, monetary, and macroprudential measures.  

Infrastructure – a priority for securing the recovery

A priority among fiscal measures is well-targeted infrastructure investment, and today the IMF has published a new paper that analyzes this opportunity in the CESEE region.

Let me highlight three key takeaways.

First, infrastructure needs in the CESEE region are sizable. 

Electricity generating capacity is around some 50 percent less than in the EU15. There are fewer internet subscriptions per 100 people than in the EU15. And physical connectivity also lags –roads and railways [adjusted for arable land area] are some 60 and 40 percent below the EU15 level, respectively. 

To close just half of these gaps relative to the EU15 by 2030 could cost countries in the CESEE region between 3 percent and 8 percent of GDP annually. The cost would be lower for those that are EU members—around 2-3 percent of GDP annually—given their smaller gaps in the quantity of infrastructure stock. 

Second, strong infrastructure governance is essential.

Infrastructure investment comes with inherent challenges – like long delays, cost overruns, increased fiscal risks, and opportunities for corruption. Cross-border infrastructure projects add layers of complexity. 

These challenges are magnified in some parts of the CESEE region due to weaker governance and low transparency – and this deters private investors and makes raising capital more difficult. 

To address the above challenges, the IMF has just published a new book earlier this month—Well Spent—to assist countries with building strong infrastructure governance and help them end waste in public investment.

Third, although costs are high, the benefits are sizeable.

Our analysis suggests that for each one percent of GDP spent on infrastructure, output can increase by ½ to ¾ percent in the short run and by 2 to 2½ percent in the long run. The benefits can beeven larger when regional infrastructure projects strengthen connectivity across borders. 

More than that – as the CESEE region emerges from the crisis, scaling up infrastructure investment would deliver a triple win.

In the short term, the investment acts as a powerful stimulus to create jobs and take up underutilized resources in the economy. 

In the longer term, improved connectivity, both digital and physical will boost the productive capacity of the economy and speed-up convergence. 

Finally, well-designed investments will help structural shifts that we need and are already witnessing, namely the digitalization and greening of our economies. 

Just think about the tech sector, the big winner of the crisis. Also, the opportunities associated with tackling climate change.  Two weeks ago the European Commission proposed more ambitious emission reduction goals of 55 percent by 2030 compared to 1990 levels. 

The message is clear – the transition to green and digital future is well underway. 

We must seize this opportunity to build forward better and invest in the economy of tomorrow, not the economy of the past.

Let me end with a proverb from Estonia that my colleague told me: 

“A mouse won’t run into the mouth of a sleeping cat”.

In other words, we must act – it is up to each of us to make a difference. 

The transformation of the CESEE region since the 1990s has been remarkable, but that journey is not yet over – and investing in infrastructure across this region will be an important ingredient for success.