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Determinants of variation in public investment in emerging Europe

Determinants of variation in public investment in emerging Europe This paper evaluates the economic, political and institutional determinants of variation in public investment in emerging Europe.Design/methodology/approachPanel econometrics (panel-corrected standard error, generalized least squares and the two-stage least squares) methods have been applied using annual data from 2000 to 2017 for 16 countries from Central and Eastern Europe (CEE).FindingsPublic investment was procyclical in relation to output and negatively associated with the level of public debt. Austerity episodes triggered a significant drop in public investment. Positive drifts in public investment during election periods and the negative impact of the number of cabinet seats held by left-wing parties have been captured. While no firm evidence on the impact of EU membership was found, the results show that arrangements with the IMF were strongly associated with lower public investment. Political factors were of greater importance in Central Europe and the Baltics, while institutional factors had a more significant impact in South Eastern Europe.Practical implicationsTo foster public capital formation, it is necessary to: 1) strengthen the countercyclicality of public investment policy and to keep public debt at a low level; 2) adjust the fiscal criteria for EU membership in a manner that would enable countries to use the EU structural fund more effectively, while maintaining fiscal sustainability; 3) put a stronger emphasis on structural features of fiscal policy when designing country-level arrangements with the IMF.Originality/valueThe paper contributes to the literature on determinants of public investment policy by adding empirical evidence for emerging Europe countries. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Emerging Markets Emerald Publishing

Determinants of variation in public investment in emerging Europe

Randjelovic, Sasa
International Journal of Emerging Markets , Volume 16 (3): 19 – Jun 1, 2021
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References (36)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1746-8809
DOI
10.1108/ijoem-07-2019-0501
Publisher site
See Article on Publisher Site

Abstract

This paper evaluates the economic, political and institutional determinants of variation in public investment in emerging Europe.Design/methodology/approachPanel econometrics (panel-corrected standard error, generalized least squares and the two-stage least squares) methods have been applied using annual data from 2000 to 2017 for 16 countries from Central and Eastern Europe (CEE).FindingsPublic investment was procyclical in relation to output and negatively associated with the level of public debt. Austerity episodes triggered a significant drop in public investment. Positive drifts in public investment during election periods and the negative impact of the number of cabinet seats held by left-wing parties have been captured. While no firm evidence on the impact of EU membership was found, the results show that arrangements with the IMF were strongly associated with lower public investment. Political factors were of greater importance in Central Europe and the Baltics, while institutional factors had a more significant impact in South Eastern Europe.Practical implicationsTo foster public capital formation, it is necessary to: 1) strengthen the countercyclicality of public investment policy and to keep public debt at a low level; 2) adjust the fiscal criteria for EU membership in a manner that would enable countries to use the EU structural fund more effectively, while maintaining fiscal sustainability; 3) put a stronger emphasis on structural features of fiscal policy when designing country-level arrangements with the IMF.Originality/valueThe paper contributes to the literature on determinants of public investment policy by adding empirical evidence for emerging Europe countries.

Journal

International Journal of Emerging Markets – Emerald Publishing

Published: Jun 1, 2021

Keywords: Public investment; Fiscal policy; Central and Eastern Europe; E62; E63; H54

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