Abstract
This paper explores the macroeconomic effects of improving public infrastructure in the Philippines, modeling the infrastructure scale-up plan being implemented by the current administration. After benchmarking the Philippines’ level of infrastructure investment, quantity and quality of public infrastructure, and public investment efficiency relative to its neighboring countries, the analysis uses a dynamic general equilibrium model to quantitatively assess the macroeconomic implications of raising public investment expenditure with different financing schemes and different rates of public investment efficiency. Critically dependent on a model structure in which accumulation of publicly provided infrastructure raises the overall productivity of the economy, the model simulations show that (i) increasing public infrastructure investment results in sustained gains in output, (ii) the effects of improving public investment efficiency are substantial, and (iii) deficit-financed increases in public investment lead to higher borrowing costs that constrain output increases over time. These results underscore the importance of improving public investment efficiency and revenue mobilization.
Highlights
Upgrading public infrastructure is a major structural challenge in the Philippines
All scenarios exhibit sustained gains in output driven by the particular structure of the Global Integrated Monetary and Fiscal (GIMF) model, in which improving public infrastructure leads to gains in overall productivity of the economy, which crowds in private investment
This paper studied the macroeconomic implications of scaling up public investment in the Philippines
Summary
Upgrading public infrastructure is a major structural challenge in the Philippines. At 20.6% of gross domestic product (GDP) in 2014, the investment rate in the Philippines is well below its regional peers (Figure 1). All scenarios exhibit sustained gains in output driven by the particular structure of the GIMF model, in which improving public infrastructure leads to gains in overall productivity of the economy, which crowds in private investment. While the public debt-to-GDP ratio increases by about 9 percentage points in the baseline scenario, 1Public–private partnership (PPP) will play an important role in improving public infrastructure in the Philippines, which has embarked on an ambitious PPP program. In (iii), shutting down the role of public capital on overall productivity results in no medium-term effect from fiscal spending This result highlights that sustained economic growth crucially depends on the model property that publicly provided infrastructure improves overall productivity of the economy. This paper shows that increasing public investment spending can generate sustained output growth, and improving public investment efficiency can bring about substantial additional benefits. Given the need to ensure debt sustainability amid the large spending needs in other priority spending areas for inclusive growth, continued efforts to mobilize revenue through a comprehensive tax reform will be critical
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