The Infrastructure Gap in the Three Seas Region: The IMF’s Take

A report authored by the International Monetary Fund in late 2020 remains the most detailed account of the size of the infrastructure gap between the western and eastern parts of the EU.

Photo: Leonid / stock.adobe.com

On May 24th, 2022, the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, visited the Three Seas House in Davos for a discussion about the future of the Three Seas Initiative (3SI). While the discussion centered on the impact that Russia’s invasion of Ukraine would have on the region, the Bulgarian head of one of the world’s most influential international financial institutions returned multiple times to an IMF report published on September 28th, 2020.

Infrastructure in the Three Seas: IMF report

The report, named “Infrastructure in Central, Eastern, and Southeastern Europe: Benchmarking, Macroeconomic Impact, and Policy Issues,” deals with a region more extensive than the Three Seas Initiative. The IMF defines Central, Eastern, and Southeastern Europe (CESEE) as the 11 EU member states that used to be either Soviet satellite states or parts of Yugoslavia: Estonia, Latvia, Lithuania, Poland, Czechia, Slovakia, Hungary, Romania, Bulgaria, Croatia, and Slovenia; the so-called Western Balkans 6: Bosnia and Herzegovina, Serbia, Montenegro, Albania, Kosovo, and North Macedonia; and five other states (Belarus, Russia, Ukraine, Moldova, and Turkey).

The report compares the infrastructure gap between this region and the so-called EU15, the 15 Western European states that were part of the EU before the union’s enlargement in 2004. Despite defining CESEE in such broad terms, the report does provide vital information for the Three Seas region as it includes statistics for the sub-group CESEE-EU, meaning the 11 EU member states in the region.

That means the statistics cover 11 of the 12 Three Seas states, with Austria being the only exception. They also mention the 3SI several times in the report, calling the Three Seas Initiative Investment Fund (3SIIF) “an initiative aiming to address infrastructure needs in CESEE” and praising it as a path forward for public-private partnership (PPP) investments into intraregional infrastructure projects

IMF Report: key findings

The report focuses on three areas: benchmarking the infrastructure gap in CESEE and comparing it to the EU15, analyzing the macroeconomic impact of improved infrastructure on the region and policy issues associated with making public investments into infrastructure more efficient, and how to attract private capital into PPPs. According to the report, the Three Seas countries would have to spend between 3.5–6 percent of GDP annually to close the infrastructure gap with the EU15 by 2030.

The report’s authors believe that spending at that level is possible and argue that it will provide macroeconomic returns for years to come. Their analysis shows that for each percent of GDP spent on infrastructure, the output will rise by around 0.5-0.75% in the short run and by 2-2.5% long term.

An increase in infrastructure investment will increase GDP by boosting aggregate demand in the short term, while long-term growth will be provided by an expansion of the economy’s productive capacity.

The authors of the report write that “investment-driven growth would be sustainable, even if the increase in public investments is financed by debt because the public debt would eventually drop as a share of GDP as the pace of economic growth would be higher than that of debt accumulation.” They also argue that there would be beneficial secondary effects, such as increased private consumption.

Finally, the report highlights that the Three Seas infrastructure projects are mainly intra-regional in character. They state that such cross-border projects provide higher efficiency of infrastructure investments than national endeavors, particularly if they lead to lower trade costs through improvements in regional connectivity. Falling back on research by Kóczán and Plekhanov (2013), they estimate that cross-border infrastructure investments can double the impact on trade compared to projects taking place within a single country.

Keeping the flow and attracting private capital

The IMF report underlines that there is only so much the state can invest in infrastructure projects and that it will be necessary to attract private investors as well to PPPs. They argue that a quick expansion of infrastructure does not have to severely burden fiscal discipline.

The 3SIIF could be one of the vehicles for private investments. The fund has commitments at around EUR 1 bn and a target to reach a total of EUR 3-5 bn. The annual 3SI summit that Latvia will host on 20-21 June 2022 will focus heavily on attracting private capital to the fund, reaching out to markets in East Asia and the Gulf States, just to mention some of the areas targeted.

Speaking at an event presenting the IMF report, Managing Director Georgieva stated, “since our level of development is lower than that of the EU15, every dollar or euro invested in our economies offers a higher investment pay-off. This makes our region a very competitive one.”

She also highlighted that increased spending on infrastructure is a good way to maintain the economic momentum that the Three Seas region had until COVID-19 hit. In 2021, she stressed that the Three Seas countries had seen an average GDP growth of 3,8% per year between 2015-2019, which was nearly double the rate of EU-15.

IMF support for the Three Seas

With Russia’s invasion of Ukraine bound to affect the economies of the Three Seas region more than those further west, investments into infrastructure will also serve to stimulate the economies. Speaking at the Three Seas House in Davos, Ms. Georgieva stated that the IMF is very interested to see what will come out of the 3SI summit in Tallinn in a couple of weeks.

It is safe to assume that the IMF will continue to support the 3SI and provide additional reports on the economic effects of its infrastructural projects. Just as the report from 2020 was driven by the interest in analyzing the interaction between the region’s infrastructure projects and the economic effects of the pandemic, it is likely that the next IMF report on the region will deal with the repercussions of Russia’s war in Ukraine.

Adam Starzynski

Political journalist with a special interest in the Three Seas region, Italy and Brazil

Leave a Reply

Latest from Business