Determinants of variation in public investment in emerging Europe

Abstract

Purpose

This paper evaluates the economic, political and institutional determinants of variation in public investment in emerging Europe.

Design/methodology/approach

Panel 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).

Findings

Public 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 implications

To 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/value

The paper contributes to the literature on determinants of public investment policy by adding empirical evidence for emerging Europe countries.

Citation

Randjelovic, S. (2021), "Determinants of variation in public investment in emerging Europe", International Journal of Emerging Markets, Vol. 16 No. 3, pp. 537-555. https://doi.org/10.1108/IJOEM-07-2019-0501