The Public Investment Gap: the Need for External Finance to Increase Public Investment

Abstract

This rapid review examined the public investment gap particularly the need for external finance to increase public investment. It draws on literatures and evidence on the need for increased public investment in developing countries and specifically the need for increased external finance to fund this bilaterally and/or from the Multilateral Development Banks (MDBs). It begins with the analysis on the trends and importance of public investment. Next session discusses the public investment needs, which followed by the role of government in terms of fiscal policy, investment management, and PPPs. Final section discusses the need for external finance and assistance. It identifies that despite recent struggles to raise public investment in Low-Income Countries and Lower Middle-Income Countries, there is a call from the international community and national governments for additional public finance to invest in sustainable development. Additional finance is needed for job creation, the transition to a green economy, climate change mitigation, sustainable and inclusive food systems, access for all to education, energy and health care. Recent calculations on investment gaps relate to the Sustainable Development Goals (SDGs). The literature references an annual US$1.4 trillion investment gap for LMICs and LICs (US$2.5 trillion worldwide). A large part (40%) could be financed through increased private investment (e.g. foreign direct investments). The remaining public investment needs are particularly high and unmanageable for LICs, as it is 27% of GDP, while for LMICs it is 5.5% of GDP. The literature further references in what sectors public investment is needed, i.e. the highest for education, energy infrastructure and transport infrastructure.