Government investment creates the public infrastructure that is essential for long-term economic growth and societal wellbeing, by supporting, for instance, the provision of public services (e.g. schools). Investments in transport infrastructure, and other large-scale projects improve productivity and competitiveness. Investments in research and development may spur benefits by promoting new technologies or products. For maximising the benefits of public investment and for ensuring that public resources are used in the best possible way, the OECD Principles of Budgetary Governance recommend 1) grounding capital investment plans in an objective appraisal of economic capacity gaps, infrastructural development needs and sectoral/social priorities; 2) assessing the costs and benefits of such investments, the affordability, the relative priority among various projects, and the overall value for money; 3) evaluating investment decisions independent of the financing arrangements; and 4) the development and implementation of a national framework to support public investment.
These principles are particularly important given that public investment accounts for such a large share of government expenditure in the Western Balkan region. In 2018, government investment represented, on average, 11.9% of total government expenditures in the Western Balkan region, where data are available. This figure is bigger than in OECD and EU countries where it was 7.9% and 6.2% respectively in the same year.
Government investment in the Western Balkan region is extremely heterogeneous. On the high end, investment as a percentage of government spending is 24.4% in Kosovo and 19.1% in Albania; however, between 2018 and 2011 investments in these two economies decreased by 13.3 and 2 p.p. respectively. Overall, during the same period public investment in Western Balkans decreased by 2.4 p.p. on average. Yet, sustaining levels of investment in Western Balkans is important, as infrastructure gaps, particularly in transport and energy, are significant and widely considered as an impediment for countries in the region to substantially catch up economically with European Union members in economic terms (EIB, 2018).
Investment as a share of GDP in the Western Balkans reached on average 3.9% in 2018, above the average for OECD (3.2%) and EU (2.9%) countries. Between 2011 and 2018 government investment in terms of GDP decreased for these three groups: it fell on average at a faster pace in the Western Balkans (-1.1) compared to the OECD (-0.5) and EU (-0.4) countries. Kosovo (-3.6 p.p.) and North Macedonia (-1.7 p.p.) were the economies in the Western Balkans where government investment spending decreased the most while public investment remained relatively stable in Bosnia and Herzegovina (a reduction of 0.2 p.p.). The need to enhance the infrastructure stock is a common need across the Western Balkan region and investment in poorer regions can play a crucial role in reducing inequalities.
