Effect of countercyclical investment on employment

An interesting paper by Buchheim and Watzinger (2023) published in AEJ: Economic Policy [15(1)] shows that investments in public buildings in Germany can quickly and cost-effectively increase employment in the short run. They can be a viable tool for counteracting an economic slowdown. 

They explore if the renovation of public buildings create jobs quickly and cost-effectively? Their paper estimates the causal impact of a sizable German public investment program, which provided 0.16% of GDP for upgrading public buildings, on employment at the county level. The program focused on improving the energy efficiency of school buildings, making it possible to use the number of schools as an instrument for investments. It also enforced tight deadlines, reducing potential implementation lags. The program was cost-effective, creating, on average, one job for one year for an investment of €24,000. The employment gains are detectable after nine months and are accompanied by an unemployment reduction amounting to half of the job creation. Employment grew predominately in the directly affected industries.

They addressed the endogeneity problem (governments may target regions that are hardest hit by the recession) by exploiting the legal structure of the stimulus bill. The bill prescribed that 65 percent of funds had to be spent on investments in the educational infrastructure, in particular on improving the energy efficiency of existing buildings. This implies that the local scope for investments was closely linked to the historically predetermined number of schools. Since the number of schools is a predetermined stock variable and thus unrelated to the magnitude of the recession in a county, it constitutes an ideal instrument for local investments. To put the cost of one job per year in perspective, the average labor costs in the construction industry was at least €45,000. The employment gains translate into a fiscal multiplier of about 1.5. 

IMF concludes 2023 Article IV Consultation and completes first and second reviews under the Extended Credit Facility

According to a press release on 28 February 2023, the IMF staff and the Nepal authorities have reached staff-level agreement on the policies needed to complete the combined first and second reviews of the ECF arrangement. Nepal would have access to about US$52 million in financing once the review is formally approved by the Executive Board. 

The IMF stated that the external audit of the Nepal Rastra Bank with the assistance of international auditors – in line with international best practices, publication of reports on both COVID-related spending and custom exemptions to enhance transparency, drafting of amendments to bank asset classification regulations, and strengthening bank supervision by launching the donor-supported Supervision Information System were notable achievements. It further notes that the monetary tightening and gradual unwinding of COVID-19 support measures helped moderate credit growth and contributed to the moderation of inflation stemming from the global commodity price shock caused by the Ukraine war. This combined with resilient remittances eased external pressures and stabilized international reserves but tax collections dampened. It recommended cautious monetary policy and expenditure rationalization while protecting high-quality infrastructure expenditure and social spending.

The ECF-supported program will help Nepal’s economy to remain on a sustainable path over the medium term with the economy projected to grow at around 5 percent and inflation at around 6 percent, while maintaining adequate levels of international reserves and keeping public debt at a sustainable level. The next priority should be given to achieving a fiscal deficit that ensures debt sustainability, while securing additional concessional financing and enhancing debt management.

The IMF projects real GDP growth to be 4.4% in FY2023, supported by recovery in tourism, agriculture sector and resilient remittances. But, Nepal remains vulnerable to exogenous shocks such as volatile and higher global commodity prices and natural hazards. So, cautious monetary policy is warranted to keep inflation at 7% targeted level and to lower pressures on international reserves. Expenditure rationalization while protecting high-quality infrastructure expenditure and social spending is also important. Structural reforms need to be pursued to establish a sustainable and inclusive long-term growth path. These include private sector development by reducing the cost of doing business and barriers to FDI. Financial instruments tailored to migrants, access to finance and financial literacy can further financial inclusion. Digitization would help in the provision of public goods. Transparency and financial oversight of public enterprises can reduce fiscal risks.