Enlargement and local development: the role of Structural Funds and

International Financial Institutions

Daniel Gros (CEPS)

Convegno UnicreditoRoma, July 9 2004

Structural Funds or the need for large public investment?

• What level of infrastructure endowment is needed for catch-up growth?

• Level of present EU-15 would seem excessive.

• Economic approach look at empirical link between level of GDP and infrastructure.

Regression Results

GNP per capita PPP CEE8 SEE CIS ASEAN R2

Paved road network (% of all roads) (a)

1.20**** (12.9)

1.50*** (2.8)

1.21**** (9.5)

1.57**** (8.5)

0.44 (0.9) 0.80

Rail network (km per surface area) (a) 0.71****

(11.3) 1.42****

(11.4) 1.34****

(11.4) 1.08****

(4.8)

-0.97****

(-2.8) 0.73

Source: own calculations. All variables are in logarithm. All standard errors are corrected heteroskedasticity-consistent. The symbols: *, **, ***, **** indicate coefficients that are significant at the 10%, 5%, 1% and 0.1% level, respectively. (a) Additional explanatory variable: population density, 118 observations. 1999 data.

Infrastructure needs: a second approach

• Alternative method: • Look at utilization rate of existing

infrastructure.• For example, road and railway usage.

Idle capacity on rails and roads?

Freight (in TKM) per km

railway line Passenger cars per km

road EU-15 average 8.5 53.6 Czech Republic 4.1 27.1 Estonia 2.8 9.2 Hungary 2.5 10.9 Latvia 2.1 7.2 Poland 3.2 24.4

Source: own calculations based on data from New Cronos.

What is being spent in reality?

• The new member states spend only a bit more than the “old” EU-15.

• Revealed preference? Shows that need can be covered without the need for large flows of funds from the EU?

Share of gross fixed capital formation by general government in GDP

New members: 2003 data Old members: 1990 data Czech Republic 4.2 Portugal 3.3 Estonia 4.7 Greece 2.7 Hungary 3.1 Spain 3.7 Poland 3.5 Ireland 2.1 Source: Commission, DG ECFIN, Statistical Annex, Spring Forecast, 2004.

Concluding remarks

• Need for (hard) infrastructure often over-estimated.

• What to do with Structural Funds?