We use a dynamic small open economy model to explore the macroeconomic impact of
alternative public investment scaling-up scenarios, analyzing how improving the
efficiency of capital spending and of tax revenue collection affect growth and debt
sustainability for three fast-growing Southeast Asian economies: Cambodia, Sri Lanka,
and Vietnam. We show that a gradual public investment profile is more favorable than
front-loading capital spending because we assume governments are able to gradually learn
how to invest more efficiently, accelerating public capital accumulation and therefore
growth. We discuss the pros and cons of alternative financing options and identify the
financing mix that generates the best macroeconomic outcome. Sometimes overlooked,
improving the efficiency of revenue collection over time may ease the burden of fiscal
adjustment, achieving higher GDP growth with substantially lower debt-to-GDP ratios,
and will help policymakers efficiently meet the challenge of addressing large
infrastructure gaps while maintaining debt sustainability.
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