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Opinion
March 9, 2018 www.intellinews.com I Page 28
spending over investment.
At the same time, the balanced budget require- ment and automatic brakes on government spending when debt hits specified levels, create added constraints. Again, short-term political cycle incentives trump long-term economic devel- opment considerations and governments across the region have tapped long-term resources to address immediate budget gaps. An example of this is the recent targeting of the second pillar of pension systems in all four Visegrad Group coun- tries to help redress the budget deficit or public debt issues.
Similarly, increased social spending or public wage hikes are being offset by cutting funding for long-term investment, for example in transport
or digital infrastructure. In Poland, the govern- ment’s capital spending dropped from 4.4% of GDP in 2015 to 3.4% a year later as the ruling Law and Justice party (PiS) cut the pension age and increased social support for families. In Romania, the government shifted resources earmarked for investment in transport infrastructure to plug the hole in current spending, which had been caused, for example, by increased public sector wages in August last year.
Short-termism in fiscal policy will likely persist in the coming years, because public support for populist governments is underpinned by increas- ing social spending, which comes at the cost of long-term public investment. This suggests that the slowdown in the convergence of CEE infra- structure quality to average EU standards will continue and likely constrain economic growth outlook for the region in the medium term.
The problem may be compounded, if the next multi-year EU budget for 2021-27 period brings a reduction in funding available to these countries. Future cohesion funding may be linked to the rule of law and EU values. This may negatively impact Poland, Hungary and Romania, which have re-
cently both recorded a drop in government invest- ment levels and clashed with the EU over the rule of law.
Several governments have turned to public- private partnerships to top up infrastructure investment spending, but the overall picture has not improved significantly. Others look to China. However, Chinese infrastructure funding typically comes in the form of loans, rather than invest- ment, and with clauses obliging the participation of Chinese construction companies in the project. While such projects are booming in the Balkans, for CEE countries they will likely clash with EU competition regulation. One example is the Chi- nese-funded project for the Belgrade-Budapest railway, which had to be delayed and its procure- ment processes redesigned to bring it into line with EU regulation. The necessity to comply with EU competition law will likely constrain Chinese interest in CEE infrastructure projects, though CEE governments will likely continue to bid for it.
Yet another alternative, admittedly available only to the larger countries in the region, is to boost long-term domestic resources. Polish Prime Minister Mateusz Morawiecki’s trade-mark eco- nomic development plan counts on an expansion of long-term savings. In February this year, the Polish government announced a planned revamp of the pension system aiming towards this very goal. A week later, Morawiecki presented a vision of the Polish economy driven by so-called national champions, or large state-controlled companies that play a key role in their respective industries, especially finance, energy and commodities. However, it remains to be seen whether this radi- cal overhaul vision leads to success, rather than scare away foreign investment that has driven Poland’s economic growth over the past two-and- a-half decades.
Otilia Dhand is Senior Vice President at strategic consultancy Teneo Intelligence, specialising in Cen- tral and Eastern Europe.