The sectoral impact of public investment in the Western Balkans

This note analyses the sectoral impact of public investment in the Western Balkans. It examines whether public gross fixed capital formation (GFCF) crowds in or crowds out overall and private investment, as well as investment across sectors and different types of assets, and whether the relationship differs from that observed in EU member states in Central, East and Southeast Europe (CESEE). Using data from the wiiw Annual Database, Eurostat and national statistical offices for the 1995-2025 period, the analysis estimates dynamic fixed-effects error correction models for total and private GFCF, sectoral GFCF, and GFCF by type of investment. The results indicate that public investment in the Western Balkans is strongly associated with higher total and private investment, and that the relationship is stronger than in the CESEE EU member states, which can be explained by the fact that the Western Balkans still face larger infrastructure gaps and poorer infrastructure quality. The sectoral results suggest crowding-in effects in manufacturing, transport, and public administration and defence, with notable negative effects in professional, scientific and technical activities. By type of investment, public investment is positively linked to all types of investment, with the strongest links in construction, structures and machinery in that order. The findings suggest that public investment can support productive capacity and structural transformation in the Western Balkans, but also that certain links with the service sector should be improved, in order for the effects to be even stronger.