Luxembourg: Selected Issues


Luxembourg: Selected Issues

Luxembourg: Diversification of the Economy and the Role of the State1

Luxembourg’s economy is less diversified than other countries, even after excluding the financial sector or when comparing with other countries with a small population. In addition, a small group of firms accounts for a significant share of employment. Recently, the authorities have outlined plans to diversify the economy in the coming decades. Historically, the Luxembourgish State has played a key role in the economy, including fostering key industries in the financial sector and manufacturing. This chapter characterizes the diversification of the economy, discusses the role of the State in Luxembourg, the role of public investment in supporting growth, and policy options to help diversify further the economy, including by removing product market restrictions and bottlenecks in housing investment.

A. Introduction

1. This chapter studies the diversification of the Luxembourgish economy and the role of the State. Diversification is important to increase the resilience of the economy to shocks and to foster broad-based job creation, including low-skill employment. While Luxembourg's economy is less diversified than other countries from the point of view of output, employment is similarly concentrated as in other countries. Moreover, the sectors with larger output have higher labor productivity. Luxembourg's State has an important role: besides ensuring prudent and stable fiscal policies, regulating the economy, and low and predictable tax rates, it identifies areas of strength and sets strategic objectives in consultation with stakeholders, and offers an attractive business environment for innovative firms. It provides innovative legal frameworks, and, last but not least, it cooperates with the private sector to secure the future of Luxembourg as a financial center. The paper is organized as follows: first, it provides a comparative analysis of the diversification of the economy; second, it describes the role of the State in Luxembourg; third, it analyzes the role of public investment in Luxembourg; fourth, it concludes.

B. How Diversified is the Luxembourgish Economy?

2. In terms of output, Luxembourg tends to be less diversified than other European economies. The financial sector directly accounts for about ¼ of GDP, and jointly with the real estate sector and wholesale and retail trade accounts for about 47 percent of GDP (Figure 1). While other countries (such as Germany and Switzerland) also have about three sectors accounting for slightly less than half of total value-added, the sectoral specialization of Luxembourg becomes more striking when considering a more disaggregated sectoral classification (Figure 2). This high level of specialization remains when comparing Luxembourg to other countries with relatively small populations (such as Iceland and Estonia), with another financial center (Switzerland), or when considering the distribution of value-added among sectors other than the financial sector.2

Figure 1.
Figure 1.

Sectoral Composition of Value-Added, by Sectors: Cross-Country Comparisons

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Source: OECD and IMF staff. Note: ISIC rev.4 sectoral classifications, top level Sections
Figure 2.
Figure 2.

Sectoral Composition at a More Disaggregated Level

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Source: OECD and IMF staffNote: ISIC rev.4 sectoral classifications, sub level divisions

The financial sector in Luxembourg, based on investment funds and private and treasury banking activities, indirectly plays an even larger role in the economy, given the need for ancillary activities (auditing and accounting, IT support and legal services). The Herfindahl index confirms the lower level of output diversification.3 In 2014, based on gross value added in 64 sectors, Luxembourg had a Herfindahl index of 0.10 compared to values between 0.03 and 0.06 for a set of benchmark countries, including countries with small populations or financial centers. Excluding the financial sector, Luxembourg's Herfindahl index was still at 0.08.


Herfindahl Index - Gross Value Added

(Higher values imply more concentration)

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Sources: OECD data by sector, ISIC rev. 4, (64 sectors), and IMF Staff calculations.

Herfindahl Index - Employment

(Higher values imply more concentration)

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Sources: Eurostat data by sector, NACE rev. 2 (22 sectors), and IMF Staff calculations.

3. Diversification in employment across sectors is similar to other countries. Measuring concentration based on Herfindahl index for 22 sectors for Luxembourg is 0.09 in 2015.4 This compares to values between 0.08 and 0.10 for benchmark countries. Excluding Luxembourg's financial sector, the index remains at 0.09. These different levels of concentration imply that output and employment have different shares in several main sectors. Some sectors, such as financial services or real estate activities, provide a relatively large share of total gross value added (28 and 8 percent of total gross value added, respectively), but account for less of total employment (10 and 1 percent of total employment, respectively). Other sectors, such as the broad sector of public administration, defense, education, human health and social work activities, or the arts and entertainment sector, account for 16 and 2 percent of total gross value added, but 29 and 10 percent of total employment.

4. The differences in output and employment shares among sectors translate to specialization in more productive sectors.5 The real estate sector is an outlier when comparing specialization among sectors and labor productivity. Given high and increasing real estate prices, the sector has very high labor productivity compared to its share of gross value added in the total economy. Among all other sectors, a positive relation between the share of gross value added in sectors and the respective labor productivity can be found for Luxembourg (Figure 3). Output is therefore specialized in sectors with relatively higher labor productivity compared to other sectors. In addition, in Luxembourg's main sectors, labor productivity is much higher than in several benchmark countries (see Figure 4).

Figure 3.
Figure 3.

Labor Productivity and Specialization in Luxembourg

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Figure 4.
Figure 4.

Labor Productivity in Main Sectors

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

5. Private investment in Luxembourg has been moderate compared to other countries. In several main sectors in Luxembourg, the share of gross fixed capital formation to their gross value added has been very limited, but since these sectors contribute the largest part of overall value added, overall private capital formation has been relatively low. In Luxembourg's main sector, the finance and insurance industry, investment has been small, including for example by renting instead of owning business space. In contrast, most investment has come from the industry, trade, and real estate sectors, mostly into construction (around 60 percent) and machinery and equipment (around 30 percent).


Private Gross Fixed Capital Formation

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Sources: Haver Analytics and IMF Staff calculations.

Gross Value Added and Investment


Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Source: Haver.

6. A small group of firms account for a significant share of employment, making Luxembourg's labor market dependent on their performance. These 32 firms account for almost ¼ of total employment, with the State and the city of Luxembourg being the top two employers. The public sector and firms that are majority state-owned account for about 10 percent of employment. Arcelor-Mittal Group remains the largest privately owned employer, in spite of the restructuring of the steel industry in the past decades, closely followed by a local retail distributor. A group of the five largest banks accounts for 2.5 percent of total employment. A group of large service sector firms, including in healthcare, security and catering, account for more than 6 percent of total employment. Many of the large employers are part of international groups.

Large employers, in percent of total employment

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Source: Statec and IMF staff calculations for 32 largest employers

7. Historically, the Luxembourgish economy has relied upon a few key activities or firms, but high restrictions on business services and the retail sector, and constraints on the supply of residential and commercial real estate may hamper firm entry. During the post-WWII period, the health of Luxembourg's economy depended mostly on the performance of the steel industry. Luxembourg diversified into the Eurobond market (1970s), private banking (1980s), and the investment fund industry (since the late 1980s). The diversification of the economy has been focused on relatively high value-added and high technology activities. Priority sectors in the government's diversification strategy are space technologies (see Box 1), health sciences and technologies, eco-technologies, logistics, and information and communication technologies.6 The high value-added of these goods produced, many of which are exported, is reflected in high export quality of goods. However, restrictions on business services and retail investment and bottlenecks that hamper housing investments should be further removed; indeed, they may have hampered firm creation and contributed to concentration of employment among larger firms, lowering overall domestic productivity and private investment.7 According to the OECD, Luxembourg appears to have more stringent regulations than neighboring countries and the euro area on average in retail trade, and professional services. Some of these restrictions are related to: (i) shareholding requirements; (ii) voting rights and multidisciplinary limitations in the business services sector; as well as (iii) operational and establishment requirements in the retail sector.8 Regarding housing investment, the constraints are related to the availability of land for construction due to zoning restrictions, and inefficient procedures to grant building permits.


Export Quality Index, 2010

(Higher values indicate higher quality levels)

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Source: IMF's Diversification Toolkit, Export Quality Database.

Sector-Regulation Indicators, 2013

(index, 0 to 6)

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Source: OECD.

The Satellite Industry in Luxembourg1

The space technologies sector has been one of five priority sectors in the government's economic diversification policy launched in 2004. The government has been involved in the sector by shareholding activities, investment, research and innovation support, and the provision of specific legal frameworks. Luxinnovation, the national agency for innovation and research, includes the Luxembourg Space Cluster to foster the development of new activities in the field and has been the national contact point for collaboration with the European Space Agency (ESA), which Luxembourg joined in 2005. Other initiatives in Luxembourg include GLAE (Groupement luxembourgeois de l’aéronautique et de l’espace), providing a permanent link between all leading companies in the space sector, and serving as an interlocutor for the government. Additionally, the University of Luxembourg and the Luxembourg Institute of Science and Technology provide and foster research activities in the sector.

The satellite industry in Luxembourg consists of 18 companies (as of 2013), dominated by SES (Société européenne des satellites), Europe's first private satellite operator which was founded in 1985 and currently the world's leading private satellite operator. At end-2014, the SES group employed 1,237 staff worldwide, of which 441 were based in the Luxembourg headquarters. This constitutes around 70 percent of employees in the space sector in Luxembourg. Overall, as of 2013, the sector provided around 1.7 percent of value added and 0.2 percent of employment to the overall economy. In 2015, in a public-private (50/50) joint venture with SES, the Luxembourg government founded the brand GovSat to provide satellite communication services to governments. Their first satellite GovSat-1, manufactured by Orbital ATK in the US, is scheduled for launch in the second half of 2017.

18 satellites are currently operated from Luxembourg, making it the 9th largest country with satellites in the world (excluding multinational projects and the ESA which is involved in another 36 satellites). As of 2016, there are reportedly 1,419 satellites in operation worldwide, mainly operated from the US (40 percent), China (13 percent) and Russia (10 percent). The main purposes of these satellites are: (i) Communications (50 percent), (ii) Earth observation/science (26 percent), and (iii) Technology Demonstration/Development (11 percent). The main users are commercial (41%), followed by governments (28 percent) and military (24 percent). Between 2000-16, an average of 72 satellites was launched in the world annually, with 150 in 2014 and 173 in 2015 (and 75 in the first half of 2016). The major satellite companies building satellites are Europe's Airbus Defence and Space, and Thales Alenia Space; Russia's JSC Information Satellite Systems; and the US’ Boeing Defence, Space & Security, Lockheed Martin, Orbital ATK, and Space Systems/Loral. Together, these companies account for about 40 percent of all operational satellites. So far, two satellites have been built by a Luxembourgish company. LuxSpace built and launched the VesselSat-1 and VesselSat-2 in 2011 and 2012, respectively.

1. Sources: 2016 Competitiveness Report by the Government of Luxembourg,,,,, Union of Concerned Scientists (UCS) database on operational satellites.

8. The Luxembourg authorities have strategically planned to further diversify the economy in the coming decades. For example, Luxembourg recently adopted a new space law providing a legal framework for private companies planning to undertake mining activities in outer space in accordance with international law, and the state has taken ownership stakes in a space mining company based in the U.S. A “Third Industrial Revolution Strategy” study on the long-term orientation of Luxembourg's economy was presented by the government in November 2016.9

C. What Roles has the State Played in the Luxembourgish Economy?

9. Governments generally play a crucial role in the economy. The government: (i) provides the basic legal and social framework for economic activity and supplies public goods (such as education, infrastructure, social protection and healthcare); (ii) regulates the economy (property rights, contract enforcement, regulations of financial markets and of other sectors of the economy); (iii) reallocates resources if needed, including for social protection purposes; and (iv) stabilizes and supports the economy through fiscal policy. The stability and predictability of how the government performs these roles are important to provide incentives to invest in the future. The government can also play an active role by facilitating private investment and innovation, or by promoting specific industries and strategic plans (including through direct financing or incentives, taking direct stakes in firms, or through partnerships with the private sector).

10. In Luxembourg, the government plays all of these roles. The government of Luxembourg has played a key role in creating an enabling environment, with a stable political environment and prudent and business friendly fiscal policy (which earned the sovereign a triple AAA rating), and a culture of consultation with social partners, including in setting strategic directions in key sectors (finance, ICT, space industry, healthcare, communications, logistics, and other service sectors), while relying on an educated workforce made up of broadly equal shares of residents and of cross-border commuters.

  • The Ministry of Finance plays an important role in regulating and promoting the financial sector (see below). In addition, it carries a general responsibility for the steering of macro-fiscal policy through which it can play a stabilizing role in the economy. The objective is carried out by setting fiscal policy, through the budget allocation process as well as through the orientation of its taxation policy. The tax administration also plays a central role in offering advance tax rulings to multinational companies that provide certainty on taxes and/or allow to lower effective tax rates for these firms. The Ministry of Finance also plays an important role in the national export-credit agency (“Office du Ducroire”), and is strongly involved with the national investment bank (“SNCI”), with both entities supporting local companies in their investment and export activities. Finally, it manages the government's stakes in listed and non-listed companies through the Treasury.

  • The Ministry of the Economy helps facilitate the development of key industries other than the financial sector, including through international cooperation.10 It ensures a competitive environment, and promotes Luxembourg brand name. It creates a transparent and attractive environment for firms and consumers, stimulates firm creation, promotes and facilitates investment in various sectors of the economy, including through direct ownership (such as in the space industry) and joint-ventures, import and export licenses, support structures for young and innovative firms, and the development and maintenance of infrastructures and energy supply. In 2004, the government initiated an economic policy of diversification defining five priority sectors in areas of strength: ICT, space technologies, logistics, health science and technologies, and eco-technologies, jointly accounting for about 10 percent of gross value added and 30,000 jobs. The Ministry of Economy has recently initiated a long-term strategic study, the “Third Industrial Revolution”, emphasizing durable economic development based on the convergence and interconnection of ICT, transport and energy sectors, while taking account of legislative and regulatory considerations. The study was undertaken jointly with the Chamber of Commerce, IMS Luxembourg (an independent association promoting corporate social responsibility), and with participation from Jeremy Rifkin.11

11. The government directly impacts the economy, including as an investor, as the largest employer, and as a shareholder of commercially oriented firms. The State and the Luxembourg municipality are the two largest employers, and account for 7.4 percent of total employment. Excluding these two employers, four out of the top five employers have state ownership (of which two fully or almost fully state-owned), accounting for about 4 percent of total employment. Overall, the government has direct participation in 35 firms in Luxembourg. The government involvement in the private sector does not aim at interfering with firms’ commercial orientation. The government has also been a key investor in high tech satellite companies. From a financing point of view, multinational groups, small and medium sized businesses, and start-ups can all tap into several state-backed measures designed to support and encourage economic diversification. Two dedicated financial institutions, the National Credit and Investment Company (SNCI) and the Office du Ducroire, offer financial support in the form of loans and export financing.


Public Gross Fixed Capital Formation

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Sources: Haver Analytics and IMF Staff calculations.

12. The generally high public investment in Luxembourg may have helped support high output growth. Public investment has generally been high compared to other European countries, which has helped compensate for the relatively lower level of private investment. As a result, the stock of public capital is high compared to peers, while the overall quality of infrastructure is good, although it varies across sectors. As shown in the October 2014 World Economic Outlook, public investment, especially when it is efficient and with adequately designed financing mechanisms, can have a very significant impact on economic growth.


Quality of Infrastructure, 2015

(Index, 1 to 7 (best))

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Sources: World Economic Forum and IMF Staff calculations.

13. In the financial sector, the authorities and the private sector are united in their objective to secure the future of Luxembourg as a financial center inter alia by increasingly seeking to diversify the customer base outside Europe. With the financial services industry directly accounting for one quarter of GDP, the government attaches great importance to its competitiveness and strategic choices. Luxembourg for Finance (LFF), a public-private partnership between the Luxembourg Government and the Luxembourg Financial Industry Federation founded in 2008, together with the High Committee for the Financial Centre, aim to develop Luxembourg's financial services industry and identify new business opportunities. It helps connect international investors to the range of financial services provided in Luxembourg, cooperates with the various professional associations and monitors global trends in finance, and manages multiple communication and outreach channels. Examples of innovative finance are: (i) recent initiatives in Islamic finance (the issuance of Sukuk); (ii) steps to become a hub for cross-border renminbi business; (iii) the positioning of Luxembourg in the sphere of digital financial services and financial technology (fintech); and (iv) green finance, including through the launch of a new platform dedicated to green securities (Luxembourg Green Exchange) in September 2016.

14. The Ministry of Finance plays a role in regulating and overseeing the sector. It chairs the Systemic Risk Committee (CRS) and the regulators’ (CSSF and CAA) non-executive boards. The government has stakes in four banks, which assets account for 95 percent of the five domestically-oriented credit institutions’ assets, or 225 percent of GDP (120 percent of GDP when weighting each bank's assets by the stakes of the State in each bank). Credit by the banking system to the government or to state-owned enterprises is however rather low by international standards. The authorities transpose EU-wide Directives into national law.


Credit to Government and State-Owned Enterprises, 2014

(Percent of GDP)

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Source: World Bank Global Financial Development Database 2016.

Government-Majority Owned Banks’ Total Assets, 2010

(Percent of total banking system assets)

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Sources: World Bank Bank Regulation and Supervision Survey 2013 and Luxembourg authorities.

15. State ownership of firms generally has pros as well as cons. Traditionally, state-owned firms play an important role in the provision of network infrastructures, in telecommunications, energy, and railroads, but they also operate in many other industries, including in high-technology industries and generally in strategic industries. In the banking sector, state-ownership has been pervasive around the world, and has increased following the global financial crisis as governments took over banks that failed or that experienced capital shortfalls and were shut-off from capital markets.12 State ownership may be desirable in regulated industries with natural monopolies, in presence of externalities, or where long-term financing plans may be important to undertake up-front fixed investment in specific technologies for which the returns accrue in the long-term (the space industry may be an example). State ownership may also allow to undertake countercyclical lending in the financial sector.13 However, state ownership may result in conflicts of interest as the political agenda could interfere with the commercial orientation and profit objective of firms, and result in inefficient support for incumbents or non-viable firms.

16. In Luxembourg, a formal framework should be introduced to govern the state's relationship with the domestically oriented banks in which it has an ownership stake. In Luxembourg, there is no evidence of interference by the State. However, to protect the integrity of the financial system well into the future, given the government's role in the governance structure of the CSSF and on the Comité de Risque Systémique (CRS), a formal governance framework for state involvement in the banking sector and other sectors should ensure arm's length involvement and that the relevant banks are free to operate prudently on commercial terms, and with adequate risk management processes in place.

D. Public Investment and Economic Performance in Luxembourg

17. Public investment plays an important role to sustain sufficiently high economic growth. While a large share of public investment usually consists of infrastructure investment, it can also include non-infrastructure components such as machinery and equipment or inventories. Public investment is generally associated with the provision of public goods, projects that generate externalities and help correct market failures, and the provision of essential inputs that are complementary to other inputs in the production process. In the short-run, public investment can provide a welcome boost to domestic demand through fiscal multipliers, especially when there is economic slack. It can help crowd-in private investment, given the highly complementary nature of infrastructure capital. There is also a supply side effect of public investment on potential growth as the productive capacity of the economy increases with a higher stock of infrastructure. Investments in education also improve the long-term productive capacity by raising human capital. The efficiency of the selection process, implementation and monitoring of projects affects the extent to which public investment impacts the long-term production capacity. Evidence from research suggests that the short-term and long-term impact of public investment in infrastructure are higher during periods of economic slack and when public investment efficiency is high.14 Moreover, countries with highly efficient public investment tend to have a higher stock of public capital, and each additional spending must take into account how marginal productivity depends on economic slack, economic needs and the costs of required operations and maintenance.15

18. Among European countries, Luxembourg enjoys a high stock of public capital and good efficiency, though public infrastructure could be further improved in certain areas. According to an IMF database of public investment, Luxembourg enjoys the highest stock of public capital among European countries, suggesting that, over year, it built up infrastructure and other public capital that kept up with the demands of economic growth (left chart, Figure 5). The quality of infrastructure is measured by an index of opinions of business leaders around the world compiled by the World Economic Forum.16 Two facts stand out: first, its infrastructure quality is high (index of 5.7 out of a maximum of 7). Second, it is close to that of neighboring countries (Belgium, France and Germany). This index contains sub-components, for instance on the quality of transport infrastructure. According to these indices, Luxembourg ranks better for Roads, than for Air Transport and Railroads.

Figure 5.
Figure 5.

Public Capital and Quality of Infrastructure

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

19. In Luxembourg, public investment generates short-term positive demand effects on economic growth. We perform a time series regression analysis of macroeconomic variables during 2000:Q1–2016:Q3 linking quarterly real gross value added growth to real gross fixed capital formation growth by the public sector and by the private sector, real GDP growth in the euro area, the quarterly growth rate of investment funds’ assets under management (an indicator of Luxembourg's financial sector performance), an indicator of financial market volatility (VIX), and the growth of EONIA as an indicator of the monetary policy stance in the euro area. In column (1), we find that all explanatory variables are statistically significant in the regression of total real gross value added (GVA) growth, with the sign as expected: an increase in real GVA growth is associated with an increase in the growth rates of public or private investment, a higher growth of funds’ assets, a higher growth in the euro area, a lower market volatility, and a reduction in the overnight interest rate.

Dependent variable: real value added growth (QoQ)

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Standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1Note: Newey West standard errors allowing for autocorrelation up to 4 lags

20. Public investment is positively associated with value added growth in the non-financialsector. In columns (2) and (3), we study respectively the real GVA growth in the non-financial sectors and the real GVA growth of the financial sector. Interestingly, we find that the growth of real public investment is significantly associated with GVA growth in non-financial sectors. The impact is economically significant: an increase in the real public investment growth rate of 2 percentage points (which is about the sample mean) is associated with an increase of real GVA growth by 0.1 percentage point quarter-on-quarter (compared to a mean quarterly GVA growth of 0.7 percent). In the non-financial sector, GVA growth also appears to be impacted by macroeconomic performance of the euro area. In the financial sector, real GVA growth appears to be driven mainly by general conditions in global financial markets and monetary conditions. Considering an average quarterly public investment growth of 2 percent, and average real GVA growth of 0.7 percent, this would imply an elasticity of about 0.1, which is relatively low but consistent with the literature findings. For example, a recent study of the World Economic Outlook (2014) found short-term and long-term public investment elasticities of 0.4 and 1.4 respectively.17

21. Public investment is positively associated with long-term economic performance among European countries. The left-hand chart of Figure 6 plots the stock of public capital in percent of GDP against PPP per capita GDP. In the case of Luxembourg, we also consider the ratio of PPP GDP to population plus cross-border workers to take into account the fact that a large share of value-added is created by cross-border workers, even though this can also only be seen as a proxy as the cross-border workers’ households are not fully being taken into account. The chart indicates that there is a clear positive relationship between the stock of public capital and the prosperity of a country, with causality that could go in both directions.18 The right hand chart plots the change in PPP GDP per capita between 2000 and 2015 against the cumulative public investment during the same period. It provides suggestive evidence that countries with higher cumulative public investment tend to experience a faster increase in standards of living. However, infrastructure investment, either financed publicly or undertaken privately (such as in the framework of a public-private partnership), should be undertaken in an efficient manner and under strict oversight (Box 2).

Figure 6.
Figure 6.

Public Investment and Long-Run Economic Performance

Citation: IMF Staff Country Reports 2017, 114; 10.5089/9781475599480.002.A001

Considerations on the Efficiency of Public Infrastructure Investment1

The quality of public investment management is an important determinant of the overall efficiency of public investment. It plays a crucial role at several stages: at the planning stage, when strategic decisions on the sustainable level of investment across the public sector, both at the national and local levels, are taken; at the stage of allocating resources, when deciding which sectors have priority and which projects are the right ones; and at the stage of implementation, with crucial considerations regarding project management, expenditure control, and reporting on project execution. Ensuring high quality of public investment management typically requires strong fiscal and budgetary frameworks, good coordination at various levels, national and sectoral planning, transparency of rules at each stage, adequate regulations of infrastructure companies, capacity to select and appraise, and to manage and monitor projects.

In the past decade, Public-private partnerships (PPPs) have accounted for a growing proportion of infrastructure services, though with important differences across countries. PPPs can offer advantages over public investment in term of mobilization of private resources and expertise, by bundling the design, construction and operation of an asset to provide incentives toward efficient, timely construction of infrastructure and maintenance of and cost recovery from those investments over time. However, to achieve long-term savings for the public sector over time taking into account net revenue flows, there should be strict oversight of the PPP, and risks between the public sector and the private firm to provide incentives and lower costs. Evidence from research also shows that PPPs work better when output, return and quality and predictable and measurable, and tend to perform poorly when PPPs are procured to circumvent budgetary constraints. In some cases, PPPs have also resulted in large fiscal costs due to poor contract designs, optimistic assumptions about revenues from user fees, and minimum income guarantees provided by the government.

1. For references, see International Monetary Fund, 2015, “Making Public Investment More Efficient”, International Monetary Fund, Washington D.C.; and: Engel, Eduardo, Fischer, Ronald, and Alexander Galetovic, 2013, “The Basic Public Finance of Public-Private Partnerships”, Journal of the European Economic Association, 11(1):83–111.

E. Conclusion

22. The economy of Luxembourg appears to be relatively concentrated relative to comparator countries. Sectoral output is more concentrated than in other countries; this relative lack of diversification is observed even when the financial sector is excluded, or when comparing Luxembourg with other European countries with a small population. However, employment is similarly concentrated as in other countries. Luxembourg is specialized in sectors where its labor productivity is relatively higher than in several benchmark countries.

23. Public investment plays an important role in Luxembourg. Luxembourg enjoys a very high stock of public capital relative to other EU countries, with an overall good quality of infrastructure. Evidence suggests that public investment boosts demand in the non-financial sectors of the economy in the short-term, while helping sustain high standards of living in the long-run, consistent with the existing literature.

24. The State should continue to take steps to further diversify the economy by creating an enabling environment for future growth:

  • First, the government should continue to regulate the economy in an arm's length and business friendly manner. Product market barriers to investment and innovation in the business services and retail sector should be removed. The central and local governments should take measures to ease zoning requirements for construction and shorten the period required to obtain permits. Administrative requirements on commercial buildings should be eased and better aligned with business demands. It should create a legal framework for its ownership participation in commercially oriented firms and further address concerns related to shareholding requirements, voting rights and multidisciplinary limitations in the business services sector.

  • Second, the government should continue to invest in upgrading the infrastructure of the country to remove potential bottlenecks, such as in transport. Public investment should continue to follow rigorous planning, allocation and implementation of projects, and rely on strong fiscal and budgetary frameworks. Instead of publicly financed and managed projects, the government could consider public-private partnerships (PPPs). However, strict oversight of PPPs would be important to provide incentives to lower costs including through efficient risk sharing between the government and the contractor.


Prepared by Anne Oeking (FIN) and Thierry Tressel (EUR).


OECD, gross value added broken down by detailed industries according to the classification ISIC rev.4 (International Standard Industrial Classification of All Economic Activities, Revision 4). The data officially distinguishes between sections (top level) and divisions (sub levels).


The Herfindahl index is calculated as the sum of the squared market shares. The index ranges from 1/n to 1 with n the number of sectors. A higher value implies more concentration among sectors, i.e., less diversification.


Based on Eurostat data, NACE rev. 2 classification, 22 sectors.


Eurostat, NACE rev. 2, 10 sectors.


Luxembourg has set up a legal framework for space mining and recently became a key shareholder in a U.S. based asteroid mining company.


According to the “Global Entrepreneurship Monitoring” report, Luxembourg performs well in term of firm creation. See:


These areas of restrictions are also noted in the 2016 EU Country Specific Recommendations which highlighted the need to ensure the long-term sustainability of public pensions and to remove barriers to investment and regulations in the business service sector and address bottlenecks that hamper housing investment.


For example, Luxembourg has been a member of the European Space Agency since 2005. Promotion of various sectors is undertaken by the Trade and Investment Board.


The Chamber of Commerce, created in 1841, is the oldest institution in Luxembourg: it is state-owned and represents the interests of Luxembourg businesses, promotes the general economic interests of Luxembourg, acts as an independent spokesperson for the market economy and a critical partner in the field of national, European and international policies, influences the legislative process, and provides services to businesses and to the public.


See for instance the seminal study by La Porta, R., F. L. de Silanes, and A. Shleifer (2002), “Government Ownership of Banks,” Journal of Finance, 57(1), 265–301, and the book by Stijn Claessens, Ayhan Kose, Luc Laeven and Fabian Valencia “Financial Crises: Causes, Consequences and Policy Responses”, International Monetary Fund, 2014.


A World Bank study (“Rethinking the Role of the State in Finance”, World Bank Global Financial Development, 2013) found that lending by state-owned banks tends to be less procyclical and that some state-owned banks even played a countercyclical role during the global financial crisis. However, according to this study, the track record of state banks in credit allocation remains generally unimpressive, undermining the benefits of using state banks as a countercyclical tool.


International Monetary Fund, World Economic Outlook, Chapter 3, “Is it time for an infrastructure push? The Macroeconomic effect of public investment”, October 2014.


Berg A, R Portillo, S C S Yang and L F Zanna (2013) “Public investment in resource-abundant developing countries”, IMF Economic Review, 61(1):92–129


The Executive Opinion Survey of the Global Competitiveness Index was audited by a team of survey experts from Gallups in 2008 and 2012 and is subject to annual internal reviews.


International Monetary Fund, World Economic Outlook, Chapter 3, “Is it time for an infrastructure push? The Macroeconomic effect of public investment”, October 2014. For a literature survey, see: Bom, Pedro R., and Jenny E. Ligthart, 2009, “What Have We Learned from Three Decades of Research on the Productivity of Public Capital?” Journal of Economic Surveys 28(3), November 2009.


For example, the positive association could illustrate the fact that richer countries can afford a higher stock of infrastructure.

Luxembourg: Selected Issues
Author: International Monetary Fund. European Dept.