Magazine article Public Finance

Time to Get Building?

Magazine article Public Finance

Time to Get Building?

Article excerpt

'IS IT TIME for an infrastructure push?' asks the International Monetary Fund in chapter three of the October edition of its World Economic Outlook. It's a question that has surprised many. Not so much because of what it asks, but because of who is asking it.

The IMF has long been a scourge of fiscal indiscipline wherever it finds it. Its Article IV consultation reports regularly chastise member countries for their high debt levels, carefree spending, weak revenue collection and general all-round public financial sloppiness.

But chapter three of the WEO signals a shift away from dear prudence and argues that increased public infrastructure investments can raise output in both the short and the long term. The context for all this is the fragile, sluggish and uneven economic recovery - the IMF's global growth forecasts have been trimmed further to 3.3% for 2014 and 3.8% for 2015 - and in periods of economic slack there is a case for a little debt-financed investment in hard infrastructure like roads, bridges and tunnels, it finds.

'In countries with infrastructure needs, the time is right for an infrastructure push,' the WEO states.

'Borrowing costs are low and demand is weak in advanced economies and there are infrastructure bottlenecks in many emerging market and developing economies. Debt-financed infrastructure projects could have large output effects without increasing the debt-to-GDP ratio, if clearly identified infrastructure needs are met through efficient investment.'

This change to the IMF's stance - if that is what it is - has certainly got the superstars of international economics talking. It received a thumbs up from Larry Summers, the former president of Harvard University and treasury secretary under Bill Clinton, who, writing in the Financial Times and Washington Post, called it an 'important and remarkable' document 'There is for once a free lunch,' he said, 'a way for governments to both strengthen the economy and their own financial positions.

'The IMF, a bastion of "tough love" austerity, has come to this important realisation. Countries with the wisdom to follow its lead will benefit.'

Naoyuki Shinohara is deputy managing director at the IMF and widely regarded as one of the figures at the fund behind this new way of thinking. He unpacked the IMF's rationale further at the IMF-World Bank annual meeting in Washington in early October.

There is a role for fiscal policy, as well as monetary policy and structural reform, in heading off the risks of perpetual sluggish growth, Shinohara said.

"If you look at the state of infrastructure development in various countries, it is clear that over the past three decades the level of infrastructure investment has declined significantly - not only in advanced economies, but also in emerging and developing countries.

"Our analysis suggests that public capital stocks as a percentage of GDP are currently around 10% below that in the 1980s for advanced economies and 20% below in the case of emerging and developing countries.

"Behind that is a trend decline in public investment in advanced economies from 4% of GDP in the 1980s to 3% of GDP now. In emerging and developing countries, there was a sharp rise in infrastructure investment in the late 1970s and early 1980s but then there is a trend decline in public capital since then.'

Shinohara pointed to reports from places like Brazil, India and some of the emerging east Asian economies where infrastructure bottlenecks are viewed as massive impediments to growth. In the western world, the picture is more mixed, with some G7 countries managing to successfully maintain, upgrade and renew their infrastructure, but others - Shinohara singled out the US and Germany - where the perceived quality of infrastructure, particularly roads, has declined.

Three prominent US economists joined Shinohara to discuss the implications for a global push on debtfinanced infrastructure investment Princeton economics professor and New York Times columnist Paul Krugman; Harvard economics professor Kenneth Rogoff; and Christina Römer, economics professor at Berkeley and a former chair of Barack Obama's Council of Economic Advisers. …

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