In its latest World Economic Outlook, the IMF has joined the chorus of international institutions (G20, OECD) calling for more infrastructure spending.
What new elements does the Fund bring to this argument? Global growth has been disappointing. One reason is that governments have cut back on expenditure — including infrastructure — to get their budget deficits under control and their high debt levels down. But the Fund argues that, at least in advanced economies, for every dollar spent on public investment, these economies can expect an increase of 40 cents of GDP in the first year and $1.50 after four years (or double this figure under the right circumstances). Infrastructure spending stimulates demand and increases supply, and thus actually improves the debt/GDP ratio after a few years.
This is a big shift from the Fund's initial views on budget deficits in 2010, when it thought that the fiscal multiplier was less than one (and even its revised view from 2013 that the fiscal multiplier might be positive). Back in 2010, international financial institutions were all fixated on the debt implications of the crises in Europe. How times have changed. The Fund's summary for the 2014 World Economic Outlook is 'The time is right for an infrastructure push'.
This sort of broad case for infrastructure spending needs caveats, which the Fund duly applies.
For one thing, this fiscal multiplier logic doesn't apply in countries are already operating at full capacity. And the IMF acknowledges the usual problems with infrastructure: projects are often large, complex and long-lived, making it hard to evaluate their social return. Even when the social returns are high, it is often difficult to get those who benefit to pay in full. In these circumstances, political forces can take over the project selection process ('pork barreling'). In Australia, the Darwin-Alice Springs railway is an example. Elsewhere, Japan's 'bridges to nowhere' are often cited, although the Fund points out that Japan's budget blow-out during the 'lost decade' was caused by increases in social expenditure, while public investment actually fell. [fold]
The IMF doesn't push public-private partnerships as a means of funding. The Fund has adopted the powerful argument that well-chosen infrastructure projects add assets to a government's balance sheet. The resulting debt from infrastructure spending should therefore not be seen as a burden on future generations, as it would if the budget deficit were to be driven by social expenditure. This issue is of particular interest in the context of the budget debate in Australia. Figure 3.3.1 from the World Economic Outlook shows how strong the Australian Government balance sheet is, either taken alone or in comparison with other countries.
The case for infrastructure spending is a strong one (such spending is perhaps even a 'free-lunch'), and the Fund shows that the quality of infrastructure in both America and Germany has deteriorated substantially since 2008. In emerging economies, the case is made compelling by noting just how far they lag behind the advanced economies in provision of electricity, telephones and roads (see Graph 3.3 here).
The infrastructure bottleneck is often in project appraisal and legal issues such as land acquisition, rather than financing (although funding is always included on the list of issues to be resolved). Also high on the list of problems for emerging economies is the low efficiency in terms of the use of infrastructure.
There is no denying the importance of the Fund's main message that there are many infrastructure projects which are not only viable (especially at today's low global interest rates), but which would also spur lagging global growth. This seems likely to be a widely held view at Brisbane's G20 meeting. Improving global growth while at the same time fixing the infrastructure shortage is a compelling idea. But, as usual, 'between the idea and the reality...falls the shadow'. The G20 needs to turn the generalities into operational prescriptions, like having the World Bank restore its detailed project appraisal capacity and for the credit-rating agencies to improve their capability to sort the beneficial projects from the lemons.
