IMF urges greater infrastructure spending after 30-year decline ~ Economics News

Friday, November 7, 2014

IMF urges greater infrastructure spending after 30-year decline

Germany has been urged to make greater infrastructure investment. The new Berlin-Brandenburg international airport, scheduled to be finished in 2011, remains unfinished.
Germany has been urged to make greater infrastructure investment. The new Berlin-Brandenburg International Airport, scheduled to be finished in 2011, remains unfinished. Photograph: Michael Urban/AFP/Getty Images
A decline in infrastructure spending over the last 30 years needs to be reversed to boost growth, according to the International Monetary Fund, which meets next week in Washington against a backdrop of slowing global growth.


The IMF said the benefits of debt-financed infrastructure projects could give an important boost to economic growth especially when the world is threatened by a long period of stagnation.
In documents released before its revised economic outlook, it urged governments to examine where infrastructure investments could benefit longer-term growth.
It said: “Debt-financed projects could have large output effects without increasing the debt-to-GDP ratio, if clearly identified needs are met through efficient investment. In other words, public infrastructure investment could pay for itself if done correctly.”
The report singles out the US and Germany as in need of large-scale infrastructure investment following a stream of critical reports from the business community over the upkeep of road and rail networks.
It says the US needs to act to arrest the decline in its network of roads.
“As the American Society of Civil Engineers notes, 32% of major roads in the US are now in poor or mediocre condition, and the US Federal Highway Administration estimates that between $124bn [£76bn] and $146bn annually in capital investment will be needed for substantial improvement in conditions and performance – considerably more than the $100bn spent on capital improvements at all government levels,” it said.
George Osborne is likely to take some comfort from the analysis, which brackets the UK with Canada, Italy, France and Japan as having an improving level of infrastructure, “albeit from relatively low levels”.
The IMF, which acts as lender of last resort to struggling countries, has been a keen supporter of infrastructure investment since the financial crash as a way to boost employment and increase productivity. Better roads and rail, digital infrastructure and power networks support local businesses and help them increase output at lower costs.
However, in its most recent study it is more circumspect with its recommendation, cautioning governments to make an assessment of how good they are at implementing large-scale projects.
It warns that many infrastructure projects can be bedevilled by a lack of competence and duplication of effort that leads to cost overruns. A debate over the relative merits of private versus public investment is made difficult in developing countries by a lack of reliable information, but it is clear that in developed countries public investment can provide much-needed infrastructure projects alongside the private sector, it says.
Even the massive public spending by Japan in the 1990s to counter the recession of the late 1980s, which has been much derided in rightwing circles, is defended in the report, which says it made a positive contribution to GDP growth and provided a platform for investment and productivity gains.
The report spares Germany the embarrassment of highlighting some of its recent failures, though it could have pointed to the much delayed and still not completed Berlin international airport and the threat of an energy crisis in the next decade when a generation of nuclear power stations are due to be switched off.
In a separate report, the IMF highlights how the large imbalances in the world economy have reduced in the five years since the financial crash, but have left the world economy vulnerable to further shocks and trapped some countries into a period of low growth.
It welcomes the halving of the US deficit with China and the halving of the surpluses racked up each year by China and Japan from trade and investments abroad.
It says these welcome developments could be reversed in the next few years because many countries have reduced their reliance on imports by depressing internal domestic consumption. Spain, Greece and many European countries have reduced their balance of payments deficits following a sharp cut in demand.
A recovery in the domestic consumption of foreign goods and services could generate a rise in imbalances again unless those countries affected change their behaviour.
The report also points out that imbalances have shrunk, but not reversed, leaving some countries that grew quickly following a large inflow of funds to suffer even bigger deficits.