‘Time is right for infrastructure push’ to boost economies, says IMF study

Out-Law News | 02 Oct 2014 | 12:05 pm | 1 min. read

The current period of global “sub-par growth” is the right time to press ahead with infrastructure projects in countries with infrastructure needs, according to a new report from the International Monetary Fund (IMF).

According to the IMF, increased public infrastructure investment “is one of the few remaining policy levers” to support growth in many advanced economies that are “stuck in a low growth and high-unemployment environment, and borrowing costs are low”.

The study (40-page / 1.56 MB PDF), which was published in the IMF’s October 2014 World Economic Outlook report, said: “In advanced economies an increase in infrastructure investment could provide a much-needed fillip... in developing economies it could help address existing and nascent infrastructure bottlenecks.”

The study said that in all economies, infrastructure investment “would help boost medium-term output as higher infrastructure capital stocks expand productive capacity”.

In a sample of advanced economies, the IMF said the study indicated that an increase of 1 percentage point of gross domestic product (GDP) in investment spending raises the level of output by about 0.4% in the same year and by 1.5% four years after the increase.

In addition, the IMF said that “the boost to GDP a country gets from increasing public infrastructure investment offsets the rise in debt, so that the public debt-to-GDP ratio does not rise”. “In other words, public infrastructure investment could pay for itself if done correctly,” the IMF said.

According to the study, “there are also arguments against such an (infrastructure) push”, because many advanced economies have “little fiscal space available given still-high debt-to-GDP ratios and the need for further consolidation”. The study said there were “open questions about the size of the public investment multipliers and the long-term returns on public capital, both of which play a role in determining how public-debt-to-GDP ratios will evolve in response to higher public investment”.

However, the study said: “For economies with clearly identified infrastructure needs and efficient public investment processes and where there is economic slack and monetary accommodation, there is a strong case for increasing public infrastructure investment.”

Evidence from advanced economies “suggests that an increase in public investment that is debt financed could have larger output effects than one that is budget neutral, with both options delivering similar declines in the public-debt-to-GDP ratio”, the study said.

Nevertheless, the study said this should not be interpreted “as a blanket recommendation for a debt-financed public investment increase in all advanced economies, as adverse market reactions which might occur in some countries with already-high debt-to-GDP ratios, or where returns to infrastructure investment are uncertain, could raise financing costs and further increase debt pressure”.

A report published this year by professional services firm PwC (24-page / 5.68 MB PDF) said the recovery of the global infrastructure market would grow between 6-7% annually up to 2025, but would be “geographically uneven and led overwhelmingly” by Asia.