Residents of Kitty Hawk, N.C. buy construction supplies as they prepare for the arrival of Hurricane Irene on North Carolina's Outer Banks. Irene could end up helping the U.S. economy. In coming months, homeowners and businesses will spend insurance payouts on building supplies, construction crews and new appliances.
Residents of Kitty Hawk, N.C. buy construction supplies as they prepare for the arrival of Hurricane Irene on North Carolina's Outer Banks. Irene could end up helping the U.S. economy. In coming months, homeowners and businesses will spend insurance payouts on building supplies, construction crews and new appliances.
Justin Yifu Lin is senior vice president and chief economist of the World Bank.
Today's mounting anxiety over weak growth prospects is more than just a bad hangover from the financial tumult of 2008. In the United States and several European countries, new jobs remain scarce. National incomes in some advanced countries still linger below pre-crisis levels. The medium-term outlook for the United States and Europe is dim. Not only will this make it more difficult for advanced economies to tackle fiscal and employment problems at home, but it will also reduce growth prospects for developing countries, many of which ? particularly in the Middle East and sub-Saharan Africa ? suffer from a lack of employment opportunities. The result? Millions trapped in poverty, creating fertile ground for social instability. While governments on both sides of the Atlantic are considering cutting budgets, what the world needs most right now is growth.
Without growth, it will be very painful and difficult for advanced economies to increase employment and significantly reduce their debt burden. But how to do it? The solution could take the form of a global infrastructure investment initiative, which would rest on two key pillars. First, advanced economies would need to spend billions of dollars on infrastructure projects, whether by upgrading old facilities or building new ones that release bottlenecks to growth. But even this might not be enough to generate sufficient growth and jobs. Thus, policymakers, entrepreneurs and investors should also promote and facilitate infrastructure investments in developing countries where opportunities for such investments abound. This should not be seen as charity: Infrastructure investments in developing countries increase demand for capital goods, such as the turbines or excavators that are often produced in the United States and Europe.
Promoting infrastructure investments in developing countries, an idea that is also being advanced by the G-20, would boost exports, manufacturing employment and growth in high-income countries, while reducing poverty and enhancing growth in the developing world. It's a win-win solution.
It is important, now more than ever, for advanced economies to continue investing in infrastructure to create jobs and support growth. Good private investment opportunities are hard to find amid the current turmoil. Factories continue to carry spare capacity, and homes and office buildings remain vacant. Infrastructure investments can fill the void, creating much-needed jobs in the construction sector, which has been particularly hard hit and generating demand for industrial products. Upgrading existing infrastructure and building new transit nodes, if well chosen, can enhance future productivity, raising competitiveness and growth and boosting countries' ability to repay the investments in the future. U.S. 10-year Treasury bonds have been trading at historically low levels since the financial crisis hit. I could therefore not agree more with my colleague Joseph Stiglitz of Columbia University, who recently wrote, "[T]he real answer, at least for countries such as the US that can borrow at low rates, is simple: use the money to make high-return investments."
But what about the fear of unsustainable debt burdens, which have Western governments searching for budget cuts? Lack of growth is one of the biggest threats to debt sustainability right now, and cutting growth-enhancing expenditure is misguided. And many infrastructure projects can actually be self-financing: Take, for example, toll bridges or highways. What's more, it is often cheaper to keep roads and other infrastructure in good shape through regular maintenance than to repair them once they are badly damaged.
With public coffers empty or at best strained, innovative mechanisms are required to attract private-sector financing for infrastructure projects, including the use of public-private partnerships, or PPPs. Well-designed infrastructure investments can generate secure and attractive returns for private investors in the current low-growth, high-risk environment. Government officials on both sides of the Atlantic have drawn up interesting proposals to encourage PPPs for infrastructure investment. U.S. President Barack Obama's administration, for example, has backed the creation of the National Infrastructure Reinvestment Bank, which could issue infrastructure bonds, provide subsidies to qualified infrastructure projects and provide loan guarantees to state and local governments. Europe is considering the implementation of a new Europe 2020 Project Bond Initiative, which would use public guarantees to leverage private-sector financing from nontraditional investors, such as pension funds.
But creative investment at home might not be enough to help high-income countries get out of the crisis. A global infrastructure initiative should also look to the developing world, where infrastructure investments can be truly transformative. America's history reminds us why: In 1919, when a young lieutenant colonel, Dwight D. Eisenhower, drove from Washington, D.C., to Oakland, California, with the Motor Transport Corps convoy, it took him 56 days to cover the 3,250 miles, covering an average of 58 miles during daily 10-hour rides. Upon his return, he reported that bridges were destroyed by the convoy, trucks became stuck during rain and some roads simply could not accommodate quick, easy travel. Later, as president, when Eisenhower promoted the 1956 Federal Aid Highway Act, he envisioned that its "impact on the American economy ? the jobs it would produce in manufacturing and construction, the rural areas it would open up ? was beyond calculation." Similar opportunities to transform economies still abound in developing countries today.
The infrastructure shortfalls in the developing world are staggering. Roughly 1.4 billion people have no access to electricity, about 880 million people still live without safe drinking water and 2.6 billion are without access to basic sanitation. About 1 billion rural dwellers worldwide are estimated to have no access to all-weather roads within two kilometers (about the length of a 25- to 30-minute walk). Per capita electricity consumption in sub-Saharan Africa (excluding South Africa) averages only 124 kilowatt-hours a year, hardly enough to power one light bulb per person for six hours a day. Lack of infrastructure not only impinges on the daily lives of millions, but it also renders firms less competitive. Power outages and water suspensions occur frequently, hampering productive activities. Enterprises in Tanzania, for example, face power outages 63 days a year. Enterprise surveys by the World Bank show that between 3 to 10 percent of total sales were lost to electricity outages in developing countries in recent years. And many businesses are never started because the required infrastructure services are not available. Developing countries' lack of infrastructure, particularly at the regional level, for example, is often a major impediment to attracting foreign investment. It's therefore unsurprising that the G-20 wants to "make a tangible and significant difference in people's lives, including in particular through the development of infrastructure in developing countries."
Investing in infrastructure would give developing countries a powerful boost. According to World Bank research, on average, annual growth in developing countries increased by 1.6 percentage points in 2001-2005 relative to 1991-1995, due to infrastructure development. The largest contribution of infrastructure development to growth was achieved in South Asia, where it reached 2.7 percentage points per year. If low-income countries in sub-Saharan Africa would develop infrastructure at the same rate as Indonesia, growth of West African low-income countries would rise by 1.7 percentage points per year. If African economies would reduce in half the gap between their level of infrastructure and the average level of infrastructure in Pakistan or India, Central African low-income countries would gain on average 2.2 percentage points of growth and East and West African countries 1.6 percentage points. Similarly, if each Latin American country would match the average level of infrastructure observed among middle-income countries elsewhere (such as Turkey or Bulgaria), growth in Latin America would rise approximately 2 percentage points per year. The Andean countries would gain most ? 3.1 percentage points of growth on average.
A recent World Bank paper also looks at the impact of large-scale infrastructure investments in China. Between 1990 and 2005, China invested approximately $600 billion to upgrade its road system. This investment's centerpiece was the National Expressway Network, which, spanning across 41,000 kilometers, was designed to eventually connect all cities with populations over 200,000 (only the U.S. interstate highway network is longer). Recent World Bank research shows that aggregate Chinese real income was approximately 6 percent higher than it would have been in 2007 if the expressway network had not been built.
Again, investing in infrastructure in developing countries, while it can do much good in these countries, is not charity. It will also create jobs and generate growth in advanced economies. Most of the capital goods required to build electricity, sewage plants and roads are produced in the United States and Europe. Infrastructure investments in developing countries would therefore increase demand for manufactured goods in advanced economies. A rough rule of thumb is that for every dollar invested in developing countries, imports of capital goods increase by 50 cents. About 70 percent of traded capital goods from developing countries are sourced from high-income countries. This implies that a $1 increase in investment in developing countries tends to result in a 35-cent increase in exports from high-income countries.
To continue reading, visit Foreign Policy.
Source: http://www.npr.org/2011/09/02/140138398/foreign-policy-austerity-must-be-built-literally?ft=1&f=
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