BOSTON — Any good international investment banker knows that the end of April is a bad time to come peddling his services, for that is when the world’s finance ministers return home from the International Monetary Fund meetings in Washington, chastened that risks to the global economy could spill over into their own backyards. Ministers are too busy recovering from their trauma to think about paying fat fees for big new international bond issues. Who wants to build up debt if there might be a financial crisis around the corner? Better to keep socking away U.S. Treasury bills, even if the return is far lower than on most other investments.
Or is it? With today’s global economy in the middle of a sustained and increasingly balanced expansion, has the time come to start considering upside risks? In particular, should governments, especially those that are endlessly building up dollar reserves, instead start thinking about how to build up their roads, bridges, ports, electric grids and other infrastructure? Has the time come to start laying the groundwork to sustain future growth, especially in poorer regions that have not yet shared in the prosperity of today?
Don’t get me wrong, I am not arguing for fiscal profligacy. But the balance of risks has shifted over the past few years. Yes, within the next three to five years, there will probably be another global recession. And, yes, there will probably be another rash of financial crises — perhaps in Central Europe, which now looks like Asia did before its 1997 crisis. Recent jitters about Iceland’s gaping trade deficit and Brazil’s new finance minister rippled around the world, reminding global investors that while many emerging markets are gradually moving toward investment-grade status, most are not there yet.
But the risks are two-sided, and sound economic policy is just as much about capitalizing on good times as avoiding bad ones. Renown economic gurus at places like the World Bank have developed a ridiculously long list of steps that countries should take to raise their growth rates (the “extended Washington Consensus”). Like maintaining good health, it is not enough to concentrate on a single component. But if there is one area where obvious opportunities exist, and where policy can really make a difference, it would have to be infrastructure investment.
The problems associated with India’s infrastructure are legendary, with airports and railroads that are comically inadequate. However, aside from a few countries — including China, of course, but also Spain — low spending on infrastructure is epidemic.
Even the United States has infrastructure that is hobbled by neglect, with collapsing bridges and a dangerously overburdened electrical grid. Land-rich Brazil, too, is a case study in the consequences of under-investment. Its infrastructure systems might be adequate to support the country’s tepid 3-4 percent growth rates, but they are hardly adequate to support the 6-7 percent rates that it ought to be enjoying amid the current global boom. Russia, despite Siberia’s massive oil and gas riches, isn’t even investing enough to support healthy growth in its energy industries, much less human development in the country’s impoverished areas (including hapless Siberia).
True, government infrastructure spending is often wasted. My hometown of Boston recently managed to spend an astounding $15 billion dollars to move a few highways underground. And that “Big Dig” looks like a model of efficiency next to many of Japan’s infamous bridges to nowhere.
But there are ways to waste less. Transparency in procurement works wonders. So, too, does private sector involvement. The Nobel laureate economist William Vickrey argued tirelessly in favor of privately financed toll roads. Private oversight can often produce better and more efficient construction, and, in theory, toll roads help alleviate traffic congestion. (Ironically, Vickrey died while sitting in a traffic jam.) Even China, which has added more than 50,000 km of roads and dozens of airports over the past five years, makes use of private financing.
True, countries that have not cleaned up their fiscal act, such as India, must not recklessly plunge ahead with big government projects without counterbalancing reforms to ensure sustainability. Fiscal prudence and stable inflation rates are cornerstones of today’s relatively healthy global economic environment. But for countries that have scope to invest more, particularly those that are holding a surfeit of precious development dollars in idle U.S. Treasury bills, the time may be ripe to reassess the balance of risks.
The IMF is absolutely right to remind ministers each April of downside risks. Countries’ need for better infrastructure is no license to throw prudence out the window. But when the world’s finance ministers recover from their April shock therapy, they also need to look at the opportunities.