Infrastructure investment is the antidote to serial disappointments in global growth.
Especially for advanced economies, infrastructure investment “is one of the few remaining policy levers available to support growth, given already accommodative monetary policy,” the fund argued.
The IMF plans to again revise down its outlook for the global economy next week.
Central banks have tried to rev up growth with cheap cash. But printing money can only go so far. And bloated balance sheets and ultra-low borrowing rates risk creating new crises. Governments, the IMF has long argued, must restructure their economies to make them more competitive and capable of consistence growth.
That’s a politically challenging task, as governments have found, from Portugal, to Egypt, to Italy, to Japan.
Far more palatable for many governments is spending on infrastructure.
And the IMF says now’s the time to pounce on investing in roads, bridges, power plants, ports and a host of other expensive projects.
Taking advantage of low borrowing costs to finance infrastructure can boost near-term growth with cash injections and long-term output by increasing the efficient flow of commercial goods, the IMF argues.
It’s a central part of the Group of 20’s target to add nearly two percentage points to global growth over the next five years.
If projects are carefully chosen, the fund argues that public investment can add two percentage points to growth in industrialized economies, cut debt levels by up to 8% of gross domestic product and increase private investment by a half-percentage point of GDP. (The extra debt from financing the projects would be more than offset by the growth returns, the fund says.)
But, debt-financed infrastructure isn’t for everyone. As debt levels in many countries have grown out of the global financial crisis, such investment could exacerbate investor concerns about the ability of countries to pay their obligations.
“These conclusions should not be interpreted as a blanket recommendation for debt-financed public investment increase across all economies,” the fund said.
The IMF’s findings are also only if the projects are well-chosen. Investment decisions aren’t necessarily guided by economic rationale and can actually hinder growth and raise debt levels through the misallocation of capital.
“This can cut both ways,” the fund’s economists warn. “Inefficient and unproductive projects are often pursued by politicians and line ministries when they should not be.”
Perhaps that’s why historically, public investment in infrastructure doesn’t always show positive results.
“Increasing public investment may lead to limited output gains if efficiency in the investment process is not improved,” the IMF said.
It’s yet unclear whether authorities and financiers have learned to choose their infrastructure projects more wisely.
In the end, debt levels will likely tell the tale.