Developed countries: Now is the time for infrastructure

An Interview with Angel Gurria

«This is the moment of mature markets, with America and Europe in the lead, and we have to seize this moment the best way possible by investing in infrastructure. In this way, we can set off a virtuous chain reaction in the real economy.»
OECD Secretary General José Àngel Gurrìa repeats this statement after presenting the organization’s latest economic outlook at the New World Forum, an annual event in Paris where economists from around the world come to take part in debates and seminars for two days in November.
The OECD expects a gradual strengthening of global growth in 2016 and 2017 to an annual rate of 3.3% and 3.6%, respectively.
Gurrìa emphasizes the point in the following way: «Developing countries, after having given a decisive contribution to global growth for so many years, have now come to a halt. Some like Russia and Brazil are in a deep recession, while the marked slowdown that is occurring in China – together with the losses in commodities markets – are sending an extremely negative signal from a very important part of the world including all the exporters of primary resources.»

After many years of suffering, can we say that it is the moment of Europe and America? What can we take from this?

«Certainly the forces behind international growth are changing. The most recently industrialized countries must improve their internal accounts, push more on consumption and not depend only on low-cost and low-quality exports. They have to restructure their labor markets, improve productivity and strengthen their respective democratic structures. In any case, the most advanced countries also have something to learn.»

What, for example?

«Both Europe and America must find the courage, now that the trend has become favorable, to make ambitious investments in terms of infrastructure. Europe has suffered from the excesses of austerity, which is known, but also America, which dedicated a lot of resources to public investments after the 2008 financial crisis.

It must go beyond this and take – among other things – this opportunity to do a series of very urgent public works. In the United States, for example, there’s a lot of talk about this plan that President Obama is launching in the final year of his presidency. It’s a project that is so ambitious that it can be described as the “Marshall Plan 2.0”, which foresees $300 billion of investments to give a definitive support to the country’s economy. It is a very important project that will take on greater relevance. The main point of this project will be infrastructure investment. The idea is to give an extra support to an economy that – even though is growing at a rate of 2.0% to 2.5% - is still below its potential which, according to our calculations, is 4%.»

Have any specific investments been planned?

«One of the investments included in the plan – which will go beyond the Obama presidency and require at least four years – is the renewal of the highway network of the United States. There already exists the Highway Trust Fund, a federal entity that manages the U.S. transport network, which will be hugely recapitalized with about $100 billion, while another $200 billion will be earmarked for railways, bridges and ports. In this case no less than $600 million will go to innovative projects by means of public tender: the best innovators will be rewarded for their work. The fact that the project could lead to an estimated 700,000 jobs speaks for itself. What’s more, these public investments will even stimulate a recovery in investments by the private sector, let alone help improve internal consumption.»

Looking at Europe, how much of a role will the Juncker Plan have in relaunching sectors like infrastructure?

«The plan will make a fundamental contribution. In fact, it concerns a mega project (by the European Union) worth €315 billion, spread among EU and private funds to relaunch investment in Europe. The plan, which will last three years, has already started and by the end of the year €50 billion will have been disbursed to the first projects throughout Europe. It is actually the package of investments foreseen by the Plan that is one of the factors that is pushing for economic growth in the European Union. The economy is expected to expand in 2017 (1.4%), with growth in imports and investments.» #gallery:447#

After years of stagnation, where does this new economic vigor among the most developed countries come from?

«The most advanced countries benefit from the low cost of money, from the ample availability of resources deriving from quantitative easing already experimented by America and Great Britain and now in the euro zone and Japan, and in the improvement of labor markets. The opposite is the case for emerging countries, which are paying for the burst of growth that occurred too quickly and exposed their lack of internal stabilization measures, the consequence of which was an exaggerated increase in inequality, in the problems of governance and in free markets. So this mechanism that is worsening will not be easily reversed: the gradual increase in the cost of money in America, for example, will lead to a revaluation of the dollar. For Europe, this is positive news because the devaluation of the euro is a panacea for exports, while for developing countries it is a disaster because it leads to investors abandoning their respective currencies and, above all, because these countries are heavily indebted in dollars and so the cost of their indebtedness will rise quickly.»

Throughout the world, there’s also talk of the deflation phenomenon that could weaken economies. How do we compensate for that?

«After getting used to living with high inflation for many years, now there’s the opposite phenomenon. Deflation impoverishes economies because it hits and weakens consumption in such a way that individuals don’t buy today what could cost less tomorrow. It’s a mechanism that moves towards the bottom and is very difficult to defeat. The low prices for primary resources, especially oil, and for money, do the rest. The phenomenon is similar in both Europe and America. Inflation, according to our calculations, is expected to be a mere 1.7% in America in 2017 and still lower – as much as 1.5% – in Europe. We will need to live with this phenomenon and it’s up to the central banks to take all the necessary measures – just like what they’re already doing – to fix this snag in the economy. But this isn’t the only negative factor that we see in the industrialised West at the moment.»

What are you referring to?

«Well, I was thinking about the considerations recently made by Nobel Prize in Economics winner Angus Deaton about the role that the liberal economy can play in favor of the world’s marginalised peoples. Deaton doesn’t want to subvert the capitalist economy. In fact, he says that it has a role as an accelerator of development that can be put in the service of peoples who are less fortunate.
But he pays attention to the internal contortions that this economic model provokes – from the internal inequalities in the ‘First World’ to the need for real and constructive help for emerging countries. Deaton loves to keep talking about the development aid that the West pours into these countries. How much of this money really helps these populations? But this aid is still crucial: they serve to build schools, hospitals and roads. More attention has to be given to how it is distributed in a genuine spirit of solidarity. In this regard there’s still a lot to do and the industrialised West carries the full responsibility of not abandoning to their own devices the mass of humanity that has lost its way in the course history.»