In light of the difficulties that monetary easing by central bankers has had in helping pull many of the world’s economies out of their stagnant state, what other initiatives are needed? Do you think investment in infrastructure is one of them?
«Monetary policy is a crucial tool of macroeconomic policy, but it is not enough to confront the problems the world’s principal economies face. Since the Great Financial Crisis erupted in 2008, most of the industrialized world’s governments have made far too little use of fiscal policy. Theory and experience tell us that recovery from a serious economic downturn can be greatly facilitated by expansionary fiscal policy, and yet only a handful of countries have made any substantial use of this tool.
In addition, much of the current stagnation is due to the continued impact of a debt overhang, an accumulation of questionable debts. This debt overhang constrains consumption by indebted households, investment by indebted firms, and lending by over-exposed financial institutions. It would help both debtors and creditors if there were more systematic debt restructuring to alleviate the burden of indebtedness and reduce the debt overhang».
Some Western countries, starting with Germany, have in fact announced plans to make major investments in transportation. Is it a signal that governments are returning to expansionary policies in infrastructure investment?
«If the promises are backed by action, it would be a step forward. But there are two aspects to this. The first is long-term: our industrial societies need substantial new investments to renew our aging and inadequate infrastructure. In the short run, these investments could stimulate our economies, so long as they are not constrained by artificial restrictions on deficit spending. Interest rates are at historically low levels: there is no reason governments should not borrow in order to make important investments in infrastructure and education that will increase social productivity».
Once complete, a piece of infrastructure is put to use immediately. But how much is its impact in terms of economic and social development?
«A well-designed infrastructure project can transform an entire economy. If it is in transport, for example, it can spur economic integration by lowering trade costs. If it makes energy more readily and cheaply available, it can lead to a host of follow-on investments in economic activities that rely on energy. Infrastructure is the essential scaffolding on the basis of which other economic activities can be built.
The development of the United States, to take one obvious example, required the construction of canals, railroads, ports, and roads. Without them, the country’s rich natural resources and agricultural lands would simply have stayed idle, and the country could never have been drawn into the world economy».
Do multilateral development banks still have a role in providing financing for public works?
«Yes, especially in the least developed countries whose governments are extraordinarily short of funds. For industrialized nations and emerging markets, national governments will be the principal source of financing – along with private financial markets».
Which countries seem to have the best understanding of the need to return to invest in the real economy?
«I don’t feel I have a clear enough understanding of every country’s understanding to give much of an answer. Certainly it appears that the Chinese government is making statements that indicate that it is interested in some substantial investments in infrastructure, but the results remain to be seen».
In terms of business opportunities and economic growth, where is it best to invest?
«If I knew, I wouldn’t tell you! Seriously, it depends far too much on the sector of interest, the time horizon of the investor, and a host of other factors».
The financial difficulties of many countries would appear to increase the need for private investors to help finance public works. Do you agree and, if so, do you expect their role to grow in the future?
«Absolutely. I think the wave of the future will be serious public-private partnerships to finance and implement major infrastructural projects. This certainly holds the hope of creating great opportunities for the private sector while also satisfying important public needs».
According with PwC, by 2030 seven emerging economies (China, India, Brazil, Mexico, Russia, Indonesia and Turkey) will surpass the GDP of G7 member countries. Will this be accompanied by a shift in investment as well?
«As these economies mature, their needs will change – moving away, generally, from industrial and manufacturing production for export and toward the satisfaction of domestic demand. This will of necessity require a retooling and improvement of the domestic social and economic infrastructure, including the provision of higher quality health, housing, and education».