How a Collective Infrastructure Push Will Boost Global Growth

IMF Blog, November 24, 2020

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With vaccines around the corner, cooperative efforts remain critical to produce and distribute vaccines globally, tackle climate change, and bolster the economic recovery from the crisis.
An IMF report published ahead of the G20 leaders meeting argues a synchronized infrastructure investment push could invigorate growth, limit scarring, and address climate goals by generating cross-border demand “spillovers.”

Public infrastructure investment can lift domestic growth and raise demand abroad through trade linkages, producing positive “spillover” effects that boost global output.
Spillovers from higher demand are particularly impactful when economic conditions are weak and interest rates low:
- When conditions are weak and inflation is well below target, monetary policy is less likely to tighten in response to higher government spending, so output responses are larger.
- When economic conditions are strong, higher government spending may push inflation above central bank targets and trigger monetary policy tightening, offsetting some of the demand boost.
The presence of ample spare capacity amplifies the impact of both domestic public infrastructure spending and demand that spills over from higher public investment abroad.

Scenario for economies with room to spend:
- Increase infrastructure investment spending by ½ percent of GDP in 2021.
- Raise it to 1 percent of GDP in 2022.
- Keep it at that level until 2025.
Scenario for economies with less fiscal space:
- Spend about one third of the amounts above over the same period.
Projected global output effects:
- Global output could increase by close to 2 percent by 2025 (dashed black line).
- About a third of that impact would come from cross-border spillovers.
- If each country raises infrastructure spending on its own (without higher spending abroad), the global impact would on average be about 1.2 percent (solid black line).
Bottom line metric:
- If G20 countries act together, they can achieve two-thirds more at the same cost than if each country acts alone.

Prioritizing green investments strengthens resilience and supports a cleaner world for the next generation.
Examples of high-impact green and resilient projects:
- Efficient mass transit projects.
- Smart electricity grids.
- Retrofitting of buildings to enhance energy efficiency.
Job-intensive public investment such as infrastructure maintenance or public works, if implemented efficiently, is also important.

Coordinated action across countries magnifies individual policy impacts via spillovers and delivers larger global gains for the same fiscal cost.
Policymakers should:
- Implement high-quality, smart spending on infrastructure.
- Prioritize green and resilience-enhancing projects.
- Focus on efficient, job-intensive public investment where possible.
Cross-country cooperation in timing and targeting infrastructure investment can amplify benefits and provide further support for all economies.

Based on research by Jared Bebee, Oya Celasun, Lone Christiansen, Ashique Habib, Ben Hunt, Margaux MacDonald, and Rafael Portillo.