IMF Survey : The Time Is Right for an Infrastructure Push

IMF News, September 30, 2014

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Published in the IMF’s October 2014 World Economic Outlook report; summary dated September 30, 2014.
Motivation: global environment of sub-par growth, many advanced economies with low growth and high unemployment, and low borrowing costs.
Infrastructure gaps noted across countries: the stock of public capital has declined significantly as a share of output over the past three decades; gaps in infrastructure per capita are glaring in emerging market and developing economies.

Short-term and long-term output effects:
- In a sample of advanced economies, an increase of 1 percentage point of GDP in investment spending raises the level of output by about 0.4 percent in the same year.
- The same 1 percentage point of GDP increase raises output by 1.5 percent four years after the increase.
Fiscal implications:
- The boost to GDP from increasing public infrastructure investment offsets the rise in debt so that the public debt-to-GDP ratio does not rise, if investment is done correctly.
- “Public infrastructure investment could pay for itself if done correctly.”
Distributional and geographic differences:
- Power generation capacity per person in emerging market economies is only one-fifth of the level in advanced economies.
- In low-income countries power generation capacity per person is about one-eighth the level in emerging market economies.
- In some advanced economies the quality of existing infrastructure is deteriorating because of aging and insufficient maintenance.

Degree of economic slack:
- The short-term boost to output is substantially larger when public investment is undertaken during periods of economic slack and monetary policy accommodation, with the latter limiting the increase in interest rates in response to the rise in investment.
Efficiency of public investment:
- Output effects are bigger in countries with a high degree of public investment efficiency, where additional public investment spending is not wasted and is allocated to projects with high rates of return.
Financing modality:
- Evidence from advanced economies suggests public investment financed by issuing debt has larger output effects than when it is financed by raising taxes or cutting other spending.

Where conditions are right (clearly identified infrastructure needs, efficient public investment processes, and economic slack), step up public investment now.
Focus on choosing the right projects and investing efficiently.
Raise the quality of infrastructure investment by improving the public investment process through:
- Better project appraisal,
- Better project selection,
- Better project execution,
- Rigorous cost-benefit analysis.
Weigh negative fiscal consequences of inefficient investment against broader social gains; recognize that inefficient investment can temper gains and lead to higher public debt-to-GDP ratios.

Infrastructure investment raises output in the short term by boosting demand and in the long term by raising productive capacity.
For countries where infrastructure bottlenecks constrain growth, alleviating these bottlenecks can yield large gains.
The key lesson: Do it now, choose the right projects, and invest efficiently.

IMF Survey : The Time Is Right for an Infrastructure Push — September 30, 2014