Investors, central bankers and policymakers are once again talking about investing in infrastructure as a way to stimulate flagging economies around the world.
If the zeitgeist is to be believed, 2017 will see a burst of infrastructure investment-related activity. It’s a good idea, but there is plenty of reason to suspect that little will happen.
A big reason why infrastructure investment is back in vogue is that global growth is poor. The efforts of central banks to provide a pick-up for it are producing ever-diminishing returns and creating nasty unintended consequences. Politics is playing a part, too.
The likely economic hit from Brexit is leading UK politicians to tout infrastructure spending as a way of avoiding the more pernicious economic impacts of exit. UK chancellor Philip Hammond has been lobbied heavily ahead of Wednesday’s Autumn Statement.
In the US, political criticism of the Federal Reserve’s policies is leading more calls for fiscal reform; president-elect Trump cited big infrastructure upgrades in his victory speech.
There is plenty of evidence to suggest that infrastructure investment might have the desired economic effect. The International Monetary Fund looked at 17 advanced economies and found that an increase in investment spending equivalent to one percentage point of national income increases the level of output by 0.4 per cent in the same year and 1.5 per cent four years later.
This does not mean policymakers will increase investment. After all, their record is pretty poor. Public investment has fallen across the advanced economies from about 4 per cent of gross domestic product in the 1980s to 3 per cent at present.
Some of the decline might be because the private sector is investing more in infrastructure (which is the case for energy and telecoms). But the level of private investment has also fallen as a share of output over the past three decades. In other words, private investment has not produced the kind of output that would create the required economic stimulus.
There is also a more basic point. The IMF report is two years old and has had little discernible impact on policymakers in the meantime. That is unlikely to change next year.
Infrastructure projects are often large and capital intensive, with significant upfront costs and benefits that tend to accrue only over the long term. Politicians are prone to short-term thinking — all the more so in this age of populism.
It would be foolish and short-sighted for [politicians] not to seize upon the current mood for greater infrastructure investment
There is a risk that poorly considered and/or politically expedient proposals to boost infrastructure investment increase a country’s debt burden. If financial markets take a dim view then a country’s financing costs could actually rise. Countries with high debt burdens are going to be particularly susceptible. Something intended to help a country’s economy could end up harming it.
Policymakers have a long record for choosing shiny, eye-catching projects over more mundane but effective ones. Slow broadband speeds in many countries hold back economic potential but this topic will not animate an audience like announcing a shiny new high-speed train line.
Some projects are contentious. The UK has been unable to decide where to build more runways in the south-east of the country for 30 years. Despite a clear demand need, voters do not want noisy planes disturbing their home life. Once again, the economic argument is trumped by politicians’ concerns about their own popularity.
Much has been made of moves by a small number of countries (including Japan and China) to ease fiscal policy, and statements of intent by others (including the UK and US) to do more. Whether they will amount to much remains to be seen, but the chances of disappointment are high.
The UK has limited room to spend without breaching borrowing limits. Political discourse in the US is highly polarised. That makes it very unlikely that policymakers will find common cause to commit to enough projects on the scale that is required for any meaningful economic dividend. Even European powerhouse Germany is yet to be sold on infrastructure investment.
Japan already spends about 4 per cent of its GDP on infrastructure. It needs far more to confront the stark challenges of its ageing population, decades of economic stagnation and an oppressive debt burden. China may do more and this would have an impact on global growth, but it cannot do the world’s heavy lifting alone. The same goes for the US.
Politicians need to rise to the challenge and only authorise projects that have a high degree of confidence of directly or indirectly supporting economic growth. It would be foolish and short-sighted for them not to seize upon the current mood for greater infrastructure investment. It would reduce the burden on central banks by boosting short-term demand and help to arrest infrastructure’s shrinking share in national income — a trend that risks permanently damaging economies’ long-term growth prospects.
Gershon Cohen is head of infrastructure funds at Aberdeen Asset Management