IMF – World Economic Outlook 2014, Chapter 3.
Greater public investment in infrastructure increases GDP in both the short and long term. In the short term, the investments boost demand through the effects of fiscal multiplier, while in the long term it expands the production capacity.
Two elements enhance returns from infrastructure investments in particular:
1) During the period of economic slack, public investments in infrastructure are able
to actually decrease the debt-to GDP ratio because of the increase in output.
2) These greater returns are conditional on the efficiency of the investment process.
Hence, has the time come for “an infrastructure push”?
- Currently, both the advanced and the emerging economies are in a period of economic slack. On the one hand, the advanced ones are still bearing consequences of the last economic crisis. A way for them to recover their growth is to invest in their infrastructure and enhance their competitiveness. On the other hand, the emerging economies’ debt-to-GDP ratio continues to increase while their growth rates are falling further, in great deal because of their lack of adequate infrastructure.
- The borrowing rates are historically low, and will probably remain so knowing that demand remains weak.
Still, there are some arguments against the “push”. Even though countries are countries can easily increase their already high debt-to-GDP ratio. Main contributors to this are:
1) difficulty in determining the investment multiplier and the long term effects, which makes it hard to account for the infrastructure investment returns;
2) inefficient investment whether when determining what to build or the procurement modality, lack of transparency etc.