Construction in Addis Ababa, Ethiopia: Investment in infrastructure can be good for growth, under the right conditions, panelists at a seminar agreed (photo: Per-Anders Pettersson/Corbis)
IMF-World Bank Annual Meetings
In the current global environment of subpar growth, where unemployment is high and borrowing costs are low, infrastructure investment might be the key to spurring growth when little else has worked, participants suggested.
Infrastructure investment and other structural reforms—as well as the troublesome rise in inequality and youth unemployment—were key topics of debate at the day-long conference “The Challenges of Job-Rich and Inclusive Growth.” Held on the eve of the IMF-World Bank Annual Meetings, the conference brought together policymakers, academics, and representatives from think-tanks and international organizations to discuss how to ignite and sustain job-rich and inclusive growth.
“There is a very real risk that the world could get stuck for some time with a new ‘mediocre’ level of growth,” cautioned IMF Managing Director Christine Lagarde in opening remarks. “With the risk of mediocrity, we cannot afford complacency.”
Era of easy growth over
The jobs and growth challenge has several worrisome dimensions, Lagarde observed. The average unemployment rate in developed economies stands at 8.5 percent, she said, and among youth, 13 percent. Moreover, inequality has reached critical levels. “The world’s richest 85 individuals control as much wealth as the world’s poorest 3.5 billion people,” she noted, citing research by Oxfam.
These themes were taken up in the first session, “The Imperative of Robust and Sustained Growth,” moderated by Adam Posen of the Peterson Institute for International Economics.
“In a no-growth environment, as the distribution of income is going the wrong way, someone is getting hurt,” said panelist Michael Spence of New York University. “Whereas in a high growth environment, the distribution of income can go the wrong way but at least everybody’s [income] is still going up, just not at the same rate.”
The United States, he said, is growing well below its potential—in part because the government has underinvested in infrastructure, education, and technology.
Ernesto Zedillo of Yale University also blamed mediocre economic prospects on mediocre policies, and was of the view that there has been “enormous complacency” in a number of countries. “This era of things being relatively easy—to ride on the shoulders of China or to ride on the shoulders of excesses in the United States—is over,” he warned.
Infrastructure—but at what cost?
One impediment to growth in emerging economies such as Brazil and India is the infrastructure bottleneck, said IMF Deputy Managing Director Naoyuki Shinohara in another of the conference’s sessions entitled “ Public Debt, Public Investment, and Growth.”
According to the IMF’s 2014 World Economic Outlook, the level of infrastructure investment has declined significantly in both advanced economies and emerging market and developing countries. While infrastructure investment in emerging and developing economies lags that of advanced economies, even the latter group is seeing appreciable deterioration in the perceived quality of infrastructure.
Right now is a good time to revisit the issue of fiscal policy and infrastructure investment, Shinohara said, because the funding cost of such investment is low and the output gap large. “If we can satisfy certain conditions, the push for infrastructure would be very beneficial—not just in the short term but also in the long term, because it would increase countries’ potential growth.”
Panelist Christina Romer of the University of California at Berkeley endorsed the IMF’s position, but noted that such a push would entail tradeoffs. “Will it come at the expense of something else that is valuable for growth, such as education or research and development?” she asked.
Harvard University’s Kenneth Rogoff also agreed that infrastructure investment, in the right conditions, was a good idea. “But what infrastructure?” he asked. “Is it the electrical grid, or cheap broadband? And what institutions do we have for choosing?”
Research shows that debt-to-GDP ratios above certain thresholds tend to be associated with lower levels of growth, noted moderator Gillian Tett. Is it therefore better for countries to increase debt by borrowing to finance more public infrastructure—or to try to reduce the debt?
“Public infrastructure is good if it’s genuinely productive,” Rogoff responded. “But there are questions as to how you calibrate the speed at which you let debt go up, and how to plan an exit strategy.” There’s a lot of uncertainty among economists about these questions, he said.
No pain, no gain
Policymakers who weigh such tradeoffs on a regular basis discussed their experiences—both with infrastructure development and with economic reform more generally—at a session called “Growth and Reform Challenges.”
Ngozi Okonjo-Iweala, Nigeria’s Finance Minister, stressed the need to prioritize spending. “When you have a limited purse, it is tough,” she said, noting that countries have to look at what will yield the highest returns and determine what is the “binding constraint” to development. Nigeria, she estimates, could grow an additional 2 percentage points through infrastructure investments in the electricity sector.
Muhammad Chatib Basri, Indonesia’s Finance Minister, talked about the importance of gaining popular support for reforms such as his country’s recent reduction of energy subsidies. “The problem with reform is that the process is immediate, but the benefit is always in the medium term.”
Nhlanhla Nene, South Africa’s Finance Minister, concurred, noting that his country faces the triple challenge of unemployment, inequality, and poverty. He talked about his country’s plan for increasing employment by offering businesses incentives to hire youth. “Some of the decisions you have to take are tough decisions,” he said, adding that “without the pain, you are unlikely to address the problems.”
Such reforms, however difficult, are essential to helping countries “move the frontier” of their development, said IMF Deputy Managing Director Min Zhu.
Reducing inequality
In a session entitled “Sharing the Fruits of Growth,” panelists discussed the issue of income inequality. Finding the appropriate balance between incentives and redistribution is an important issue in every country—particularly given the powerful forces of globalization and technological change at play, panelists noted.
The panel largely agreed that reducing inequality through distributive policies would not impact growth and debated how inequality could be reduced with minimum trade-offs.
In discussing possible solutions to inequality, panelist Nancy Birdsall of the Center for Global Development noted that the IMF could help by strengthening its work with countries on tax administration. There is much scope for raising revenue by increasing tax compliance—especially in countries like Pakistan, where the lack of a workable tax system feeds inequality, she said.
Other panelists cited the IMF’s recent contributions to the work on inequality, such as the research by Jonathan Ostry, Andrew Berg, and Charalambos Tsangarides. In the 1980s, the IMF was all about fiscal austerity, observed Justin Wolfers of the Brookings Institution. “What’s astonishing is the extent to which this institution has turned around in recent years. Now, we have serious ideas from within the IMF on fiscal solutions that could address inequality.”
