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With global economy stuttering, governments urged to open purse
[Washington] Advocates of a global infrastructure push foresee hundreds of billions of dollars of efficiently managed projects springing up across developed and developing nations alike, putting the unemployed to work while paving the way for stronger economic growth in the future.
But the effort could well founder on the politics tied to public spending in high-debt nations like the United States, as well as the realities of infrastructure itself: for every well-designed road or port, there's a "bridge to nowhere," an underused Olympic stadium or a pork barrel project that has added to government debt without a clear economic payoff.
The International Monetary Fund, a prime mover in the call for some governments to ease their fixation over debt and invest in economically worthy projects, warned in a recent report that while the best projects can pay off, "in practice, public investment decisions frequently are not guided by economic rationale." Studies done by groups like the McKinsey Global Institute estimate the world needs to spend tens of trillions of dollars on airports, roads, bridges and power plants over the next 15 to 20 years.
It won't come fast.
In the United States, an Obama administration proposal to overhaul roads and bridges is stymied in Congress, evidence of the difficulty even wealthy nations may face in deciding between higher debt today and future productivity.
Canadian Finance Minister Joe Oliver, speaking to reporters on the sidelines of the IMF and World Bank fall meetings in Washington, also said there was no rush in his country. "We understand the importance of infrastructure. The question is how much you devote to it. But we think Canadians, who are paying on average I think it is 43 per cent of their income on some form of tax, ... are paying enough, too much actually," Mr Oliver said.
German officials have also balked, arguing the risk of a fresh recession in the rest of Europe was no reason for them to start borrowing and spending to excess.
German Finance Minister Wolfgang Schaeuble on Thursday dismissed the idea of "writing checks" in Europe to bolster growth even as Europe's largest economy, which contracted by 0.2 percent in the second quarter, faces the prospect of flatlining in the third quarter and weakening into 2015.
The message from IMF officials, however, was blunt: for countries that can afford it, there may be no choice but to open the spigot to keep the world economy from backsliding. "There has been a big drop in aggregate demand. Someone has to fill that gap," IMF Deputy Managing Director Min Zhu said.
Underlying that comment is a recognition that six years of crisis-fighting has failed to do the job. Loose monetary policy has pumped trillions of dollars into global markets, but much of it is sidelined in the form of bank reserves or large corporate cash holdings - and less of it translated into business investment or household spending.
Recovery programs in Europe and Japan have failed to gain traction, China is slowing, and American officials are worried the situation could choke off the US recovery as well.
Global efforts at structural reform and trade liberalization have also stalled.
During a panel discussion here on Thursday, European Central Bank President Mario Draghi ventured close to a fiscal prescription for the euro zone, noting that investments in public education could also be construed as "infrastructure,"and making an only slightly veiled call on Germany to loosen the purse strings. "For governments that have fiscal space it makes sense to use it. You decide to which countries this sentence applies," Mr Draghi said.
There are doubters, and even advocates at the IMF say the effort will need to proceed with a level of care not always present in public works projects.
Doubt about the public and economic benefits of the largest infrastructure programs led the World Bank to largely abandon them until a few years ago, a policy current President Jim Yong Kim is reversing.
At a conference where he urged a stronger world fiscal response, IMF Deputy Managing Director Naoyuki Shinohara also acknowledged the wasteful public works spending in Japan that ran the country's debt to the highest in the world, with parallel roads built by different ministries, for example.
Beyond that, developed nations in Europe and elsewhere may be too debt-constrained to spend much more. "I don't see the conditions in the largest economies to have a sudden increase," Mexican Finance Minister Luis Videgaray said in an interview with Reuters on Wednesday.