Invest in infrastructure to create connectivity, rather than pouring good money after bad, to save the global economy

The hoped-for spending spree from cash handouts has not materialised but a major boost in infrastructure spending could pay dividends after stimulus runs out
The China way, with institutions such as the Asian Infrastructure Investment Bank providing a lead, could be a model

Anthony Rowley

Published: 3:30am, 31 Aug 2020

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If the global economy is to avoid a post-pandemic implosion, a New Deal will be required, one that combines elements of former US president Franklin D. Roosevelt’s New Deal and Keynesian stimulus with a fresh approach to public and private cooperation on capital investment.

As in other areas where China’s capacity for innovation has often been underestimated, the country’s penchant for embarking on bold capital investment projects could provide a model now, with institutions such as the Asian Infrastructure Investment Bank (AIIB) helping to provide a lead.

Trillions of dollars of fiscal and monetary stimulus are being pumped into the global economy in what is almost certainly a vain bid to maintain consumer demand, when much of that money could be going instead into infrastructure investment capable of generating new economic activity.

The money is available to finance a new approach but there are two main reasons it is not happening. One is an outdated but widespread belief that infrastructure spending simply creates “white elephants”, and the other is an equally invalid approach to private investment in infrastructure.

Such things are understandably not among policymakers’ top priorities with the Covid-19 pandemic rampant in many places and when the United States and China are in a cold war that threatens to become hot (and with election issues also competing for attention).

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It is easy to fall into the trap, meanwhile, of thinking the worst is over for the global economy because so many individuals and businesses have been anaesthetised against the shock of the pandemic by cash handouts from the seemingly bottomless purses of governments. But such resources are not limitless, and need to be directed instead into public capital investment.

Attitudes towards financial stimulus are influenced more by short-term politics than by longer-term reasoning. It is natural to want to avoid a Covid-19-induced collapse in employment and a tsunami of corporate failures.

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Hence the tide of cash handouts that has flowed from governments to the public and businesses. Advocates argue that supporting consumer demand has kept the wheels of business and industry turning, which will spur capital investment and economic activity.

Recent data suggests the reality is different. Even spendthrift US consumers have been using their cash handouts more to pay down credit card debt (and even to increase savings) than on a shopping spree.

Once the stimulus runs out, the real impact of the post-Covid-19 collapse in demand will become brutally apparent in soaring joblessness, corporate and individual distress, and quite possibly social unrest.

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Since a further post-Covid-19 economic shock is inevitable, it is surely better to begin implementing policies that at least hold out a reasonable chance of recovery, thus giving grounds for hope. This is where a major boost in infrastructure spending could pay dividends.

First, it is essential to abandon the idea that physical infrastructure is simply about building roads and bridges that create demand for steel and concrete (plus construction) but little else. Infrastructure creates “connectivity” which in turn means human interaction, trade, production and jobs.

As AIIB president Jin Liqun told me, what is needed is “infrastructure that will tackle climate change, enhance connectivity in Asia, mobilise private capital, and bridge digital divides in our region and with the rest of the world”.

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The multiple and proven benefits of providing or renewing infrastructure are discussed in my recently published book, Foundations of the Future – the Global Battle for Infrastructure and they are much wider than is often supposed, in creating trade employment and other economic activity.

One area where President Donald Trump deserves credit is in pushing infrastructure renewal in the US, although this appears to be partly a reaction to China’s domestic infrastructure blitz and Beijing’s visionary and globe-girdling Belt and Road Initiative, which is inspiring other powers to copy it.

Using infrastructure as a major policy tool to prevent economic collapse and aid growth, however, cannot hope to succeed without very substantial financial contributions from the private and public sectors – and this is where leading capital markets fall short.

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Companies and their shareholders are wary of infrastructure investment because of the perceived risks, and there are fiscal limits on how much governments can invest. Multilateral development banks have the ability to take on some of these risks – but not on the financial scale required.

Here again, the AIIB is taking a lead under its Sustainable Capital Markets Initiative which aims to tap capital markets in innovative ways and thus increase the bank’s powers as an intermediary to get private funds flowing into infrastructure. This is just one example of much-needed new thinking.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

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