Global infrastructure initiative and global recovery

Available online at www.sciencedirect.com

Journal of Policy Modeling 35 (2013) 400–411

Global infrastructure initiative and global recovery夽 Justin Yifu Lin ∗ China Center for Economic Research, National School of Development, Peking University, Beijing 100871, China Received 5 January 2013; received in revised form 15 February 2013; accepted 9 March 2013 Available online 21 March 2013

Keywords: Global infrastructure initiative; Global recovery; Structural reforms

1. Introduction Since September 2008, the global economy has witnessed its most tumultuous times since the Great Depression. The impressive coordinated policy response of the G-20 nations has helped the world avoid the worst scenario. However, the global economy, especially the advanced countries, has not fully recovered. Structural reforms are required for advanced countries to regain their competitiveness and normal growth. Without structural reforms, the debt-ridden countries in Southern Europe are likely to require repeated and increasingly large rescue packages. And without structural reforms in Japan and the United States, they will also suffer from sluggish growth, persistently high unemployment and rapid accumulation of public debts. These advanced countries will continue their loose monetary policies to keep interest rates low to support the financial system, help indebted households, and reduce the costs for refinancing public debts. The likely outcome is that the Eurozone, Japan, and the United States will all be trapped in a “new normal” of slow growth, high risks, and low returns to financial investment (Clarida, 2010) or even Japanese-style “lost decades”. Low interest rates will also encourage short-term speculative capital outflows to international commodity markets (resulting in volatile prices) and to emerging economies (resulting in asset bubbles, currency appreciation, and difficulties in macroeconomic management). 夽

Paper prepared for the Society for Policy Modeling and American Economic Association Joint Session “From G7 to G20” at AEA Annual Meetings in San Diego on January 5, 2013. The arguments in the paper draw on Lin (2013) Against the Consensus: Reflections on the Great Recession. ∗ Corresponding author. Tel.: +86 10 6275 1475; fax: +86 10 6275 1474. E-mail address: [email protected] 0161-8938/$ – see front matter © 2013 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved. http://dx.doi.org/10.1016/j.jpolmod.2013.03.003

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The problem is that structural reform is contractionary and may cut deeper into jobs, economic growth, and government revenues, at least in the short run. Thus structural reforms are not politically feasible in many advanced countries. And even if implemented, such reforms might not reduce the fiscal deficit because social spending generally increases in response to rising unemployment and fiscal revenue shrinks when growth slows. The market will respond negatively to the rising public debt. The standard recommendation from IMF has long been to offset the contractionary effects of structural reforms by devaluing the currency to increase demand for a country’s exports. The countries in southern Europe do not have such a choice. Any attempt at currency devaluation in the Eurozone, Japan, or the United States could trigger competitive devaluations as their products are competing in the global markets. In fact, this was exactly what happened in the past few months. I will argue below what the world needs now is a global recovery initiative with a focus on productivity-enhancing bottleneck-releasing infrastructure investments, which will create space for simultaneous structural reforms in advanced countries (Lin, 2009). Productivity-enhancing infrastructure investment opportunities in advanced countries are limited and may not be large enough to pull the countries out of crisis. However, opportunities for productivity-enhancing infrastructure1 investments abound in developing countries and will generate demand for the exports of high-income countries, with an effect similar to that of a currency devaluation. The funds for investment should come from both reserve-issuing and reserve-rich countries. In today’s global economy, infrastructure projects are good investments for private sector funds, including pension funds, and sovereign wealth funds. Multilateral development banks and governments could help make infrastructure projects attractive to private investors through innovative arrangements that leverage private funds. This paper is organized as follows: Section 2 discusses why advanced economies should invest in infrastructure under the current economic circumstances. Section 3 focuses on the benefits of infrastructure investment for developing countries. Section 4 lays out the global implications of infrastructure investments in developing countries. Section 5 highlights implementation issues. Section 6 concludes. 2. Implications for advanced economies Infrastructure investments in advanced economies could mitigate some of the post-crisis economic ills that advanced countries currently face. Persistent high unemployment, combined with the weak balance sheets of governments and financial institutions, hold back aggregate private sector investment, job creation, and household demand, fueling a crisis of confidence that leads to widening spreads of continental Europe’s highly indebted economies. The average public debtto-GDP ratio in G7 countries breached the 100 percent mark in 2010, raising concerns about the stability of global financial markets. Without growth, which means less revenue and higher social spending needs, it will be nearly infeasible for citizens and governments to put debt ratios on a declining path. The combination of excess capacity, low returns on investment, high risk, and lower growth in advanced economies has been referred to as the “new normal”.2 Fears have increased that this “new normal” will become entrenched and that several advanced countries 1 Infrastructure refers to hard infrastructure, such as highways, telecommunications networks, port facilities, and power supplies, but not to soft infrastructure, such as institutions, regulations, social capital, value systems, and other social and economic arrangements. 2 PIMCO (2009).

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will face a lost decade with severe economic and social consequences, such as sustained high unemployment, lack of opportunities for young people, and rising poverty rates. Under these circumstances, several advanced economies, including the United States and some core European countries, would need to increase and sustain aggregate demand by investing in jobs and boosting the manufacturing sector to upend the vicious cycle of high unemployment and weak balance sheets.3 Increased employment will lead to increased consumption and the improved health of financial institutions, as, for example, the number of non-performing loans declines. Over time, demand for housing will pick up and excess capacity in the housing sector will be absorbed. For the private sector, good investment opportunities are hard to find when factories continue to carry spare capacity and homes and office buildings remain vacant. Since the private sector is not poised to lead this process, governments will have to play a proactive role in creating jobs and increasing demand. Infrastructure investment is one area in which the government can play such a role. Infrastructure investments can create jobs, increase demand for manufactured goods, and improve competitiveness.4 For the U.S., it has been estimated that US$1 billion in new investment spending in transportation, schools, water systems, and energy could create 18,000 jobs (Heintz, Pollin, & Garrett-Peltier, 2009), of which about 40 percent would be in construction and 10 percent in manufacturing, the two sectors hardest hit by the recession of 2008–2009. In addition, sustaining the manufacturing sector, which has been on a secular decline in the U.S. and several European economies, will be important to maintain large-scale employment opportunities, particularly in capital-intensive sectors where labor-productivity levels are consistent with the income levels of advanced countries.5 Maintaining infrastructure investment is also important in order to keep advanced countries competitive and avoid further external imbalances in the future. Given high debt levels, however, the fiscal space for government-financed public investment is limited in many advanced economies. Governments therefore have to make more out of less. In particular, they should focus on bottleneck-releasing infrastructure investments that maximize economic returns and generate user fees. If debt-financed infrastructure investments are solely repaid through additional tax revenues generated by these investments, amortization of the investment is likely to be prolonged, even if its growth impact is high.6 Therefore, governments should seek to implement innovative financing mechanisms using public sector resources to leverage long-term private sector financing.7 Some governments have already taken steps in this direction. The Obama administration, for example, has backed the creation of a National Infrastructure Reinvestment Bank,8 which could issue infrastructure bonds, provide subsidies to qualified

3 These efforts would need to be combined with structural reforms that remove existing barriers to growth. The effects of structural reforms may take time to materialize, however, despite their importance to boost productivity. 4 Infrastructure in this context could also refer to investments in green technologies, which also have the potential to create jobs, including in manufacturing. 5 See Spence (2011) for a discussion. 6 For Brazil, Ferreira and Araujo (2008) find that a debt financed increase in the infrastructure stock of 1 percent of GDP in one year would have effectively paid for itself through tax revenues after 20 years, though this simulation result is very sensitive to changes in key assumptions, such as the interest rate on government debt, the rate of tax collection, and the depreciation of the infrastructure stock. 7 The economic uncertainties have prompted many long-term investors, such as pension funds, sovereign wealth funds, and life insurers to look for new opportunities for long-term investment opportunities. Infrastructure projects require long-term financing. Traditionally, however, the private sector’s role has been limited, thus governments need to play a role in making infrastructure projects, such as roads and water systems, more attractive to private sector financiers. 8 For more information, see http://www.govtrack.us/congress/bill.xpd?bill=h112-3259.

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infrastructure projects, and issue loan guarantees to state or local governments. President Obama suggested that loans made by this bank would be matched by private sector investments and that each project would generate its own revenues to help ensure repayment of the loan.9 Furthermore, Europe is considering the implementation of a new European 2020 Project Bond Initiative, which would use public guarantees to leverage private sector financing from non-traditional investors, such as pension funds (European Commission, 2011). This initiative proposes to invest D1.5 trillion to D2 trillion (approximately US$2 trillion to US$2.7 trillion) in Europe’s infrastructure over the period 2011–2020. Opportunities for investing in bottleneck-releasing infrastructure investments are relatively limited, however, within the borders of advanced economies, which tend to already have rather well-developed infrastructure capital stocks. Advanced countries should therefore look beyond their own borders and seek ways to scale up infrastructure investments in developing countries, where infrastructure investments can be truly transformative and growth dividends are likely to be high. As I will argue in Section 4, in an interconnected world, infrastructure investment in developing countries will increase demand for capital goods produced in advanced countries, generating jobs and growth, and creating a win-win solution for both developing and advanced countries. 3. Implications for developing countries Infrastructure shortfalls in the developing world are staggering and impinge on the daily lives of millions of people. In Africa, more than 70 percent of households had no access to electricity and only 33 percent of rural households had access to an all-weather road in 2006 (International Road Federation, 2010). Lack of infrastructure is also likely to significantly affect health and education outcomes (Agenor & Moreno-Dodson, 2006). The construction of all-weather roads in Morocco increased school attendance by girls from 28 percent to 68 percent between 1985 and 1995, as the road construction significantly freed women’s time. Another major gain in women’s welfare stemming from better quality roads was the introduction of butane for cooking and heating.10 Not only did these improvements in roads affect education, but also health indicators. The number of visits to hospitals and health centers doubled over this time period (World Bank, 1996). Similarly, studies have shown that improved water supply and sanitation can significantly reduce diarrheal morbidity, which causes the death of 1.8 million people every year (WHO, 2004). Lack of infrastructure also renders firms less competitive. Many businesses are never started, since the required infrastructure services are not available.11 Nowhere is this more apparent than in Sub-Saharan Africa, where per capita electricity consumption averages only 124 kilowatthours a year,12 hardly enough to power one light bulb per person for six hours a day (Foster & Brice˜no-Garmendia, 2010). Since electricity is scarce, it is also costly. Firms in Benin, Burkina Faso, the Gambia, Madagascar, Mozambique, Niger, and Senegal spend more than 10 percent of

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http://www.whitehouse.gov/blog/2011/11/03/five-facts-about-national-infrastructure-bank. Before road improvements, women had to spend an average of 2 h per day collecting and carrying wood for fuel. Butane gas, used extensively in urban areas, did not reach the rural areas due to the high transport and distribution costs. Initially, a bottle of butane cost 20 Dh; following improvement of the road, the price dropped considerably, to as low as 11 Dh, making it affordable for many families (World Bank, 1996). 11 Using data from Uganda, Reinikka and Svensson (1999), find that unreliable provision of electricity is a significant deterrent to investment. 12 Excluding South Africa. 10

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their total costs on energy, whereas in China, the cost of energy is only 3 percent of total costs. Losses from power failure alone amounted to 10 percent of sales for the median Tanzanian firms compared to only 1 percent for the median Chinese firm (Eifert, Gelb, & Ramachandran, 2005). Furthermore, many people in Sub-Saharan Africa lack access to domestic and global markets (World Bank, 2009). About two-thirds of the population of Sub-Saharan Africa lives in rural areas, many countries are landlocked, and it is the region with the lowest road density in the world. Not surprisingly, transport costs are high, representing about 16 percent of firms’ indirect costs (Iarossi, 2009). Going forward, the demand for infrastructure services is likely to increase further in developing countries. Per capita GDP of developing countries is expected to grow at more than 5 percent in the medium-term, increasing the demand for infrastructure services (World Bank, 2011d). Moreover, the world’s population is projected to approach 9 billion by 2050 and more people are likely to move to cities. As a result, the world’s building stock is projected to double by 2050, necessitating further improvements to electricity, water, sanitation, and transportation systems (World Bank, 2011c). Infrastructure investments are also of high importance for developing countries since they can facilitate the process of structural transformation. Economic development in any country is a process of continuous technological innovation, industrial upgrading and diversification, and structural transformation. At the outset of economic development, countries often start with more than 85 percent of the population engaged in agriculture and income levels are low. At this agrarian stage, farmers produce mostly for their own consumption and the need for infrastructure services is limited. When the production shifts to manufacturing, economies of scale become larger, and producers will mostly mass-produce for the broader market rather than for individual use. As market range expands, infrastructure will enable entrepreneurs to get their goods and services to market in a secure and timely manner and facilitate the movement of workers to the most suitable jobs (Lin, 2011). In addition, with global climate change and increasingly intense natural disasters, adequate infrastructure is needed more than ever to support sustainable development by minimizing vulnerability to natural disasters and promoting reliance on public transportation. Empirical studies confirm that infrastructure investment has a large effect on growth in developing countries. Calderón and Servén (2010) estimate that, on average, annual growth among developing countries increased by 1.6 percent in 2001–2005 relative to 1991–1995 as a result of infrastructure developments. This effect was particularly large in South Asia, reaching 2.7 percent per year. Calderón and Servén (in press) find that if low-income countries in Sub-Saharan African were to develop infrastructure at the same rate as Indonesia, the growth of West African low-income countries would rise by 1.7 percent per year. If African economies would half the gap between their level of infrastructure and the average level of infrastructure in Pakistan or India, Central African low-income countries would grow on average by an additional 2.2 percentage points per year and East and West African countries by additional 1.6 percentage points per year. Similarly, if each Latin American country were to match the average level of infrastructure present in non-LAC middle income countries (such as Turkey or Bulgaria), growth in Latin America would rise approximately by 2 percentage points per year (Calderón & Servén, in press). The benefits of infrastructure investment are particularly apparent when examining the Chinese development experience. Between 1990 and 2005, China invested approximately US$600 billion to upgrade its road system. The centerpiece of this investment was the 41,000 km National Expressway Network, which was designed to eventually connect all larger cities with more than 200,000 inhabitants. Only the 75,000 km U.S. Interstate Highway System exceeds its length. Roberts, Deichmann, Fingleton, and Shi (2010) show that aggregate Chinese real income was

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approximately 6 percent higher than it would have been in 2007 if the expressway network had not been built. 4. Global implications of scaling up infrastructure investments in developing countries Infrastructure investments in developing countries would also benefit advanced economies. Building power stations, roads, and ports, for example, requires capital goods, many of which are produced in advanced economies. In fact, about 70 percent of capital goods in low-income countries are sourced from high-income countries. Research has also shown that investing in infrastructure increases trade prospects for both developing and advanced countries. In general, a US$1 increase in investment in developing countries is accompanied by a 50 percent increase in imports in those countries, and a US$0.35 increase in exports from high-income countries.13 It is estimated that the entire infrastructure gap, i.e. the gap between projected available resources and estimated financing needs, in the developing world exceeds US$500 billion annually. Based on the above estimates, closing the infrastructure gap would correspond to an increase in demand for capital goods imports on the order of US$250 billion, of which about US$175 billion would be sourced from high-income countries. This corresponds to about 7 percent of total capital goods exports from high-income countries in 2010. Increasing infrastructure investment in developing countries could support a virtuous, selfreinforcing cycle, and lift global growth. As discussed in more detailed below, infrastructure investments in developing countries can significantly enhance domestic growth. It is likely that demand for imports, many of which are produced in high-income countries, will continue to increase further, solidifying the role that developing countries are playing as key drivers of global growth. In the first quarter of 2011, for example, demand from developing countries was responsible for more than 50 percent of the increase in total global import volumes, largely benefiting high-income countries, whose exports were expanding at an annualized rate of 15 percent (World Bank, 2011b). 5. Implementing a global infrastructure initiative The success of a global infrastructure investment initiative will hinge upon several key factors. First, countries will have to make the best out of existing resources by implementing the right bottleneck-releasing projects cost-effectively. Second, following the example of recent infrastructure financing initiatives in advanced economics, such as the U.S. Infrastructure Bank and the Europe 2020 Project Bond Initiative, developing countries should use existing resources to attract additional private sector financing to close the financing gap. Third, governments will need to implement an appropriate macroeconomic and institutional environment to support the infrastructure initiative. Infrastructure projects can be transformational in developing countries. But selecting the right bottleneck-releasing projects requires very specific know-how that is not always available in developing countries. Cross-country empirical evidence confirms that the quality of project selection and implementation plays a crucial role in determining the return on investment and ultimately its growth dividend (see, for example, Esfahani & Ramirez, 2003). A newly developed Public Investment Management Index (Dabla-Norris, Brumby, Kyobe, Mills, & Papageorgiou, 2011) finds that 13

Based on 2008 trade data from WITS/COMTRADE.

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overall public investment efficiency tends to be particularly low in low-income countries for project appraisal and selection, both of which are key for identifying bottleneck-releasing investments. The international community could help developing countries by providing targeted financial resources and technical assistance. Identifying the right projects often requires significant resources for project selection and preparation. Developing a project ideally requires an array of institutional, legal, social, environmental, financial, regulatory, and engineering studies. These studies tend to be costly, particularly for complex projects. For example, project preparation costs for the Nam Theun 2 hydropower project in Lao PDR amounted to US$124 million, or 9 percent of the total investment of US$1.4 billion. By one estimate, bringing Africa’s key transformational projects to a stage where they can actually attract investors (public or private) would require some US$500 million (Foster & Brice˜no-Garmendia, 2010). Many project preparation funds exist, but they are fragmented. Both governments and the private sector are reluctant to allocate substantial resources upfront for project preparation activities. Some new initiatives are underway to address these shortcomings. In November 2010, the World Bank Group launched the Infrastructure Finance Center of Excellence, which aims to leverage Singapore’s expertise in urban development and financing and the World Bank’s global development knowledge and operational experience to attract more private capital for public infrastructure projects throughout the East Asia region. The center provides tailored technical assistance to governments on project identification, preparation, and marketing, and assists client governments in securing project preparation funds via third party facilities (World Bank, 2011a). In addition, in the context of G20 meetings, the Multilateral Development Banks have developed an Action Plan which proposes concrete actions to improve project preparation, develop regional projects and help countries to improve spending efficiencies (MDB, 2011). Second, governments could use existing resources to attract additional financing, particularly from the private sector, for infrastructure development. These resources could include official development assistance (ODA) and domestic public financing. ODA plays a particularly important role in financing investment in low-income countries, representing only about 35 percent of new capital spending. It is therefore important to find ways to further leverage its catalytic role to attract investors, particularly from the private sector. On the contrary, in many middle-income countries, infrastructure investments are to a large extent financed by the public sector (Foster & Brice˜no-Garmendia, 2010). While private sector financing of infrastructure projects in developing countries has been increasing in recent years, the amount of total financing going to infrastructure investments is small at a global scale. Take the example of Sovereign Wealth Funds (SWFs), which were estimated to hold more than US$3.2 trillion in financial assets at the end of 2008 (Klitzing, Lin, Lund, & Nordin, 2010). The Emerging Markets Private Equity Association estimates that SWFs allocated approximately 18 percent of their portfolios to non-domestic emerging market investments, only a small portion of which was allocated to infrastructure.14 Moreover, private sector financing in developing countries is heavily concentrated in a few countries and in one sector, telecommunications. The private sector generally engages in infrastructure financing through public-private partnerships (PPPs), which are established through a long-term contract between a government and 14 Examples include the China-Africa Development Fund, an equity fund that invests in Chinese enterprises with operations in Africa, which reportedly invested nearly US$540 million in 27 projects in Africa that were expected to lead to total investments of US$3.6 billion in 2010. The Qatar Investment Authority plans to invest US$400 million in infrastructure in South Africa (Klitzing et al., 2010). However, these funds tend to have very conservative risk-taking strategies.

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a private investor, bundling investment and service provision into a single long-term contract. The investor (usually a group of private investors) finances and manages the construction of the project, and maintains and operates it over the time of the contract (usually 20–30 years), before transferring the assets to the government. Over the duration of the project, the investor receives a stream of payments as compensation, for example, through user fees or government payments. Since infrastructure assets are illiquid, upfront capital financing is large and repayments often take decades, PPPs entail significant risks for the investor. These risks include: higherthan-projected projects costs; shortfalls in projected revenues (for example, if the demand for the infrastructure services and user-fees are lower than projected); exchange-rate risks if infrastructure financing is provided in foreign currency and user fees are paid in domestic currency; force majeure; and political and regulatory risks. It is therefore not surprising the private sector involvement in infrastructure projects in developing countries is still limited.15 Several mechanisms exist that can diversify some of these risks and make investments in developing countries more attractive. Government guarantees can insure against project-related risks, such as a shortfall in demand. But they are unlikely to mitigate investors’ perception of governmental risk, such as policy reversal, regulatory failure, and concerns about the creditworthiness of the government. Multilateral institutions and donors are likely to be better positioned to assume these risks. The World Bank has increasingly made use of guarantees to catalyze private finance by mitigating the risk of default by governments. As of March 2010, it had approved 36 guarantees, totalling US$3.8 billion in 28 countries (World Bank, 2010). MIGA, the arm of the World Bank that provides political risk insurance for foreign investments, recently adapted its products and expanded the potential applications of its guarantees in order to facilitate the underwriting of infrastructure projects. Even more promising than guarantees that diversify risks, is the possibility of actually reducing the risk. This can span a wide range of actions, including improving a country’s regulatory framework and implementing sound macroeconomic policy. In economies with high country risk, investors in infrastructure projects are often asking for real returns on equity in the order of 20 percent or more and a country risk premium of up to 5 percent on debt (Klein, 2005). Similarly, Guasch (2004) shows that regulatory risks to investments in Latin America can add up to 6 percent to the cost of capital. Analyzing credit spreads of infrastructure bonds, Dailami and Hauswald (2003) find that projects located in host countries with a stronger legal framework have lower funding costs and tighter spreads. In the end, only sustained macro-economic stability will earn the desired investment grade rating that is essential to attract the attention of the large institutional investors at attractive prices. Multilateral institutions and bilateral agencies could play an important role by building capacity and supporting improvements in this regard. Public–private partnerships can help governments overcome temporary budget constraints, but they do not necessarily provide additional financial resources. PPPs change the timing of government disbursements and revenues, but they have little impact on the government’s intertemporal budget constraint,16 unless they increase the efficiency of the investment (Engel, Fischer, & Galetovic, 2010). There exists some empirical evidence that private management has been more efficient than public management (Foster & Brice˜no-Garmendia, 2010; Guasch, 2004), but at the 15 In low-income countries, demand for infrastructure services may simply not be high enough to attract private investors, particularly in Sub-Saharan Africa where population density is low. As a result, private investment in power, water, or railways has been very limited (Foster & Brice˜no-Garmendia, 2010). 16 With a PPP, the current government can forego the investment outlays, which can be significant for infrastructure projects. But in turn, the government relinquishes either user fees or future tax revenues.

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same time, the cost of private sector funds can be higher than under pure public provision (Engel et al., 2010). Furthermore, PPPs can impose significant fiscal risks if not managed carefully. PPPs often include contingent liabilities in the form of minimum revenue, foreign-exchange guarantees to private investments or commitments from the government to acquire the service from the private holder should demand fall short of projections, leaving the public sector with the same liabilities and risks as it would have had in the absence of the PPP (see, for example, Calderón & Servén, 2010). Moreover, clear accounting standards for PPPs are often unavailable and infrastructure spending related to PPPs is often moved off the budget and the related debt off the government’s balance sheet, creating contingent liabilities for the government (Engel et al., 2010). The arising costs can be significant. Calderón and Servén (2010) cite the example of Colombia where government guarantees led to fiscal costs that were 50 percent higher than the investment supplied by the private sector. The authors conclude that credible hard budget constraints on service provides, a comprehensive regulatory framework, and independent regulatory and supervisory bodies are important to contain the fiscal risks associated with PPPs. In general, it is important to keep in mind that how infrastructure investment is financed will significantly affect its growth impact. First, if infrastructure financing leads to a crowding out of private sector investment – whether through “excessive” levels of taxation, deficits, or debt – its impact on growth will be diminished. Second, the ability of the government to capture at least part of the marginal product of infrastructure, either through taxes or user fees, will determine how the investment affects the country’s fiscal sustainability outlook. If, for example, the tax administration is weak and fiscal revenues capture only a small fraction of the extra income, even projects with high-growth impacts will weaken government financing. The collection of user fees, on the other hand, may pose significant challenges, especially in low-income countries where the population is poor and administrative capacities weak. Third, government finances will also be affected by the cost of borrowing, which depends on the type of financing, the government’s level of debt, and the risk perception of the investors. Debt relief under the Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI) substantially reduced debt burden indicators in many low-income countries and enabled them to access capital markets, albeit often at a high cost. Prudent macroeconomic policy, a stable political environment, and good debt management policies could be helpful in improving the costs of borrowing. Lastly, public infrastructure is likely to have the largest economic impact when combined with other forms of productive investment, for example, in human capital (Adam & Bevan, 2005). The government’s role goes beyond the realm of fiscal and macroeconomic policy, however. First, as discussed above, choosing the right projects and implementing them in a cost-effective manner will be key for maximizing economic returns. Second, a strong institutional context and good policies are important for maximizing the growth impacts of public investment. Inefficiencies or corruption can lead to unfinished roads to nowhere or incomplete bridges. Pritchett (2000) mentions the example of two steel mills, one built in South Korea and the other in Nigeria, both of which cost billions of dollars. While the mill in Korea became a serious competitor in world markets, the mill in Nigeria, which cost over US$4 billion, was never finished to its planned capacity. Third, as a result of decentralization waves in many developing countries, revenue and expenditure assignments related to infrastructure spending have been pushed to lower levels of government, requiring a comprehensive alignment of fiscal responsibilities, accountabilities, and, in some cases, supportive transfer mechanisms to ensure an adequate level of infrastructure provision. Fourth, recent detailed country work by the World Bank shows that efficiency gains in infrastructure can be significant. The World Bank (2011a) estimates that more than 11 percent

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of electricity and about 24–50 percent of water is unaccounted for in developing countries. In Africa, as much as US$17 billion out of an overall spending need of about US$93 billion could be met if existing resources would be used more effectively. Steps to enhance efficiency include safeguarding maintenance spending, improving the performance of utilities and other service providers, addressing deficiency in public expenditure frameworks, and modernizing administrative and regulatory frameworks (Foster & Brice˜no-Garmendia, 2010). Fifth, regional integration can significantly help reduce infrastructure costs and improve access to regional and global markets. Benefits from exploiting large economies of scale in ports, airports, or power generation and transmission could be reaped through enhanced regional cooperation (World Bank, 2009). In Africa, for example, regional power trading could reduce energy costs by US$2 billion and carbon emissions by 70 million tons annually (Foster & Brice˜no-Garmendia, 2010). Sixth, infrastructure investments should be environmentally sustainable since they have the potential to cause significant environmental damage. Fossil fuel energy generation, for example, can create emissions that contribute to acid rain and global warming. Irrigation works can lead to overuse of water, land degradation, and water pollution. In total, the environmental costs associated with infrastructure investments have been estimated to reach 4–8 percent of GDP for some developing countries (World Bank, 2007). Supporting environmentally sustainable infrastructure investment could significantly reduce these costs. Innovative infrastructure financing should take these factors into consideration.

6. Conclusion: moving from the “new normal” to the “new new normal” The Eurozone and the United States face the possibility of a protracted “new normal” of decades-long sluggish growth with a rapid accumulation of unsustainable public debt, as Japan has experienced it in its “lost decades.” However, there is a better alternative. Promoting bottleneckreleasing infrastructure investment in developing and developed countries could pave the way for a “new new normal” of solid growth in developed countries and stronger growth in developing countries. China’s experience during the East Asian financial crisis of 1997–1998 shows that a “new new normal” is possible. Facing economic conditions similar to those of the recent global downturn, China focused its fiscal stimulus investments on highways, railroads, port facilities, and electricity, areas that were bottlenecks to China’s growth. China’s highway network expanded from 4700 km in 1997 to 25,100 km in 2002. And China’s annual growth rate rose from an average of 9.6 percent in 1979–2002 to 10.9 percent in 2003–2010, without the two-digit inflation that had previously accompanied rapid growth. Meanwhile, as growth accelerated, public debt fell from more than 30 percent of GDP in the early 2000s to 23 percent in 2008 (National Bureau of Statistics of China, 2012). In 2010 the G20 expressed the goal to “boost and sustain the global demand, foster job creation, contribute to global rebalancing, and increase our growth potential through investment in infrastructure to address bottlenecks and enhance growth potential” (G20, 2010). It is time to make this happen by launching a global infrastructure initiative that brings together governments, development banks, and the private sector to remove obstacles to sustained global recovery and growth. This could be the last opportunity for the world to avoid a protracted “new normal” of low growth and high debt, replacing it with a “new new normal” of a return to pre-crisis growth rates in advanced countries and enhanced growth in developing countries.

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