Multilateral Development Cooperation in a Changing Global Order

H. Besada, S. Kindornay, H. Besada, S. Kindornay

• Publisher: Palgrave Macmillan
• Year: 2013
• Print ISBN: 9781137297754
• eBook ISBN: 9781137297761
• Topic: Social Sciences
• Subtopic: Development Economics
• Index: Social Sciences

This volume addresses the changing nature of the international aid system and the challenges it poses for the multilateral system, donors and aid recipients, centring on new regional and national relationships developing in the multilateral system, economic and social forces, and national and global policy making.

Part I

Multilateral Development Cooperation: The Current State of Play

1

How Infrastructure Investment Can Advance the Development Agenda

Justin Yifu Lin

Introduction

Only two years remain to deliver on the Millennium Development Goals (MDGs). Progress on the goals has been mixed at best and varies significantly across goals and countries (Chapter 2, this volume). Currently, several MDGs are unlikely to be attained either globally or by a majority of countries, with lagging progress most apparent in low-income countries.¹ Take the reduction of extreme poverty, for example. The number of extreme poor (those living on less than $1.25² a day) has fallen from about 1.8 billion in 1990 to 1.4 billion in 2005 – that is, from 42 percent of the population to 25 percent (Chen and Ravallion 2008). Though this global progress is considerable, it masks stark differences across countries as it is largely driven by successes in China. In many countries, extreme poverty has either fallen slowly or worsened.³

Economic growth is needed to improve development outcomes and put the MDGs within reach. A quick glance at regional growth rates illustrates this point. Annual real gross domestic product (GDP) growth in sub-Saharan Africa averaged approximately 2.6 percent between 1990 (the benchmark year for the MDGs) and 2005. During this period, the share of people living in extreme poverty dropped from 58 percent to 51 percent, a difference of only 7 percentage points. In contrast, the East Asia and Pacific region grew 7.8 percent per year on average during the same period, and poverty levels plummeted from 55 percent of the population to 17 percent, a reduction of 38 percentage points (Chen and Ravallion 2008). Beyond these simple statistics, convincing empirical evidence exists that suggests growth is good for the poor (Dollar and Kraay 2002). Using a large sample of 92 countries and a time period spanning four decades, the authors find that average incomes of people living in the bottom quintile rise proportionately with average incomes in a country. A recent paper by the World Bank (2010) finds that growth alone accounts for 30–40 percent of past variations on the MDG indicators across countries and time. Similarly, Roemer and Kay Gugerty (1997) show that an increase in the rate of GDP growth translates into a direct one-for-one increase in the rate of growth of average incomes of the poorest 40 percent of the population.⁴

As a result of the recent financial crisis, the anemic global recovery, and the financial turmoil in Europe, near-term global growth projections have been revised downward. Global growth, which between 2006 and 2008 averaged 3.1 percent in real terms, is estimated to remain below 2.8 percent in 2011 (World Bank 2011d). Going forward, growth prospects in many advanced economies are likely to face strong headwinds as these countries struggle with high debt levels, financial turmoil, and a crisis of confidence. If these adverse conditions become more severe – and in the absence of an effective policy response – growth performance in advanced economies could be further weakened, with serious consequences for developing countries. This could trigger a vicious cycle, because in today’s interconnected world, growth in developing countries is increasingly necessary to sustain a global recovery. It is projected that in the coming years more than one-half of global growth will emanate from developing countries (The World Bank 2011d). A slowdown of growth in developing countries could have negative feedback effects on advanced economies.

What the world needs now is a growth-lifting strategy. Such a strategy would need to include advanced economies, whose growth prospects are projected to remain anemic, as well as developing countries, which are increasingly important drivers of world growth. It could focus on improving green technology, education, or research and development, but as argued below, under the current economic circumstances, a key focus should be on infrastructure investments, specifically targeted infrastructure investments that can significantly contribute to growth. In the short run, infrastructure investment can not only create jobs and growth in the local economy, but generate demand for capital goods produced in high-income countries and thus jobs and growth there as well. In the long run, it raises a country’s output by enhancing productivity, increasing private capital formation (by raising expected returns on private investments as the marginal productivity of inputs increases or transaction costs decline), and facilitating the exploitation of agglomeration economies. A global infrastructure initiative that scales up bottleneck-releasing infrastructure investments in some core advanced economies, as well as in the developing world, could be such a growth-lifting solution. The successful implementation of a global infrastructure investment initiative in developing countries hinges upon two key factors. First, countries will have to make the best of existing resources by implementing the right bottleneck-releasing projects in a cost-effective manner. Second, developing countries will need to raise the funds necessary to close the infrastructure-financing gap. The international community, and multilateral organizations in particular, could play an important role in assisting countries overcome these constraints through targeted financial resources and technical assistance.

Implications for advanced economies

Infrastructure investments in advanced economies could mitigate some of the post-crisis economic ills these countries currently face. Persistent excess capacity,⁵ 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 plummeting stock markets and widening spreads of continental Europe’s highly indebted economies. The average public debt-to-GDP ratio in Group of Seven (G7) countries breached the 100 percent mark in 2010, raising concerns about the stability of global financial markets. Without growth – and thus 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 low growth in advanced economies has been referred to as the ‘New Normal’ (PIMCO 2009). Fears have increased that this ‘New Normal’ will become entrenched, and that several advanced countries 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 (US) 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 excess capacity and weak balance sheets.⁶ 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.⁷ For the US, it has been estimated that $1 billion in new investment spending on transportation, schools, water systems, and energy could create 18,000 jobs (Heintz et al. 2009), of which about 40 percent would be in construction and 10 percent in manufacturing – the two sectors hit the hardest by the recession of 2008–09. In addition, sustaining the manufacturing sector, which has been on a secular decline in the US 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.⁸ 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 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.⁹ Therefore, governments should implement innovative financing mechanisms using public-sector resources to leverage long-term private sector financing.¹⁰ Some governments have already taken steps in this direction. For example, the Obama administration has backed the creation of a National Infrastructure Reinvestment Bank,¹¹ which could issue infrastructure bonds, provide subsidies to qualified 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.¹² 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 1.5–2.0 trillion euros (approximately $2.0–2.7 trillion) in Europe’s infrastructure over the period 2011–20.

Opportunities for investing in bottleneck-releasing infrastructure investments are relatively limited within the borders of advanced economies, which tend to 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. 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, as discussed below.

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 and 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.¹³ In addition, the number of visits to hospitals and health centers doubled (World Bank 1996). Similarly, studies have shown that improved water supply and sanitation can significantly redu...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• List of Figures and Tables
• Foreword by Joaquim Alberto Chissano
• Acknowledgments
• List of Abbreviations and Acronyms
• Notes on Contributors
• Introduction: Multilateralism in an Era of Change
• Part I: Multilateral Development Cooperation: The Current State of Play
• Part II: Cases in Multilateral Development Cooperation: Old and New Challenges
• Part III: Emerging Multilateralisms: Possibilities for the Twenty-First Century
• Post-2015 as the Litmus Test for Multilateral Development Cooperation?
• Index